Sez And Sez Polices Of India & Development (growth In Prospectus Of China)

ASSIGNMENT ON SEZ India’s sez policy was inspired by global experiences of govt of industry affairs to cut cause and multiply on forex earning. Q1. is India’s sez policy has been successful as contrasted to china. Q2. India’s sez policy has been done more harm to OTE industry for promoting on equal competitive. Q3. India is deals with full flash new town not thetawnlefs represented by SEZ.

What is SEZ? SEZs are virtually industrial townships that provide supportive infrastructure such as housing, roads, ports and telecommunication. The scope of activities that can be undertaken in the SEZs is much wider and their linkages with the domestic economy are stronger. Resultantly they have a diversified industrial base. Their role is not transient like the EPZs, as they are intended to be instruments of regional development as well as export promotion. As such, SEZs can have tremendous impact on exports, inflow of foreign investment and employment generation. Special Economic Zone (SEZ) is the new buzzword in corporate circles, and in the media too. SEZs in India are a direct follower of Shenzhen, China. The goal of SEZ structure is to increase Foreign Direct Investment and usually the entire production of SEZs are intended for export. To overcome the loopholes experienced on account of multiple control and clearances, infrastructural constraints and unstable fiscal regime, the Government of India had announced the introduction of Special Economic Zone Policy in April, 2000. The basic objective of SEZ is attracting FDI, earning foreign exchange, generating employment, facilitating technology transfer, promoting export of goods and services and developing the infrastructural facilities. Special Economic Zone developers are enjoying exemption from income tax, Central sales tax, service tax, State sales tax, minimum alternate tax, dividend distribution tax etc. Benefits derived from SEZs are evident from the investment, employment, exports and infrastructural developments additionally generated. Investment of the order of Rs.100,000 crores, including FDI of US$ 5 to 6 billion, is expected by the end of December, 2007. Five lakh direct jobs are expected to be created by December, 2007. The benefits derived from the multiplier effect of the investments and additional economic activity in the SEZs and the employment generated thus will far outweigh the tax exemptions and the losses on account of land acquisition. Stability in fiscal concession is absolutely essential to ensure credibility of Government intentions. Some of the examples of successful SEZs in India include – Nokia SEZ in Chennai, Quark City SEZ in Chandigarh, Flextronics SEZ and Mahindra World City in Chennai, Motorola Dell and Foxconn, Apache SEZ (Adidas Group) in Andhra Pradesh, Rajiv Gandhi

Technology Park in Chandigarh, ETL Infrastructure IT SEZ in Chennai and Hyderabad Gems Limited in Hyderabad. Apart from China and India, Special Economic Zones have been established in several other countries, including Brazil, Pakistan, Iran, Poland, Jordan, Kazakhstan, the Philippines, Russia, Ukraine and North Korea. According to World Bank estimates as of 2007, there are more than 3,000 projects taking shape in SEZs in 120 countries worldwide. The Indian Economic Survey 2005-06 lauds the SEZ Act, saying it provides for very attractive fiscal incentives and tax concessions for developers as well as manufacturers. Other salient features of the law relate to the establishment of free trade and warehousing zones to create world-class trade-related infrastructure, apart from the setting up of a separate authority for each SEZ to ensure greater administrative autonomy. “The Act will provide confidence and stability to domestic and foreign investors, and signal the Government’s commitment to the SEZ policy framework.” [Economic survey 2005-06]. SEZ EVOLUTION – MILESTONES Starting from an Industrial park in Puerto Rico in 1947, the Free Zone concept (also known as Special Economic Zones, SEZ in countries like India, China) has today become ubiquitous as an infrastructure facility for promotion of exports. The spread of SEZs in the initial few decades was slow. It was only in 1980s, after the success of Chinese SEZs such asShenzhen and Pudong, that the concept gained global popularity. It has acquired greater significance in recent times with globalization and increase in international trade. The concept of export oriented infrastructure is not new in India. The first Indian Export Processing Zone started in 1965 (Kandla) followed by SEEPZ in 1972. However, further development of the concept took about 4 decades till the SEZ Act, 2005 came into effect. What has been witnessed since then is a frenzied rush for obtaining SEZ approvals. As against 19 SEZs in 2005, there are over 270 notified SEZs as on December 2008. SEZ GROWTH SCENARIO Indian SEZs will continue to face a changing industry scenario. In the near-term, Government is likely to sweeten SEZ incentives to support initial SEZ growth, particularly in the context of the recent economic slowdown. This will entail relaxation of some restrictions for a limited period, providing an exit route for notified SEZs and enabling easy access to capital. However, the success of the SEZs will depend on the export demand emerging out of increase in international trade due to improvement of economic health of developed as well as other developing countries. In the long-term, SEZ concept will move towards its intended objective of increasing India’s presence /competitiveness in the global markets, bringing investments and in creating employment.

