SEZs past, present and Future

The concept of SEZs is not new .If we look at history we would find in Harapan and Roman times also we have Small fenced-in areas specializing in manufacturing for exports. Modern version of export zones started from Puerto Rico (USA), Shannon International Airport in Ireland in 1959 latter considered the first one.

Rationale for SEZ

Benefits sought from SEZs are: * * * * and * Faster economic growth Employment generation on a large scale Earning more foreign exchange Infusion of modern technologies & their demonstration spread effects Economies in production due to clustering

Benefits can be there for the whole country if appropriate 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 freetravel investment zone.

Free trade zones have been set up in various countries much before Chinese SEZs, but Chinese SEZs have evoked a real interest in the concept. China decided to adopt the open door policy in 1979 as an experiment to open Chinese economy to

the open market. The idea to establish a distinct class of open costal economies because of strategic advantages like long coastline close proximity to booming economies of east and south east. It was difficult for China to begin with an outright exposure to global and especially markets of west. It was felt that opening up could begin with costal states in order to gain necessary experience.

Political environment: It was relationship between central and provincial government that helped to launch such a kind of experiment. (In china provincial governments enjoy certain amount of freedom in formulating economic policies).As green signal comes from central government the costal provinces went whole hog and were able to formulate packages for provincial development. Incidentally these costal provinces were known as special zones. Initially this experiment was limited to four costal provinces and later o same model was adopted in other costal provinces also.

Role of Non resident Chinese:Non resident Chinese who were residing in Taiwan and Hong Kong rushed in with their investments when they sensed the breeze of change in the Chinese economy. It seemed as if they were missing their motherland .It is worthwhile to mention that since 1995 a major portion of FDI investments in China came from Taiwan and Hong Kong. Western investors were not very convinced about the investment climate in China. SEZs in china attained success very late as it has taken time to win the trust of western investors.

Indian scenario: -

We have tendency to compare our SEZ policy with that of China so we expect our SEZ policy to work overnight. We should be realistic and understand the working of systems in India. The Indian SEZs are bound to be fundamentally different in structure as well as character from those of Chinese SEZs .Some difference in SEZs in both the countries are given below. 1. We want our SEZ policy to work equally in every state irrespective of location, whereas china focused first on costal regions and Chinese provinces have more financial autonomy as compare to India and they can also mould economic policies according to their needs. 2. We have also failed to develop our costal provinces uniformly. India can become a hub for successful NRIs producing a variety of products and services but we have to understand that this is not going to happen overnight as policies take time to evolve. We need to keep a constant watch on situation and exert a constant pressure if we want the systems to deliver. Secondly if we compare the role if Indian NRIs in comparison to their Chinese counterparts, here also we need to take an objective view of the situation. We should not flog the NRIs for not doing what non resident Chinese have done. NRIs have played a distinct role in terms of transfer of Knowledge skills and experience NRIs have made a huge qualitative contribution in post reform economy in comparison to Chinese who were inherently paranoid.

SEZs in India (Second Innings)

SEZs which are said to be engines of growth are expected to change Indian landscape .Though India had a headstarted in the direction by building its first export processing zone in 1969 with certain minimum infrastructure and fiscal sops, it could not muster enough political will to build full-fledged Special Economic Zones with foreign territory status in the matters of international trade till the turn of the century. China started very late in year 1979 with now possessing most successful SEZs in the World. The Indian SEZs act announced in

May 2005 is move to gear up FDI and domestic investments to corner benefits of new business opportunities .The act offers facilities like single window clearance, timely disposal of applications tax beaks for fifteen years. Many big industrial houses and real estate developers are in beeline to take advantage of SEZ wave. India adopted the concept SEZs as a part of foreign trade policy in year 2000 but even with around 500 SEZ proposals out of which 220 SEZ started operating most of them are not working to their full potential. China has over 600 operational SEZs which account for 40 percent of exports and support each other, whereas on the other hand Indian SEZs struggled with each other to attract Investments. If we were able to setup 4 to 5 large size SEZs of international standards they would help a lot in our economic growth. It is interesting to not that many state industrial development corporations have send proposals for setting up SEZs.

Services, Real estate, Recession a mixed Saga:China has become worlds manufacturing hub with the help of SEZ model. India has a strong hold in services sector and Indian SEZs have been successful in attracting FDI in services sector .As FDI limits in real estate have been removed big developers and industrial houses can foray into the SEZ development activity. Recession have come as a big blow to Indian IT/ITES sector as Indian companies were getting business from various organizations of west and mainly of US.US is the country from where recession started. US is also Indias biggest business partner so Indian economy can never be untouched. Recession has also affected Europe and other big economies of the world. Big Industrial houses all over the west are cramming to cut costs. Indian services sector and SEZs can act as a low cost solution to those companies. NASSCOMS pre-recession estimates expected IT/ITES industry to grow at a rate of 35% per annum and attain the size of $148 bn by year 2012.Employment potential was expected to grow at .2 million annually which

