Critical issues in Indian SEZ model and applicability of Chines model to improve performance

Abstract

In line with the highly successful SEZ model of promoting export oriented growth in China, Indian SEZ policy was formulated in the year 2000 to bring in new investments, promote exports and develop infrastructure facilities in strategic zones. As the policy framework is getting updated periodically and in the light of increasing number of criticisms it has attracted, analysing the policy framework becomes relevant. While most of the literature on SEZ calls for either scrapping the SEZ policy or suggests why SEZ policy is beneficial, this report critically analyses the policy issues applying basic principles of economics, identified the key issues of concerns and suggests policy recommendations so that SEZ functions efficiently to meet its primary objectives. With land acquisition being the most critical concern, other issues identified include inadequate resettlement and rehabilitation package for the displaced farmers, large number of SEZs in comparison to China making it difficult to man the zones, the ratio of processing and non-processing zones, revenue loss to the Government, small size of SEZs raising concerns about economies of scale, shifting of investments rather than new investments, inadequate approval mechanism, real estate motive of SEZ developers and inequity in resource distribution. The critical issues identified are compared with the Chinese model of SEZ to offer solution in terms of policy change. Chinese model is not applicable in its entirety because of the significant differences between the two countries. For example, with China having a totalitarian regime land acquisition was forced and huge SEZs were possible to be established which is not directly applicable to India. Hence the basic framework could be emulated from the Chinese model but not the entire framework. Primary interviews conducted with the Development Commissioners of SEZ and SEZ consultants aided in identifying the possible avenues for policy recommendations and its feasibility. The following policy recommendations are suggested: 1. Only the processing zone needs to be contiguous and manned and there is no strong reason why real estate constructions like hotels, residential complex, entertainment zones etc should be contiguous with the processing zone. Hence it is proposed that processing zones and real estate constructions in non-processing zones could be separated when it involves acquiring agricultural land. This reduces the need for acquiring large contiguous land when there is agricultural land in between. 2. Considering the returns in real estate sector and increased activity in that space due to market demand, clearly real estate players do not require tax breaks and other incentives. When SEZ employs a large number of people it would create a market demand for real estate activity and hence the incentives for real estate players should be scrapped or significantly reduced. 3. Multiple exit points can be allowed in an SEZ on a case to case basis when the benefits clearly outweigh the cost of having multiple points. The SEZ could be made to bear the cost and the Government should come up with guidelines for minimum area for which multiple SEZs can be allowed. 4. Primary interviews indicated that the current evaluation process for approval is inadequate. The economic parameters should be evaluated and the approval process should ensure that the proposed caters to the primary objectives of SEZ. 5. Compensation model for the rehabilitated farmers include share in the profit of SEZs with a Special Purpose Vehicle model, replacement with a fertile land, market valuation norms and employment options in the SEZ. 6. One of the crucial factors for the success of Chinese model is its strategic location. As Government is providing special benefits to specific zones, it should ensure that such SEZs are located in the strategic zones especially coastal regions so that it generates maximum export growth and generate efficient returns. Hence SEZs should be approved only in strategic locations. 7. Enforcing an upper limit of 5000 hectares was more of a political decision than an economical one. This would affect the possibility of economies of scale and makes huge infrastructural facilities infeasible in the zone. Hence such a policy should be scrapped. 8. Again, increasing the minimum processing area requirement to 50% is a political decision in response to criticisms on land grabbing. A demographic analysis on the existing ratio suggests a ratio of 12 to 19% processing zone area. Land grabbing issue should be addressed by removing the tax incentives and separating the processing and non-processing zones and not increasing the processing area requirements. 9. There should be provisions for de-notifying unsuccessful SEZs so that land does not get locked up. EOU scheme should be continued for export oriented companies in such denotified SEZs and tax break of 1 year to other companies to stabilize. 10. Companies that already enjoy tax benefits like IT, ITES and are merely shifting to SEZs for ever-greening and are not new investments should not be approved. If required the Government can evaluate and extend the existing tax breaks given to them. 11. Instead of completely transfer the land acquisition process to the developers; the Government should take up an advisory role in over seeing the acquisition process. These recommendations are discussed with Development Commissioners and SEZ consultants for feasibility analysis. It is found that certain steps are not immediately implement able but feasible anyways. These recommendations may not be the answers to all the questions raised regarding SEZs but are in line with reducing the critical problems especially the land acquisition issue.