148 Special Economic Zone proposals worth an investment of Rs. 100,000 crores ($ 20 Billion) all over the country. These SEZ's are spread over an area of 40,000 hectares and will create jobs for more than half a million people. What is special about the Special Economic Zone? I have an idea that is means there are different tax, trade and labour laws in that special place, and probably lesser regulation as well. I am also aware that the Government has adapted the trickle down model for economic liberalization to spread. It is hoped that as centers of economic performance, these SEZ's will slowly spread their reach and soon most of India will be liberalized in an orderly fashion.
Many of these SEZ's are approved in the state of Gujarat, followed by Maharashtra. They had to defer the proposals for TN, WB and Kerala because of the upcoming elections. Speaking of Gujarat, Gujaratis all over the world may feel proud to know that their state has overtaken Maharashtra to be the most industrialized state in the country. I hope the people of Maharashtra are listening: with crappy voting comes crappy leadership. Talk about Maratha pride all you want, but it still wont get food on your table.
Some of the biggest were:
Govt clears Rs 100,000 cr investment in SEZs
Reliance Infrastructure Ltd will be setting up a petrochemical SEZ at Jamnagar spread over 450 acres with an investment of over Rs 20,000 crore (Rs 200 billion). Gujarat Industrial Development Corporation's multi-product SEZ over 4,370 acres, with an estimated investment of over Rs 4,000 crore (Rs 40 billion), was also approved.
Two proposals of the Adani group -- the Mundra SEZ of Gujarat Adani Port Ltd spread over 5,000 acres and Adani Chemicals' SEZ, also in Gujarat, spread over 7,000 acres with an estimated investment of over Rs 12,000 crore (Rs 120 billion) -- were also cleared.
Biocon's proposal for a bio-technology SEZ in Bangalore spread over 90 acres with an investment of around Rs 200 crore (Rs 2 billion) also got the nod.
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So to understand whats going on, I read what the Chief Economist at Crisil has to say:
Why everyone is interested in SEZs
All these will enjoy the several benefits that have been offered under the recent SEZ policy framework and are expected to be operational within three years in order to be entitled to them.
Among the developers of the approved zones are such prominent corporate names as Reliance, Bajaj Auto, Mahindra & Mahindra, TCS, Wipro and Ranbaxy, as well as others known for
their strategic orientation and long-term commitments. Their participation provides a great deal of credibility of the process and reinforces the expectations of proponents of the whole programme.
Over the years that we have had various generations of the concept in place--free trade zones or export-processing zones or any other--their collective share of the country's total exports has not risen above 5 per cent.
Whatever impeded the competitiveness of domestic producers outside the zones apparently had an influence inside them as well. The direct fiscal incentives were obviously not strong enough to offset those disadvantages.
On the policy front, the issue that was most debated was the possibility of exempting producers locating in the zones from the labour market regulations, particularly those applying to job security. Many people saw this as an indispensable part of the SEZ strategy and were disappointed by the ultimate decision not to provide these exemptions.
Obviously, the huge enthusiasm shown by developers, specially the names mentioned above, suggests that this concern is not as significant as it first appeared.
This perception is reinforced by the fact that many of the zones are focused on multi-product manufacturing activity, where the failure to deal with labour market issues has the maximum potential to cause damage. Well, apparently not, in the minds of the developers.
There is one clear difference between the old and new regimes. The developer--private or in partnership with a public agency--will have enough control over the infrastructure and services within the zone to provide his clients with a high degree of assurance with respect to their quality and reliability.
The zones that we have had so far have been managed by public agencies, who, as we well know, cannot usually offer that kind of comfort.
There is a perception that a lot of investment that would otherwise take place isn't, because the infrastructure situation is a huge deterrent. If this problem is solved within the framework of the SEZ, a substantial part of this potential would be realised.
While the labour issue may continue to be an irritant, there are bypasses available. For example, state governments, whose permission has to be sought to lay off workers, may be willing to co-operate in order to attract investment.
Although the policy objective is oriented towards exports, it does not prohibit producers from selling in the domestic market, provided they pay all the duties that exports are exempt from, including customs duties on imports into the country.
I suspect that for many products, producers will find it economical to locate in the zones and sell in the domestic market. This tendency will be reinforced by falling import duties, which will reduce the price gap between exports and domestic sales for producers within the zones.
For zones in the interior parts of the country, weak transport linkages to ports may offset the efficiency gains from locating in them and make domestic sales even more attractive.
The critical question is: are the zones "investment-creating"--attracting investment that wouldn't otherwise take place--or "investment-diverting"--inducing relocation from existing facilities?
Two factors will determine the direction. The first is the signal that state governments send on allowing de facto labour market flexibility. If they fight shy, producers who already have workers on their rolls will shift in order to take advantage of the infrastructure, while losing nothing on the labour front. However, new businesses will continue to have a problem with the prospect of a permanent labour force.
The second is the degree of dependence on infrastructure outside the zone, which will, almost by definition, not match up to its counterpart within. Again, the logic of relocation is clear, while the logic of start-ups is not.
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So there is the trickle down effect that i was talking about. Start-ups will continue to face the perennial labour inflexibility of India, while those who can't get the state govt. to allow them to retrench might simply relocate. Good trump card in industry's hands.
But it is not all song and dance here, and considering the respect I give to Business Standard, let me look at their editorial on the same:
SEZ = tax scam?
The proposed investment of Rs 100,000 crore in 148 special economic zones (SEZs) will be equal to a third of what the top 300 companies in the country are planning to invest in the country over the next 18 months. That would make the SEZ programme look like a success story in the making.
The logic of creating a special economic zone is to offer infrastructure and other facilities that cannot be provided quite so easily across the country as a whole. In India, this would mean assured electricity, good transport links (some of the new SEZs are adjacent to ports), and, because India’s labour laws are needlessly restrictive, the assurance that an SEZ will provide more flexible labour laws.
However, if the SEZ becomes little more than a tax dodge, then there is everything to be said for stopping this business in its tracks. India already has tax loopholes of many kinds, and does not need to add another one.
The government’s declared policy is to bring that number down, whereas the SEZ programme seems designed to do just the opposite. If the commerce ministry
is pushing for this, over-riding the finance ministry’s objections, the Prime Minister should step in before more damage is done.
The crucial element that justifies making special provisions for infrastructure and relaxing labour laws is the additionality factor; in other words, the investment that comes into a special zone should be over and above what would have taken place in the normal course.
And the danger is that, if the primary attraction of an SEZ is the tax benefits that are offered, the investment is likely to be a diversion from
the domestic tariff area. In other words, potential tax revenue would have been given away for little or no benefit.
The manner in which the SEZs are being drawn up certainly raises fears about just such a scenario.
The zones themselves are often too small—as little as 100 hectares. For some special kinds of industries (software, bio-tech, gems and jewellery), that minimum size has been reduced to 10 hectares—which is little more than the size of an industrial plot. Providing quality infrastructure in such a small area can have no real meaning.
The irony is that the flexibility in labour laws that should have been part of an SEZ scheme is being offered in very limited doses, as a reading of the guidelines makes clear.
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I always knew that Indian industry's achilles heel has always been its
ridiculously inflexible labour laws. One needs to take the permission of the
state government to fire people. And we know the government only sees in black
and white: will this get me votes or will it wont?
But lets wait and
see.
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