further demand for twenty million square feet of space annually .Clause of tax incentive to IT/ITES industry is going to end by the year 2009, so IT/ITES companies are planning to move towards SEZs to take advantage of Tax holiday for the Next 15 Years. Tax holiday is a cost advantage tool that India can offer to the ailing service and production companies. Most of EPZs will are subjected to tax elimination by 2009, SEZs can provide companies a good and viable option for some more tax breaks and a huge opportunity to real estate developers . The real estate story and recession :Real estate developers have adopted wait and watch approach and wary of creating infrastructure in this state of recession. Many Big companies like DLF who have initially planned more then a dozen SEZs have planned to give up half of their SEZ projects. Other Issues;(1)With growing Urbanization it is difficult for companies to acquire large parcels of land with high sticker prices, So presently SEZs are located away from urban centers. (2)Indian SEZs are also small in size as compare to Chinese SEZs and most of them are not of international standards. (3)Success in SEZs depends upon developing mini township experience in SEZ to fulfill social requirements also. Infrastructure cost has been reduced twenty percent by exempting material and services purchased by SEZ developer .Power plants in SEZs are also given tax benefits which provide efficient power at competitive prices. Right now real estate developers are feeling as if they are in the mid of a mess due to global recession, but they have a reason to cheer up.

A strong domestic market: - Everyone knows that global recession has not affected India as much as it has affected America and other Western economies and this is due to strong and real domestic demand .Companies can use this domestic demand as leverage in this period of recession. It is time that developers should understand the needs of local customers and offer them customized real estate solutions and according to their purchasing power. Recession is not going to stay for long and signs of improvement have started appearing. Every professional around the world is looking for ways to tame recession, so they should see light at the end of the tunnel. Multiplier effect:There is new fear that is engulfing up governments in this era of SEZs and recession is loss of tax revenue on account of rise in tax sops of fifteen years provided to SEZs .We should understand that tax revenues of Indian economy was only ten percent of GDP. Government feels the heat as tax sops may not become a problem in funding social sector, but these tax sops could also play a significant role in employment generation, forex generation, competitiveness in Industry, access to latest technologies and catalyzing economic growth. Increase in employment opportunities would further increase purchasing power of people and flow of money. Forex earnings would strengthen our economy in balancing import bill, diversify currency devaluation risk. Tax incentives would be critical to draw large share of world trade Pie as this would provide much needed capital for economic sustenance and growth. In the long run the above said benefits would outweigh the financial incentives provided to SEZs. India China: Are they on the same ground. Though India had a head-started in the direction by building its first export processing zone in 1969 with certain minimum

infrastructure and fiscal sops, it could not muster enough political will to build full-fledged Special Economic Zones with foreign territory status in the matters of international trade till the turn of the century. As opposed to that China developed five mega Special Economic Zones (the largest being Shenzhen built over 49,500 hectares), India opened its doors to private players and allowed sector-specific Special Economic Zones to develop on just 10 hectares of land. In India, more than 500 Special Economic Zones have been proposed, 220 of which have already been created, with most of them not working to their full potential. The economies of scale, which seems to have worked so well in China by reducing production costs, may not have the same effect in the Indian Special Economic Zones. In China, the government chose the location for Special Economic Zones With a lot of thought all the first five SEZs were located near the coastal regions. This made it easier for the Special Economic Zone units to export their products and import inputs. In India, Special Economic Zones are being built all over the country, wherever land can be acquired by the developers. This has also led to allegations of land-grabbing and conversion of productive agricultural land by developers. As a result, Centre has made it mandatory that all proposals should have a certificate from the state governments notifying that the land being used is non-agricultural for at least 90%. One of the most basic differences between the Special Economic Zone model adopted in China and India is that the Chinese Special Economic Zone initiative is government driven, whereas Indian Special Economic Zones are driven by private sector. In China, the State acquires the land and develops the required infrastructure, while private enterprises are invited to set up units. Under such a system, land continues to be under the ownership of the State. In India, however, private entities are being involved in developing the Special Economic Zone infrastructure. As a result, Land is being acquired by the State and handed over to private developers.

The way forward:The three pillars of SEZ act are incentives regulatory freedom and world class infrastructure. State governments are to be allowed to adopt flexible labor laws. Prime Minister Manmhan Singh once said there is urgent need to reform labour laws and if we cant do it in the whole country we can try this in SEZs. Even China has made specific labour reforms for SEZs. We need to take care of labor issues if we need to get global investments. Now in the wake of recession when whole world is looking for low cost markets, big industrial houses are struggling to survive; India can offer a unique low cost labour market. Government has also expressed interest in improving infrastructure, through SPV route with public private partnership. This would raise necessary capital in domestic as well as international markets .Global businesses can play their role in creating volume potential which will provide economic wherewithal to address geo political climate. Right infrastructure is the key that will help in retaining industries even after TAX breaks are over. Indian SEZs need to build purpose-fit facilities, specialized services, a streamlined minimum red tape environment to encourage clustered manufacturing. Competition is heating up among states to attract investments. If governments acts meaning fully our SEZs can attract investments from foreign SEZs in China, Singapore ,Dubai etc by building competitive advantages gradually in the time of recession. When big industrial houses of the world like general motors, GE and various other companies are looking for bailout packages, giving Pink slips to their employees to cut costs Indian SEZs with huge tax soaps can act as heaven with other advantages like Cheap professionally qualified labour and strong domestic market.