Monday, May 4, 2015

Whose comfort zone is it?

4 May 2015, New Delhi, Pankaj Sharma

In India’s context special economic zones are a white elephant

The story of the failure of Special Economic Zones (SEZ) in India is unfolding in a surreal manner. Thanks to the manipulative skills of a number of business houses, the explicit purpose with which the Congress-led UPA government had launched SEZs years ago is yet to be achieved. The SEZ scheme was introduced 15 years back with a view to providing an internationally competent and hassle free environment for export production. Before this, previous governments had tried and encouraged Export Oriented Units (EOUs). 

These industrial units used to manufacture goods for exports. As time gradually passed, these units started trading their products in the export market. The geographic area where goods may be landed, handled, manufactured or reconfigured, and reexported came to be known as Free Trade Zones (FTZ). However, soon after the need for support infrastructure and logistic facilities for smooth functioning of the FTZs came.

Till now the Government of India has given formal approval for 564 SEZs in different states. United Andhra Pradesh, Maharashtra, Tamil Nadu and Karnataka got the largest chunk of these approvals. Gujarat, Haryana, Uttar Pradesh and Kerela also got larger share of SEZ approvals. Companies dealing in information technology, electronic hardware and semiconductors got maximum number of approvals. Biotech, pharma, chemical, textiles, gems & jewellery, metal and multi-product companies also got sizable number of approvals for creating SEZs. Sectors such as agro, non-conventional energy, plastic processing and strategic manufacturing were comparatively far behind.

The list of big beneficiaries of the government’s largesse includes illustrious corporate giants like Reliance, Adani, Tata, Larsen & Tubro, Ramky Pharma, Dr. Reddy Laboratories, Ranbaxy, Vedanta, Sterlite, K. Raheja Corporation, DLF, Unitech, Sanghi, Parshwanath, Hiranandani, Balaji, Lodha, Nagarjuna, Mahavir, Oppto, Infosys, HCL, Wipro, Emmar, GMR, Ansal, Hindalco, Ruchi Reality, Mahindra, Dalmiya, etc. Today the number of operational SEZs in the country does not cross even 200. This means that more than half of the SEZs formally approved are lying dead and the land acquired and given to them is not being utilised for the basic purpose.

Of the 564 SEZs that have been formally approved so far, only 192 are operational. The total employment in these enclaves is around 12.77 lakh as against an expectation of 17.5 by 2009. It means that even after six years we are short of achieving the target by 4.5 lakh. While the share of SEZs in total exports rose from 6 percent in 2006-07 to 28 percent in 2010-11, it has declined in subsequent years. The total area under SEZs currently stands at 61,624 hectares and more than half of this land remains unutilised.

Under the original scheme, businesses in SEZs were exempted from the minimum alternate tax (MAT) on book profits and developers were exempted from payment of the dividend distribution tax (DDT). However, with indications that companies were misusing the policy for real estate arbitrage and that information technology companies were using the policy to recoup tax benefits that they lost when the Software Technology Parks of India (STPI) scheme ended, these exemptions were withdrawn from 2011-12. SEZ units and developers were put under MAT and DDT exemptions for developers were terminated. MAT was levied on book profits at the rate of 20 percent, while DDT was levied at 20 per cent on dividends distributed to shareholders. Previous government had to take these steps after receiving complaints about certain misdoings by several private players. After Narendra Modi took over as prime minister, a strong lobby is raising a voice against these withdrawals and terminations and arguing that Special Economic Zones (SEZs) are likely to be central to realising Prime Minister’s ambitious ‘Make in India’ agenda. The withdrawal of tax incentives, however, has made SEZs an unattractive proposition.

It is true that a key attraction for corporate houses was the income- tax holiday and now with taxes being levied, the savings for companies on account of tax concessions was reduced, impacting their earlier interest in SEZs. However nobody is willing to answer the question as to why for all these years, most of the SEZs remained non-functional? The taxation issues cannot be the only reason impeding SEZs. Despite offering over 300 incentives and schemes for the promotion of manufacturing, growth has not risen substantially. Therefore, incentives need to be carefully evaluated and studied. Incentives should not be the only reason for units to be located in SEZs. Success depends on the business facilitation measures adopted and professional zone management too. It is for the companies to assess where they failed in these two areas.

According to a World Bank estimate there are around 5000 projects taking place in SEZs across 120 countries worldwide and most of them are growing fast. The first industrial park called Free Trade Zone was set up in Manchester almost 120 years back in 1896 to promote free trade, conceptually improved by Hong Kong after the Second World War. The special zones on the line of our SEZs were started in Spain in 1929 and China’s Deng Xiaoping gave a tremendous push to this concept in 1979. Deng used SEZs as the economic quake to attain the success of his liberalised economic policies.

On the contrary, Indian SEZs have had no noticeable impact on any aspect of economic growth while they have claimed thousands of crore rupees of ineligible taxes. A CAG audit report tabled in the winter session Parliament in November last year says that the objective of SEZs was employment generation, investment, exports and economic growth. However, the trends of the national databases on economic growth of the country, trade, infrastructure, investment and employment, among others, do not indicate any significant impact of the functioning of the SEZs on the economic growth. The report pointed out that the SEZs in India have availed tax concessions to the tune of Rs 83,104.76 crore, of which Rs 55,158 crore of income tax and indirect taxes of Rs 27,946.76 crore, between 2006-07 and 2012-13. Isn’t it the time when the current government must expedite the process of streamlining SEZs started by UPA three years back?

Author is Editor and CEO of News Views India

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