SEZs in India : gateways to prosperity?

Abstract

Special Economic Zones (SEZs) are designed as demarcated geographical enclaves where tax concessions and duty exemptions are clearly defined. They are primarily focussed on exports of goods and services. SEZ s are expected to create additional economic activity, jobs and are seen as an attractive destination for foreign as well as domestic investment. It is an attempt to insulate infrastructure bottlenecks and other regulatory hurdles and to create a conducive and investment friendly eco system in few such enclaves. There is an economic argument for setting up of such zones. It helps in clustering of Industries around a certain geographic area where it is expected to create an eco-system of its own. It envisages planned urbanisation, with all modern social infrastructure and not mere Industrial estates . Our experience and data shows that it could achieve its objective with respect to boosting up exports and creation of jobs to a large extant. However, such a model of economic development has its own challenges and limitations. There are several policy dilemmas associated with such kind of enclaves. Empirical evidences show that, they are successful only if they have locational advantage where costs of transportation and communication are competitive. In other words, connectivity, both physical and electronics, is the key to success. Also, to be successful, it should be situated in a larger ecosystem of associated economic activities and not in isolation. Besides, this cannot be seen as a policy instrument for backward area development. Again, despite social infrastructure is critical for its success, the regulatory hurdles and tax issues are a serious concern for developing such facilities. We have seen that foreign investors till date have not shown much interest in this scheme primarily because they are not seeing India as a production base for their supply chains to global operations except in few sectors like IT. Most of the SEZ investments are domestic. Unless our SEZs provide a global competitive environment, and an ecosystem is built around it, not much FDI is expected to come. Also, the larger macroeconomic context in the country and the world, can t be ignored. There is a limit to which we can insulate such zones from inefficiencies and bottlenecks of our wider economy. Economies of Scale cannot happen if production is exclusively focussed on export markets. Also, high tax concessions can distort investment pattern and lead to sub-optimum utilization of resources. Besides, there are large moral hazard associated with such exemptions. Again, exports are a subset of the larger production network and to isolate it into export and domestic production is self-defeating in the longer run. It also examines the need for strong backward and forward economic linkages with domestic economy and hence suggests removing certain rigidities associated with it. For example, supply from SEZ to DTA should be taxed as per FTA rate on that product. (rather than MFN rates). It argues that it is the dynamic benefits and impacts of the SEZ scheme, that should be the criterion to be looked in to, and not to focus exclusively in static benefits like export figures, employment etc. Proactive support of State governments should be sought and enlisted and they should be given more voice in the routine administration of SEZs. Evidences shows that states which took pro-active steps attracted more investments in SEZs in those states. Notwithstanding any such criticisms, this paper argues that, SEZ has achieved a statistically significant figure in terms of all policy parameters which it was intended to meet. After examining various aspects of policy, this paper is recommending few policies including redefining the aim and objective of the SEZ policy, in view of its past experience and new challenges and also overhauling the supervisory and administrative mechanisms to infuse a new sense of vigour and vitality into the whole scheme. This pertains to more transparency in data on SEZs, more accountability and autonomy to DC s, and setting certain targets and figures that have to be achieved. Finally, it must be admitted that the success of the policy is also dependent on how it will dovetail and smoothly get integrated with other policy initiatives and clustering schemes like Make in India, Skill India etc. SEZ, as a standalone scheme, without dovetailing with other economic development initiatives will be less sustainable in the long term.