CHINESE SEZ Polices-

• Reforms since 1978 (Lecture 1) Aim : Quadrupling GDP in 20 years – 1980 to 2000 • Four modernizations – Liberalization of Agriculture; Rural & Town Industrialization through TVEs; Defence; Urban & Area Export-oriented enterprises through ETDZs and SEZs Importance of the last in faster economic growth, modernization of Industry & Trade and export growth. • Policy of preferred regions – unequal growth – open-door policies Hong Kong and East Asian factors • Overriding approach based on Deng’s Observation: “For us to establish SEZs and adopt open-door policies, we must have a clear guiding ideology: that is, “Not to constrain but to release”

Development of CHINESE SEZ Polices over the years•

Four SEZs started in 1979 – three in Guangdong adjacent to Hong Kong and one at Xiamen in Fujian Established principally to test the effectiveness of alternative market-based export-led growth strategy, as in East Asian countries. Heavy government investment in infrastructure. Each zone could introduce its own Regulation to growth investment, approvals and tax concessions. Based on the success, in 1984, the SEZ benefits were extended to 14 coastal open cities. Economic & Technology Development Zones (ETDZ) and High Tech and New Technology Industry Development Zones encouraged in coastal open cities. In 1985, three development triangles – Pearl River Delta (PRD), the Yangtze River Delta (around Shanghai) and Minum Delta (around Xiamen) were designated as coastal open areas. Hainan Island was declared as fifth SEZ in 1988

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Reasons for Success of CHINESE SEZ : •

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Unique locations – of the five SEZs, Shenshen, Shantou and Zhuhai are in Guangdong Province adjoining Hong Kong. Fourth, Xiamen, is in Fujian Province and nearer Taiwan. Large size with government and local authorities providing improved infrastructure with foreign collaboration. Investment-friendly attitudes towards Non-Resident Chinese and Taiwanese! Attractive incentive packages for foreign investment & Liberal customs procedures. Permission to sell in DTA. Flexible Labour Laws providing for contract appointments for specified periods.

SEZ Policies in India The First SEZ Policy of India came in to existence because the economic reforms promulgated and implemented in the early 1990s did not resulted in the overall growth of the Indian economy. The First SEZ Policy of India was drafted to act as a catalyst to fuel the

economic earnest in the early 1990s. Bottlenecks like red tape, lengthy administrative procedures, rigid labor laws and poor physical infrastructural facilities had detrimental effects on the flow of Foreign Direct Investments (FDI). Further, the Indian markets were not mature enough to embrace Foreign Institutional Investors (FIIs) in the system. Furthermore, the legal framework of Indian economy was not binding enough to prevent overexploitation of Indian markets by the foreign investors Today, there are approximately 3,000 SEZs operating in 120 countries, which account for over US$ 600 billion in exports and about 50 million jobs. The SEZ policy was first introduced in India in April 2000, as a part of the Export-Import (“EXIM”) policy of India.

The main objectives of the First SEZ Policy of India are as follows •

Generation of additional economic activity across all the states

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Promotion of exports of goods and services across all Indian sates according to their indigenous capabilities

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Promotion of investment from domestic and foreign sources

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Creation of employment opportunities across India

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Development of world class infrastructural facilities in these units

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Simplified procedures for development, operation, and maintenance of the Special Economic Zones and for setting up units and conducting such business activities

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Single window clearance cell for the establishment of Special Economic Zone

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Single window clearance cell within each and every Special Economic Zones

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Single window clearance cell relating to formal requirements of Central as well as all State Governments

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Easy and simplified compliance procedures and documentations with stress on self certification

SEZ Policy of 2000 –

New Policy in April 2000. SEZs permitted to be set up in the public, private, joint sector or by the State Governments.

