Special Economic Zones (sezs) In India: Status, Policy, Performance, Debates

Special Economic Zones (SEZs) in India

Status, policy, performance, debates

Overview of SEZ Policy in India •

• • • • • • • • • • • •

India had introduced EPZs in 1990s to overcome domestic infrastructural and institutional constraints and boost manufacturing sector But lack of government commitment, piecemeal reforms, policy reversals, poor site selection, weak incentives, poor regulation of zones limited success In 2000 replaced old EPZ regime with Special Economic Zones scheme with additional lucrative incentives and benefits, prompted by success of China Difference between SEZ and EPZ- former is an integrated township and latter is industrial enclave All existing zones converted into SEZs and three greenfield SEZs made operational by 2004

SEZ Act 2005 

• 2005 enacted SEZ Act, SEZ rules notified in February 2006 • State governments also enacted own SEZ laws to cover state subjects 

• “A Special Economic Zone (SEZ) is a specifically delineated duty free

enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs”



• Objectives: – Boost exports, employment and investment – Overcome infrastructural deficiencies, procedural complexities, bureaucratic hassles, other barriers faced by producers which raise transaction and establishment costs – Speed up industrialization process in strategic and selective manner 

• By allowing private sector to set up SEZs, government transferred burden of infrastructure development to private players, in return giving various incentives 

• Main features: – – Integrated policy framework provided for all main stakeholders in an SEZ- developer, operators, occupant enterprise, out zone supplier, residents – – Board of approval constituted by central government for promoting and ensuring orderly development – – Minimum size and investment spending requirements depending on type of SEZ – – Benefits provided in SEZs include: • tax incentives • provision of land or factories at low rents with extended lease period • provision of infrastructure and utilities • single window clearance • simplified procedures • exemptions from various restrictions to investment

•

•



Specific incentives include – – Ten year tax holiday out of 15 years in phases on all income – Ten year tax holiday for all export income across block of 15 years – One time waiver of customs duty, central excise, service tax, central sales tax, and local taxes for all inputs – FDI permitted to develop townships within SEZs – FDI upto 100% allowed via automatic route for all manufacturing activities – No cap on foreign investment in SSI reserved items – Provisions for establishment of free trade and warehousing zones to create trade-related infrastructure and make India a global trading hub – Setting up of offshore banking units and units in an international financial service centre in SEZs – Public private participation in infrastructure development –

• Centre did not address issue of labour laws but left to states – States may amend various labour laws, allowing permanent hiring of contract labour, deemed all such units as public utilities and thus outlawing strikes 

• Ministry of Commerce projects: – Increased investment – Employment creation of 4 million – Additional revenues 

• Competitive advantage of such zones also expected to result from creation of industrial clusters, with external economies of scale and other benefits help firms reduce costs, develop competitive production systems 

Some of the big ones… 

• Reliance putting in Rs. 30,000 crores into 2 SEZs in Maharashtra, Rs. 40,000 crores into SEZ in Haryana • • DLF investing Rs 31,000 crores in Amritsar, Ludhiana, Gurgaon, Ambala • • Many Indian companies planning to buy, develop, lease out over 300,000 hectares of land • • Required cumulative investment of Rs. 3,30,000 crores of as much as Rs. 5,50,000 crores, 10-17% of India’s GDP •

Status (Dec 08) • SEZs set up prior to the SEZ ACT: 19 

• Post enactment of SEZ Rules in Feb 06 – No of SEZs formally approved- 552 – In-principle approval granted - 141 – No of SEZs notified - 260 

• Land acquired and required for development of these SEZs – Land required for all formal approvals - 67,680 hectares (2.27% of land in the country) – Land already in possession of State Industrial Corporations - 20,853 hectares – Land already under operational notified SEZs - 31,405 hectares  

 

Sector-wise distribution of SEZs (as on Dec 08)

State-wise distribution of SEZs (as on Dec 08)



