By notifying the Special Economic Zones (Amendment) Rules, 2013 to implement the SEZ reforms announced on April 18, 2013, the government has put to rest all speculation over the continuance of the policy. In view of an extremely grim balance of payment scenario, there is no option for India other than promoting exports and foreign direct investment (FDI).
Considering that the SEZ programme can be a promising instrument for achieving both these objectives, government has turned to SEZs once more, after a series of controversial policy reversals. Under the new rules, the minimum land area requirement has been halved for different categories of SEZs. Further, there will be no minimum land requirement for setting up information technology/IT enabled service SEZs. The package also includes greater flexibility in utilising SEZ land tracts, sectoral broad-banding and an exit policy for SEZ units.
Can these reforms rekindle investor confidence in SEZs? My answer is no.
Historical evidence suggests that even though the export zones have been an integral part of India's export promotion policy since 1965, the government has never demonstrated a strong commitment to the programme. In the early phase, the crippled investment climate it offered in SEZs thwarted the programme from taking off. In 2005, a special legislation and overriding laws were formulated to provide a significant "push" to the policy. But when the policy came under heavy criticism, the government responded by diluting it through a series of policy reversals for fear of losing popular support.
These policy reversals and public bickerings between the commerce and finance ministries over the SEZ policy sent negative signals around the world regarding the government's sincerity towards its policy, discouraging in particular foreign direct investors. In March 2011, SEZs were dealt a major blow when they were brought under the purview of minimum alternate tax (MAT) and dividend distribution tax (DDT). Uncertainties continue to dog the policy. The Direct Tax Code Bill, 2010, pending with the Parliament seeks to further dilute the incentive package offered to SEZs by replacing the profits-linked tax benefits with investment-linked ones.
It was shocking that just two months after the announcement of the April 18 policy reforms, media reports that the government might scrap SEZs hit the headlines. Experience of successful countries indicates that a strategic SEZ policy requires a clear vision, strong commitment, concerted efforts, continuity in efforts, and a pragmatic approach. In contrast, in India, the implementation of the policy is undermined by weak commitments, policy reversals, and a lack of vision in policy design and implementation.
At the aggregate level, SEZs appear to have made a significant contribution to investment and exports. They have received investment of over Rs 2.39 lakh crore. Exports from SEZs have seen a dramatic jump from Rs 22,840 crore in 2005-06 to Rs 4.76 lakh crore in 2012-13. But a disaggregated analysis is less favourable. Of the 589 formally approved and 389 notified SEZs, only 170 are operational. Further, only two SEZs accounted for nearly 42 per cent of the total SEZ exports in 2011: the Jamnagar refinery and DLF Infosys Mangalore. The share of FDI also remains abysmally small. Not only that, the proposed FDI in newly notified SEZs has been declining. It has declined from Rs 34,509 crore as on 31 December 2009 to Rs 30,964 crore in September 2010 and then further to Rs 26,984.4 crore as on March 31, 2012.
The reforms are claimed to be an outcome of a comprehensive review of the SEZ policy after intense stakeholder consultations for over a year. Unfortunately, however, major demands such as the withdrawal of MAT and DDT, extension of benefits of some of the incentive schemes to SEZ units, and relaxation of rules pertaining to domestic tariff areas (DTA) sales to counter the business cycle effects have not been acceded to. There is an unduly heavy emphasis on the expansion of SEZ infrastructure, while ignoring the issue of creating a favourable investment climate in them to attract production investment.
Considering that only 170 of the 589 formally approved zones are operational, the most pressing challenge is to make the existing SEZs successful. Restoring fiscal incentives could go a long way in this direction. Indeed, the vision of SEZs is to ensure investors a business-friendly environment. But given that SEZs could not be insulated from the overall investment context, fiscal incentives, both direct and indirect, have been critical to attract investors. Ironically, however, there are more indirect fiscal benefits for units outside SEZs. Benefits such as duty drawback, and reward schemes like Vishesh Krishi Gram Udyog scheme, Focus Market scheme, Focus Product scheme, Served from India scheme, Status Holder Incentives scheme, and so on are available to units outside the SEZ and are not offered to SEZ units. The zero-duty EPCG scheme has also taken away one of the attractions of SEZs. The introduction of MAT and DDT undermined the direct tax exemptions also. Further, the practice of assessing custom duty on goods manufactured in SEZs based on their full value upon entry into domestic (DTA) commerce is discouraging for investors, in this global recession scenario. In successful countries, such as China, Malaysia, Korea and Taiwan, customs duty on DTA sales is assessed only on the imported materials used in the production of SEZ exports. China also permits duty-free domestic sales if the SEZ product is based on new and sophisticated technology. This has not only been a major incentive for investors to invest in SEZs but has also proved to be a key motivation for SEZ investors to forge linkage with the domestic economy. Further, in view of the fact that under the regional trading agreements, imports of agreed products from partner countries to India enjoy nil or negligible duties, it is ridiculous that imports from SEZs are allowed after paying the full range of duties.
In this fiercely competitive global economy, the hesitation of the government in implementing the benefits will seriously jeopardise efforts to promote FDI and exports via SEZs.
The author is associated with Delhi University and the Wadhwani Foundation
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