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Minimum size of 1000 hectares (4 sq. miles)

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Simplified procedures and more incentives

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Main measures were:

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Customs procedures simplified

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Conditions for automatic approval relaxed considerably

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Units could produce items reserved for SSI units in domestic market

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100% FDI investment for manufacturing

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Profits could be repatriated fully

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Freedom for sub-contracting

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100% I.T. exemption for five years

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Exemption from Central Excise Duty on capital goods, raw materials, consumable spares from domestic market

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Reimbursement of CST paid on domestic purchases Some states also promulgated SEZ Policies (including Kerala)

Incremental changes over 2000 Policy: main are: • Corporate I.T. exemption increased to a block period of 15 years. • 100% I.T. exemption for 5 years, 50% for next five years and 50% of ploughed-back

profits for last five years. • Other fiscal incentives in the form of exemption from Service Taxes and Securities

Transaction Tax. • Greater operational freedom, eg., Free to fix user charges.

• Approval committee for each zone to provide ‘single-window’ clearance in all matters. • 10 more SEZs were sanctioned since the Act was passed in June 2005. • Bigger than before. Investment of over 15000 crores in all. Big players like WIPRO,

Reliance, Biocon, etc., in action. • SEZs are public utilities under I.D. Act, but no changes in Labour Laws.

INDIA’S Experience with EPZs •

Starting with Kandla in 1965; SEEPZ in 1972, Based on reviews of working, Cochin, Falta, Madras (Chennai) and NOIDA in 1984 and Vizag in 1989

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Less than 40% of approvals fructified Rest cancelled or lapsed

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Employed only 0.01% of labour force

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FDI was less than 20% of total investment

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Accounted for less than 4% of exports. Net export much lower as imports were over 60% of exports

Differences between SEZ policy of China & India. Issue

China

India

Size

Very big. Typically in hundreds of

Even 10 hectares will do.

hectares. Location

Well thought out and located only on

Anywhere. No restriction.

coasts. To facilitate exports and imports easily. Labour laws

Relaxed in the SEZs.

Flexibility is totally absent.

Policy regime

Experimentation of liberal policies in

Based on fiscal sops.

the specified areas while insulating them from the rest of the country. Investors

Commencement

Basically foreigners who are wooed

Basically locals. Not

with sops and promise of stability in

foreign investor driven; which

policy.

should have been the case.

In 1979

In 1969 with the export processing zone concept. But failed to muster courage in giving these regions foreign territory status till the year 2000 when Murasoli Maran announced the SEZ policy.

Number

Only six: Shenzhen,

Any where and any number. So

Zhuhai, Shantou,Xiamen, Hainan and far 28 operational. About 200

Tax holidays

Pudong

received approvals.

Present.

Longer and steeper than in China.

China's SEZ initiative is government driven. But in India the private sector will develop most of them. There is no minimum area requirement to set up an SEZ in China, unlike as in India. And China does not offer tax incentives across the board to all companies, as India does.

The reasons of Low Development of Indian SEZ were: (i) Very Small Size of EPZs

Location

Size (Sq.miles)

Kandla (Gujarat)

1.17

SEEPZ (Mumbai)

0.15

Cochin (Kerala)

0.16

Surat (Gujarat)

N.A

NOIDA (UP)

0.48

Chennai (TN)

0.41

Vizag (AP)

0.56

Falta (WB)

0.44

(ii) Inadequate infrastructure (iii)Restrictive policies (iv)Lengthy procedures – No Single Window (v) Locational disadvantages (vi)Stringent labour laws

In the 1990s, as a part of reforms, powers delegated to zone authorities, additional fiscal incentives were given, policy provisions were simplified and greater facilities were provided leading to some, not very significant, improvements.

Drawbacks of Indian SEZ policy as comparison to China-: 1. On paper this seems to be a good idea and the Chinese experience has only validated it. In the 1980s, the Chinese set up a few SEZs (6 or so) along their coast to promote export oriented growth. They were able to successfully attract huge foreign investments in these