• •

• •

•

Performance and Impact of SEZs in India

SEZs have had some beneficial role in promoting new production areas, exporting new products – Jewellery industry transitioned from cottage based to modern and mechanized industry with new production techniques due to EPZ in Mumbai, became more export oriented – Helped in creating base for growth of electronics industry via technology transfers, spillovers, demonstration effects – High share in exports of certain products But overall contribution of such zones until recently was minimal – only 5% contribution to total exports in 2005-06 – only 1% of factory employment – 0.32 percent of factor investment – limited contribution to regional economies

Recent evidence on impact Employment  Total employment in SEZs - 3,49,203 persons  Incremental employment in SEZs since Feb., 2006- 2,14,499 persons   Details of employment in notified SEZs (214): Direct employment- Current 100,885 (63% men, 37% women), proposed 2,448,246 Indirect employment – Current 220,506, proposed 2,455,196  DIRECT Employment created in notified SEZs (as of 30.6.08)

100885 persons (all Incremental Employment generated after February 2006)

DIRECT Employment in Private/State 48988 persons (Incremental employment generated since Govt. SEZs which came into force prior Feb. 2006: 36,250 persons) to SEZ Act, 2005 (as of 30.6.08) DIRECT Employment in 7 SEZs 1,99,330 persons (Incremental employment generated since established by the Central Government Feb. 2006: 77,094 persons) (as of 30.6.08)

Exports (Rs crore) 

SEZ exports registered 92% growth in 2007-08 



Investment  Total investment in SEZs (June 2008)- Rs. 81,093 crore  Incremental investment since February 2006- Rs. 77058 crore Investment in notified SEZs (as of 30.6.08)

Rs. 73348 crore (all Incremental Employment generated after February 2006))

Investment in Private/State Govt. SEZs Rs. 3701.91 crore (incremental investment generated since which came into force prior to SEZ Act, Feb. 2006 is Rs. 1946 crore) 2005 (as of 30.6.08) Investment in 7 SEZs established by the Rs. 4043.28 crore (incremental investment generated since Central Government (as of 30.6.08.) Feb. 2006 is Rs. 1764.08 crore)

Debate around the SEZ Policy 

Several questions raised about SEZs – Will they significantly help boost the manufacturing sector, employment, and exports and at what cost – Is there clarity in approval of projects? – Is the approval process transparent and fair? – Is there clarity on ancillary issues and how they will be tackled and have such mechanisms and institutions been put in place – Has any impact assessment been done? – Can SEZs be viable, profitable, sustainable business ventures and earn decent return? – Will they help accelerate the growth rate? – Can SEZs substitute for pursuing economy-wide institutional and infrastructural improvements? – Can the competitiveness of SEZs be sustained without economywide improvement in investment and business climate? –





Main concerns about SEZs 

Land Acquisition

• •

Large scale land acquisition by developers causing displacement of farmers with inadequate compensation and no alternate livelihood provided

• •

Profiteering on purchase and sale of land

• •

Loss of agricultural land if SEZ built on fertile land and implications for food security

• •

Real estate developers will get land cheaply and also profit from speculation on nearby land and hurt profitability of serious players, unproductively lock up land



•

Some estimates place loss of livelihoods of families dependent on this land at an approximate 212 crores a year affecting 10 lakh people



•

After sustained protests and concerns raised government responses: – Land Resettlement and Rehabilitation policy: checking land acquisition and limited land to be acquired to 30% – Ministry of Commerce stating it will not grant approval to SEZs where there is evidence of forceful land acquisition 

• Land acquisition will be critical to SEZ success in India – Different models of acquisition being used by private players • Firms trying open market purchase of land but facing political and social opposition where agricultural land involved • Firms using state industrial corporations to acquire land and enter into joint venture deal – But problems being faced already • Even when farmers willing to sell land, not have records to effect transfer • Not getting contiguous tracts of land as fragmented land holdings and firms required to start with smaller SEZs initially and not avail of fiscal incentives • Constraints to conversion of farm to non farm land, purchase of agricultural land by non-agriculturists • – Delays in land acquisition can hurt the viability of many SEZ projects – • How does one define public interest? • When is the state justified in acquiring land for the private sector? • What is an appropriate compensation framework? • 



