Special Economic Zones (sezs) In China & India

SPECIAL ECONOMIC ZONES (SEZs) IN CHINA & INDIA Introduction -

Historical background From ancient times – Harappan, Roman to mediaeval times and later Small fenced-in areas specializing in manufacturing for exports Modern times – Free ports – Aden, Singapore, Hong Kong – Difference Modern version of export zones starting from Puerto Rico (USA), Shannon International Airport in Ireland in 1959 – latter considered the first one India – Kandla in 1965. EPZs in Taiwan, S. Korea and other countries Since 1979, most extensive, large and successful SEZs in PRC (China) After early start, India slow in following up Recent interest in India

SPECIAL ECONOMIC ZONES (SEZs) IN CHINA & INDIA Common Features of SEZs -

Duty-free imports of capital goods and inputs for production for Export Liberal access to foreign exchange Encouragement to FDI Simplified, “one-stop” approvals Generous tax concessions esp. in early years Flexible Labour Laws Limitations on sales within the country Better Infrastructure (Power, Transport & Communications)

We will note the differences between China and India later.

SPECIAL ECONOMIC ZONES (SEZs) IN CHINA & INDIA Rationale for SEZs -

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Main benefits sought from SEZs are: * Faster economic growth * Employment generation on a large scale * Earning more foreign exchange * Infusion of modern technologies & their demonstration and spread effects * Economies in production due to clustering Benefits can be there for the whole country if same policies are adopted everywhere. Economic, political, social reasons for restricting to certain places. SEZs as ‘second-best’ options to generalized liberalization. Export-led growth and creation of fast-growing, employment-generating areas main objectives. Advantages of coastal regions in export zones – experience of Mongolia which turned the whole country into a free-travel investment zone.

SPECIAL ECONOMIC ZONES (SEZs) IN CHINA & INDIA SEZs in China Policy Background -

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”

SPECIAL ECONOMIC ZONES (SEZs) IN CHINA & INDIA SEZs in China Development over the years -

Started soon after beginning of reforms in 1978. Four SEZs started in 1979 – three in Guangdong adjacent to Hong Kong and one at Xiamen in Fujian (See Map in Annexure 1) 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 Since then, 52 cities (including all provincial capitals) have become open cities Uncontrolled proliferation and later consolidation (Annexure 2)

SPECIAL ECONOMIC ZONES (SEZs) IN CHINA & INDIA SEZs in China Reasons for Success: - 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 (Annexures) - 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 - Powers to Provinces and local authorities to frame additional guidelines and in administering the Zones. These arise out of the over-all ‘releasing’ open-door policy mentioned earlier Emerging Challenges -

Over-capacity Heavy burden of non-performing laws Declining competitiveness WTO constraints

SPECIAL ECONOMIC ZONES (SEZs) IN CHINA & INDIA SEZs in India 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 Very limited impact Less than 40% of approvals fructified -

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Rest cancelled or lapsed

Employed only 0.01% of labour force FDI was less than 20% of total investment Accounted for less than 4% of exports. Net export much lower as imports were over 60% of exports

SPECIAL ECONOMIC ZONES (SEZs) IN CHINA & INDIA SEZs in India The reasons 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

SPECIAL ECONOMIC ZONES (SEZs) IN CHINA & INDIA SEZs in India (ii) (iii) (iv) (v) (vi)

Inadequate infrastructure Restrictive policies Lengthy procedures – No Single Window Locational disadvantages Stringent labour laws

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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.

SPECIAL ECONOMIC ZONES (SEZs) IN CHINA & INDIA SEZs in India 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 Minimum size of 1000 hectares (4 sq. miles) Simplified procedures and more incentives Main measures were: • Conditions for automatic approval relaxed considerably • Customs procedures simplified • Units could produce items reserved for SSI units in domestic market • 100% FDI investment for manufacturing • Profits could be repatriated fully • Freedom for sub-contracting • 100% I.T. exemption for five years • Exemption from Central Excise Duty on capital goods, raw materials, consumable spares from domestic market • Reimbursement of CST paid on domestic purchases

Some states also promulgated SEZ Policies (including Kerala)

SPECIAL ECONOMIC ZONES (SEZs) IN CHINA & INDIA SEZs in India -

Since 2000 • 11 functioning SEZs • About 40 were approved in addition • Growing interest by private developers to go in for large projects – Mumbai Integrated Special Economic Zone, Reliance Petroleum Zone at Jamnagar and so on.

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The special Economic Zones Act 2005 – Comprehensive law providing for larger tax incentives – Covers all aspects of establishment of zones, operation and fiscal regime

SPECIAL ECONOMIC ZONES (SEZs) IN CHINA & INDIA SEZs in India 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.

General perception among foreign investors that SEZs won’t play a great part in Indian manufacturing • Reasons – Problems of infrastructure, continued small size despite some increase; continued centralization of power with GoI & its functionaries, over-all restrictive climate for foreign investment. Role of FIPB and FIIA.

SPECIAL ECONOMIC ZONES (SEZs) IN CHINA & INDIA Special Economic Zones in Kerala 1. SEZ for Electronics at Kalamassery, Ernakulam District The SEZ is planned in an area of 30 acres. Expressions of interest have been called for getting a co-developer. However, the response has not been very encouraging and hence KINFRA, who is the implementing agency, is on the lookout for a co-developer. Government of India has already given approval. 2. SEZ for Food Processing Kakkanchery, Malappuram District The SEZ is planned in an area of 30 acres for which KINFRA on the lookout for a co-developer. Government of India has already given approval. 3. SEZ for Animation and Gaming, Trivandrum District This SEZ is planned in Trivandrum District within the already existing video park of KINFRA. SEZ is planned in an area of 25 acres. KINFRA has also constructed a building 1.5 lakh sq.ft. and is on the lookout of a co-developer. Government of India has already given approval.

SPECIAL ECONOMIC ZONES (SEZs) IN CHINA & INDIA Special Economic Zones in Kerala 4. Infopark, Ernakulam District Approval obtained from Government of India for converting the existing Infopark into a SEZ. Discussions are being held with Dubai Internet City for handing over the Infopark to be developed as Smart City. 5. Technopark, Trivandrum District Inprinciple approval has been obtained by the existing Technopark, Trivandrum from Government of India for converting 100 acres of their 3rd phase expansion into a SEZ for IT & IT enabled services. 6. New SEZs being proposed by KSIDC are:SEZ for health care products in Trivandrum District (100 acres) SEZ for textiles at Cherthala, Alappuzha District (250 acres) SEZ for petrochemical products at Kasargod District (1000 acres)

ANNEXTURE

CHINA’S SEZ’S, COASTAL OPEN CITIES, AND OPEN ECONOMIC REGIONS