Vinayak Chatterjee: The ongoing SEZ saga

INFRATALK

Approvals leading up to an area equal to eight new Chandigarhs are throwing up a bunch of intended and unintended consequences.

If the NDA government is remembered for the National Highway Development Program, the UPA government will most certainly be remembered for SEZs.

What really is happening on the ground?
Let us start with statistics. As of March 13, 2008, the status of approvals to SEZ developers is as shown here.

About 91,225 hectares of SEZs are at various stages of development. The Union Territory of Chandigarh measures 11,400 hectares. So, we are talking about a bundle of approvals totalling eight new Chandigarhs.

In a review of developments with my colleagues Mukesh Khandelwal and Manish Jain, eight broad trends are clearly visible:

1. IT and BPOs at the forefront: Sector-wise analysis of the notified SEZs indicates that the IT and BPO sectors account for a lion's share "" 66 per cent by number, and about 15 per cent by area "" of notified SEZs. [This excludes the share of IT / BPO in multi-product and multi-services SEZs. Developers of multi-product and multi-service SEZs also have significant acreage planned for the IT and BPO sectors.] The volume of IT / BPO space planned inside these "notified" IT SEZs is sufficient to meet industry demand for more than 15 years at present levels of industry growth. And we are only talking about "notified SEZs" not "formal approval" and "in-principle" categories. Whether this will mean large-scale relocation of STPI units into SEZs "" despite government policy barring such relocation "" remains to be seen. What is abundantly clear, however, is that the IT / BPO sector, which accounts for nearly 70 per cent of demand for high-end office space in tier I metros, will, in the coming years, set up operations almost exclusively in SEZs. This will have huge implications on occupancy levels and rentals in the non-SEZ commercial office sector.

2. Manufacturing sector yet to perk-up: For the manufacturing sector, SEZs are yet to demonstrate the kind of hyper-activity that has been seen in China. Partly, this is linked to the land intensity of manufacturing SEZs. Delays associated with the land acquisition process have slowed down the pace at which large manufacturing-focused SEZs have progressed. The small size of SEZs, [the largest notified zone is only about 2,650 hectares while the average zone is sized at 129.6 hectares], and the consequent inability of these zones to provide scale and cost-competitive infrastructure as in China is also inhibiting manufacturing investment.

3. Distribution skewed to five coastal states: Not surprisingly, there is a concentration of SEZ activity near the coastline, as in China. What is surprising is the intensity of this concentration. As much as 90 per cent of the total area under SEZ notification is accounted for by five states "" Gujarat, Andhra Pradesh, Maharashtra, Karnataka, and Tamil Nadu, in that order. In fact, Gujarat and Andhra Pradesh, two states with the largest concentration of private ports, account for over 60 per cent of the total area under notified SEZs. Left to market forces, this development imbalance is likely to intensify. 
 

SEZ STATS
Nature of Approval	Nos	Hectares
Notified under SEZ Act, 2005*	207	26,825
Accorded formal approval*	246	30,900
In-principle approvals	136	33,500
Total	589	91,225
(* Land already in place and therefore higher likelihood of implementation)

4. Job creation is in non-manufacturing: Unlike China, the manufacturing sector will not contribute to a very significant proportion of the employment to be created in SEZs. Nearly 70 per cent of the direct employment created by exporting industry will be in 'white-collar' services sectors. Specifically, the IT sector will account for nearly 5.5 million of the total employment across all notified SEZs; nearly four million of this will be accounted for by five cities "" Hyderabad, Chennai, Pune, Delhi / NCR, and Bangalore. In fact, SEZ activity levels suggest that both Hyderabad and Chennai will upstage Bangalore as the country's leading IT destinations in the years to come.

5. Supporting infrastructure awaited: The projected SEZ activity would lead to significant demand for infrastructure facilities. Currently notified SEZs would call for more than 15,000 mw of power generation capacity, 2,500 million litres per day of water supplies, and logistical capacity to handle nearly 1 million TEUs of export traffic annually. Few real-time plans are in place.

6. Labour question still indeterminate: Promoters and investors in SEZs were fervently hoping that the "labour laws of the land" would not apply to SEZs, and flexibility and international style 'hiring-firing' practices would be allowed. Such, apparently, is not to be. And therefore the persistent questioning "" that other than fiscal sops, what's 'special' about Special Economic Zones.

7. Land acquisition process has received much-needed attention: The SEZs initiative has willy-nilly ended up giving a massive boost to a new age Rehabilitation and Resettlement Policy and a nation-wide concern and appreciation of this soft underbelly of infrastructure development.

The Draft National Rehabilitation Policy 2006 is a favourable fallout of the SEZ land-grabbing spree. It has also lead to the formulation of clear-cut guidelines on the role that state governments should play in procuring land that is to be used by private-sector.

8. Cost-benefit still being debated: Notified SEZs have a pre-tax profitability potential of nearly Rs 2 lakh crore annually. Under the SEZ regime, the Centre would potentially have to forego nearly Rs 66,000 crore of direct tax collections annually (or Rs 44,000 crore if MAT is made applicable on SEZ units). SEZ developers would also receive direct and indirect tax benefits totalling to Rs 35,000 crore for development of these zones. The jury is still out on whether enhanced economic activity driven by the SEZ policy justifies this largesse.

Keen observers of the SEZ scene have argued that the commerce ministry could have taken upon itself to develop only five to six world-class SEZs and make a significant national impact. This would have been akin to the ministry of power's move to lead-develop the high-impact ultra-mega power plants, and then bid them out to the private sector.

In India, SEZ development has been pushed only by an enabling policy framework, and left to market forces. This might see the county dotted by more than 1000 or more relatively small zones. Economic historians will then be well within their right to question the iniquitous nature of SEZs and why SEZ-like facilities could not have been extended to the entire domestic tariff area.

Vinayak Chatterjee is the chairman of Feedback Ventures. He is also the chairman of CII's National Council on Infrastructure. The views expressed here are personal