Revenue Loss



•

Ministry of Finance estimates on revenue losses:INR 19000 crores



•





Report of the CAG to Parliament: – With SEZ units permitted to treat their domestic sales as export earnings, government had to forgo revenue amounting to nearly Rs. 2,000 crore in 2008 – Government had to forgo Rs. 1,043 crore in customs duty exemptions to SEZ units – Total duty of Rs. 106.71 crore plus interest of Rs. 46.17 crores recoverable from 24 SEZ units which failed to achieve positive NFEs – Duty foregone on the SEZ scheme from 2000-01 to 2005-06 was Rs. 8,842 crore, during 2006-07 duty foregone Rs. 2,146 crores –

• Noted economists’ views – India’s SEZ policy a tax “give-away” – Likely to shift Indian production to SEZs rather than create new economic activity – Viability of zones would depend on provision of superior infrastructure, business-friendly regulations and exemptions from labour laws “rather than offering often misdirected subsidies, guarantees, and tax sops that a stretched budget can ill-afford”. • Incentives are not all compatible with India’s WTO obligations • No evidence to substantiate that tax benefits to SEZs have contributed significantly to exports and value added 

• Commerce Ministry differs, estimates revenue losses will be offset by potential job creation and export revenues earned 

• May have to wait for the policy to be in effect a while longer to assess costs and benefits

Widening Regional Disparities 

• So far only few states have reaped benefits of SEZ policy more than others • States with the highest no of notified SEZs – Andhra Pradesh – 57 – Tamil Nadu - 44 – Maharashtra - 43 – Karnataka & Haryana – 25 – Gujarat – 24 • 6 states account for 80% of notified SEZs, 75% of formally approved SEZs •

Within these states, SEZs being setting up in and around urban areas (Bangalore, Gurgaon, Pune, Raigarh, Vizag, Hyderabad) • Higher number of SEZs in industrially advanced states

Uneven sectoral distribution • Bulk of SEZs being set up in 2-3 sectors alone, defeating purpose of boosting exports in other sectors • Sectors setting up the most SEZs : – IT/ITES/Electronic Hardware/Semiconductor : 66% of all notified SEZs and 61% of all formally approved SEZs – Engineering & Pharma – 5% each – Textiles & Apparel: 3 % 

• But IT/ITES already availed of many incentives from central and state governments 

• To what extent does this pattern support the policy objective of broadening the country’s export basket , in particular manufacturing exports 

• Are IT/ITES firms entering SEZs to prolong their tax incentives? 

–

Labour Laws •

Concerns that important labour laws would not apply within SEZs. (formation of trade unions, working hours, handing over of powers to the Development Commissioner, protection against retrenchment, waiver from Minimum Wages Act)



•

Some state governments (Gujarat, Maharashtra, AP, Orissa, Karnataka) tried to take advantage of this and amend state labour laws



•

But widespread protests, supported by Left parties, and UPA alliance and Labour Ministry made clear that it will be difficult for states to have flexibility to amend core labour laws



• 

•

States that passed their SEZ Act prior to the centre’s 2005 SEZ Act can hold on to amendments made in their labour laws as applicable in these zones

Bypassing other key legislations • Concerns that environmental norms like EIA (Environment Impact Assessment Notification) will not apply to SEZ 

• Used in protests against SEZs in Goa – Gorai - Manori EsselSEZ (that was later dropped) on grounds of the amusement SEZ undermining local culture and heritage of the traditional fishing village

Centre-State jurisdictional ambiguity • SEZ Act 2005 a central Act but implementation left to state governments • Jurisdictional ambiguity in the event of a clash • State governments used their discretion in aiding SEZ developers in setting up units in order to boost investment 

Case of Goa: • Under pressure from opposition party and public protests, Government of Goa scrapped all proposed 15 SEZs in the state (Jan 08) • 3 notified SEZs (Meditab specialities' Pharma SEZ at Keri, K Raheja's IT SEZ at Verna and Peninsula Pharma's Bio-tech SEZ at Sancoale) yet to be denotified • Following Goa government’s decision, developers took state government to Court • Central government not yet passed a verdict on the matter 