zones. Thus China became the pillar of many manufacturing industries like electronic parts, automobiles and spare parts etc. Compared to the Chinese, the Indians took time in this regard. It was only in the late 1990s and early 2000s that the government decided to promote SEZs as an instrument of economic growth. 2. It has been a rough ride for the governments promoting SEZs. There were frequent conflicts between various stakeholders like the farmers whose land was to be acquired to set up the SEZs and the industry owners. It has also been alleged that the SEZs were not successful in promoting the kind of economic growth that the government had hoped for. Nevertheless, SEZs did offer a few benefits to the Indian society. They increased the productive capacity of the country by providing quality employment to the millions of educated youth in this country 3. There has been criticism that not all the land demarcated for an SEZ is used to produce goods and services. Only about 25% is used to set up factories etc. The remaining land has been used by the developers to develop real estate and make money out of it. Also, there is no obligation on the companies to export a certain percentage of their output to earn foreign exchange for the country 4. The Comptroller and Auditor General’s performance-audit of some of the functional SEZs reveal domestic earnings are larger than exports for most of them. According to an OECD study, domestic sources account for 75% of the capital formation in Indian SEZs. 5. Fertile land should never be diverted to setting up SEZs. Saline land and land suffering from various abiotic stresses should be used to set up an SEZ. If acquiring fertile land is inevitable then only rain fed and single crop lands must be diverted. Farms that produce multiple crops within an year and which have good irrigation facilities must never be diverted, but there is no such type of provisions in Indian SEZ policy.

Exports from the functioning SEZs in India during the last three years are as under: Year

Value (Rs. Crore)

Growth Rate ( over previous year )

2003-2004

13,854

39%

2004-2005

18,314

32%

2005-2006

22 840

25%

2006-20007

34,615

52%

2007-2008

66,638

92%

Current investment and employment: Investment:

Rs. 83450crore

Employment:

1,13,426 persons

Exports as percentage of GDP of various countries -: country

1990

2001

2004

China

13.3

22.6

35.9

india

5.7

9.3

11.3

Exports as percentage of Manufacturing GDP: country China India

1990 37.00 17.1

2000 43.6 15.6

2005 41.8 15.9

Conclusion-: If we see the SEZ Policy of China and India ,India is not so much successful because China's SEZ(The GDP of these zones were $630 billion ,40% of total GDP of China) initiative is linked to the opening up of its economy. It goes back to the 1980s when China was looking for a way to invite private and foreign investment. India's SEZ policy comes 15 years after it kicked off economic liberalization. And its goals are many - building infrastructure, creating employment or inviting foreign investments. Thus the current policy of SEZs has seen many drawbacks and it has the potential to raise many social conflicts that India could ill afford if it were to emerge as a first rate economic power by 2020. But the Govt. Of India has introduced New Policy in April 2000. SEZs permitted to be set up in the public, private, joint sector or by the State Governments. That would be very beneficial for the development of Indian SEZ.

Q2. India & SEZ policy has done more harm to DTA(Domestic tariff Area)industry by promoting unequal competition. Domestic Tariff Area (DTA) means an area within India that is outside the Special Economic Zones and EOU/EHTP/STP/BTP. Domestic Tariff Area in other words are also known as Units operating under certain specific schemes such as EPZ/SEZ/EOU and are expected to carry out their activities within customs bonded area. The area which is not coming under the jurisdiction of custom bonded are called Domestic Tarif Area. It means DTA stands for Domestic Tarif Area . The Units which are located in India and clear its

finished products on payment of duty as per Central Excise Tariff Act 1985 and exports on the basis of undertaking or bond are called as DTA unit. Problems faced by DTA from SEZ area-: DTA firms to face increased SEZ competition: • As India continues to lower its import duties, pure domestic firms which currently enjoy protection on account of import duties will face increasing pressure from “domestic market-seeking” SEZ units. The cost savings from global sized operations in an SEZ environment is expected to be far greater than a target import duty barrier of 7.5%~10%. This threat is especially true for categories currently having low entry barriers. As competition for the domestic market intensifies, pure DTA firms may consider increasing operating scale / efficiencies or relocating in SEZs. • Only the industries within the SEZ must be entitled to tax breaks and that too for a limited period like 5 years with no provision for extension. The SEZ developers should not be entitled to any benefits. There should be a rationalization of tax between SEZs and Domestic tariff Areas to ensure that the industries in DTAs are not at an advantage. It has been observed that SEZs have not been very successful in adding new investments. There have been cases where in the investments have moved from DTAs to SEZs to avail tax benefits. • As the SEZ established companies are getting tax benefits like export duty, excise duty, tax holidays, definitely their cost of production is less than the DTA, therefore DTA companies are unable to compete with SEZ companies. This shows promoting unequal competition within the country. SEZ units and units set up as export-oriented units (EOUs) can import capital goods at zero duty, whereas units in the domestic tariff area (DTA) have to pay at least 5.1 per cent duty under the export promotion capital goods (EPCG) scheme. SEZ units can import construction material at zero duty whereas EOU and DTA units can import at 36.74 per cent duty. • SEZ is a area where every types of infrastructure facilities are already available, which helps the company to reduce transport cost, easy availability of raw materials, which is difficult in case of DTA industries. • As the investor in SEZ area are generally foreign or big companies of India their investment amount is larger than the DTA company for that they able to enjoy the profit due to scale of returns. • Due to tax relaxation the SEZ Company now prefers procurement of goods instead of production from DTA company. • As there is no specific rules for declaring SEZ allover India more than 200 SEZ are already established & possibility of declaring more also which reducing the market for DTA industries. • The main aim for establishing SEZ was to attract foreign investor & increase of export, but now the total export from SEZ is going to domestic area as export to DTA is also comes under export nearly about 75% export is going to domestic market which is a great challenge for DTA company. •

