The commerce ministry has put up a ‘Discussion paper to facilitate stakeholder consultation on potential reform of the Special Economic Zone policy and operating framework’. The idea is to invite suggestions to make the scheme more attractive and work out a road map for the future.
The paper highlights achievements of the SEZ sector, some significant trends in SEZ sector growth, flags the challenges, identifies perceptions needing to be addressed, mentions some adverse impacts visible, puts up certain issues for discussions and possible approaches to dealing with the challenges, suggests ways to get better involvement of states, articulates certain extraordinary ideas and gives a set of questions for stakeholders to ponder and respond.
The mnistry deserves praise for taking up a review of the SEZ scheme, giving the essential information, putting forward its own views and proposals, and calling for actionable suggestion. It is frank in conveying anxiety that the initial euphoria about the scheme had evaporated and that the realities don’t measure up to the expectations and self-congratulatory messages that were emanating some time earlier.
The report reveals that out of 583 formal/in-principle approvals, only 17 multi-product SEZs have come up. The information technology and petroleum sectors contribute two-thirds of the exports from SEZs/ A few manufacturing units have come up, only six states account for 92 per cent of exports from SEZs and most SEZs are in urban areas. Also, recently, fewer proposals for setting up SEZs are coming, there is significant increase in de-notification of SEZs and withdrawal of proposals approved, and reduced interest in setting up SEZs.
Although the ministry does not say so, astute observers would know that much of the exports of SEZs come from units, especially IT units, which migrated from the Domestic Tariff Area (DTA) in search of better tax breaks. To some extent, SEZs merely facilitated diversion of investments from DTAs to SEZs. Also, with too many small SEZs, the expected infrastructure build-up has not materialised.
The paper floats the idea to reduce minimum area requirements for setting up SEZs (e.g. from 1,000 hectares to 250 ha for multi-product SEZs), relaxing area contiguity stipulations, allowing SEZs where commercial buildings already exist, allowing broader category of units to come up in sector-specific SEZs, allowing non-processing areas away from the core SEZ area, goading States to do more to promote SEZs, treating DTA sales from SEZs on par with imports under Free Trade Agreements, giving duty credits to SEZ exports on par with exports from DTA and so on.
However, the idea that betrays the desperation of the ministry relates to allowing SEZs to sell in DTA at concessional duty rates, The ministry seems very keen on making SEZ scheme succeed, somehow. It believes that given the high current account deficit, high dependence on petroleum imports and high proportion of very mobile and somewhat transient foreign institutional investment inflows on the capital account, there is no option for India other than promoting exports and foreign direct investment growth. Making investments in SEZs more attractive than making investments in DTA seems to be the way forward for the ministry. email: tncr@sify.com