• • •

SEZs or REZs (Real Estate Zones) Why frenzied real estate development around SEZs? • • Section 5(2) of the SEZ Act permits developers to use 75% of the area for non-industrial proposes (recreation, housing, hotels & lodging, amusement) • • Same fiscal incentives and tax breaks extended to real estate developers • • Top real estate developers in India have entered the SEZ promotion cycle • • Many real estate companies who have no track record in manufacturing or exports have become SEZ promoters • • Recently, many developers queuing up to get their SEZs de-notified or reduced in size due to the impact of the current crisis on the real estate market 

Government’s response to concerns  

 

Counterarguments provided but not always convincing – Relocation of investment not likely given tax incentive structure – Net revenue gains likely due to additional investment and exports – Land requirement of all SEZs only 100,000 hectares, less than 0.1% of total cultivable land in India – Onus on state governments to ensure reasonable and transparent land acquisition laws for SEZs and provide for adequate rehabilitation and relief package for affected people – Generally use single crop and waste and barren land for SEZs, double cropped land if required to be acquired not to exceed 10% of total SEZ land requirement – Regulate usage of SEZ area by developers to prevent real estate speculation and profiteering and allow construction of housing and real estate development only in phased manner –

• • • •

Global evidence on SEZs and lessons for India Across countries SEZs used to overcome infrastructural constraints, land ownership, labour problems But evidence shows that: – Majority of successful SEZs set up and maintained with government not private capital – Private companies invest for building factories not establishing and maintaining SEZs – SEZs do help promote investments and provide world class infrastructure for companies – But SEZs have long gestation periods, do not provide profits to companies for some time, involve high capital costs, and are high risk-high return

• Examples • • Dubai’s Jebel Ali Free Zone – Much of initial investment by government and still financially supported by Dubai govt – Role of zonal authority to attract investments, create jobs, promote trade and industry – Profits and rate of return on investment not main motives of authority – Very generous fiscal incentives with unlimited access to cheap capital –



• China’s SEZs – initially capitalized with government money, state owned, later leveraged for bank lending – Motive was not profit but investment promotion, with role for development agencies – Fewer in number (started with only five) and in selected regions unlike large number approved already in India – Used flexible labour laws and work permits to control wage costs – More generous incentives, 20 year tax holidays – Focus on developing overall business and investment eco-system and not only enclaves – SEZs have major contribution to economy and integration with world markets, account for 40% of country’s exports and major share of FDI  







• India only country to go for private development of SEZs in such large numbers 

• Large groups in India expecting profits within few years and high rates of return on investments which may be unrealistic 

• India’s SEZs will be much smaller than those abroad and won’t give scale required to be lower cost in manufacturing – Minimum area for multiproduct SEZ is 1,000 hectares (3.9 sq miles) compared to 126 square miles for China’s largest SEZ in Shenzen

– 

Proposals for Improved SEZ Policy • • • • • • • • • • • • • •

Create fewer, 4-5 special economic regions Adequate safeguards required to ensure irrigated and agriculturally fertile land not acquired by SEZs SEZ proposals should be supported by certification of quality of agricultural land, format of assessment for building on prime agricultural land should be made clear State governments must prescribe minimum prices for land in various areas, valid for registration of sales deeds and payment of compensation Prices should be high enough to reflect opportunity prices of land In addition to suitable financial compensation, displaced farm labour and rural workers should be given preference in employment either by SEZ developer or in SEZ business units Every SEZ developer should be required to set up a training institution where appropriate training provided for workers displaced from their traditional employment

•

Call for international and domestic bids in these regions, weigh bids across various parameters and approve

 •

Reconsider issue of tax sops, assess if required for competitiveness given duties falling – What sops to be provided, what sops to be removed – Core versus ancillary activities – Merit versus non-merit subsidies

– •

Reconsider what portion of land to be used for processing (raise from 35 to 50%) and rest for social infrastructure development

 •

SEZs should be primarily devoted to exporting