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In India the private company applies SEZ area to govt. So every company is interested for this because everybody wants to enjoy SEZ facilities which reducing the number in DTA. Some DTA company is also now trying to change into SEZ area.

Conclusion-: As a lot facility available to SEZ as comparison to DTA industry definitely it’s a real challenge for DTA industry to sustain in Indian market. Though SEZ is available in China also but they are not getting so much huge facilities like India, but their export is too much high than India .So it’s necessary to control Indian SEZ company rather than providing support to them.

Q3.India needs full fledged new towns , not town led represented by SEZ. India’s population is crossing 120 cr, & Its seeming that it’ll cross 200 cr. in 2020.The total land occupied by India is only 2.4% of the world. Most of rural areas worker who are not skilled labour is now migrating to urban for livelihood purpose. In this situation it need more urban space to stay, which is a difficult tax for govt & it’s going to be more crucial to day to day. So I don’t think that the town represented by SEZ is substitute of this problem because our people are not getting sufficient space to survive how we invite foreign investment by offering SEZ facilities to them. Other problems in case development of town through SEZ are-: 1. The real problem is that SEZs are a half-baked solution to the rapidly rising demand for urban spaces generated by India’s fast growing industry and services. With the number of

new urban dwellers over the next 15 years expected to be at least 200 million, India needs full-fledged new towns, not the town lets represented by SEZs: the size of an SEZ is capped at 50 sq km, whereas the additional demand for urban space to accommodate 200 million plus, new urbanites would run to tens of thousands of sq km. India needs hundreds of new townships equipped with world-class infrastructure to accommodate large-scale migration of newly skilled workmen from rural to urban areas. That requires new urban planning, innovative policy to release farm land and reskill people. Merely hoping that the private sector would build the urban infrastructure the economy needs, if they are given tax sops just won’t do. 2. Destruction of environment and ecological balance, 3. Paucity of land for agriculture, horticulture and vegetable farming, making these commodities scarce for city dwellers, 4. Displacement of large Adivasi population which may migrate to cities adding to slums, Deforestation resulting in climate changes, 5. Increased vehicular traffic to existing cities from these townships for work, recreation, higher education and medical facilities, 6. Sez is for only supporting those kinds of people who are trying to control Indian economy. 7. Unnecessary SEZ reducing the land for agriculture purpose, living purpose, which is creating unbalance in population distribution in India. 8. Due to SEZ the economic balance of the country is also affecting means the industrialization is growing faster at that town & the income level also more than other parts of the country. 9. If town will develop as usual there will no situation arise like Nandigram,Kalinganagar which will create challenge between govt & people. 10. The town created by SEZ may be increase foreign investment but in another way it will reduce the earnings from tourism.

Conclusion-: Though India needs full fledge town but this is not from SEZ which will create “WINDOW DRESSING” situation inside the country. Let this movement defeat the lot of people’s livelihood. - Medha Patkar

Bibliography-: 1. The Economic Times- article written by Amiti Sen . 2. SPECIAL ECONOMIC ZONES ‘AN INDIAN PERSPECTIVE’

3. IndiQuest Research-( Market assessments and consultancy firm). 4. SEZs - Is it Still a Growth Story?- publish by tata strategic management group. 5. The Indian Economic Survey (2005-06,2007-08 & 2008-09) SEZ Act. 6. “Socio-Economic and Political Dimensions of SEZ”, by Sanjeev Kumar Singh and Sanjukta Sanyal. 7. “Special Economic Zones: Issues in Corporate Governance” written by Anirudh Burman .

8.“SEZs in China: A Case Study” by Amit Shrikant Abhyankar 9. Internet