India: SEZs as an Export Promotion Strategy: Can India Recreate China's Success Story?

2007

Assistant Professor D. Tripati Rao

Governments doll-out export subsidies to domestic export-oriented firms making them competitive in the world market. However, to align with WTO norms, these subsidies are given covertly by subsidising the initial 'set-up' costs of the firm throughout the 'incubation' period. This serves the twin objective of meeting the trade deficit bulge as well as the domestic macroeconomic development of employment generation, pegging up investment for pulling up growth and export promotion. While creating a tax free environment for the entire country is beyond the reach of fiscally-constrained state, the general environment is characterised by the lack of infrastructure. Thus the idea of Export Processing Zones (EPZs) was borne to create 'industrial enclaves'- pockets of heightened investment activities to promote exports and to support economic growth.

India spearheaded EPZs in Asia by setting up the first EPZ in Kandla in the state of Gujarat in 1965. Complex bureaucratic norms ridden with red-tapism ensured that the EPZ policy was slow starter and wasn't as successful as was envisaged. By the year 2000, there were only a total of eight central government sponsored EPZs accounting for less than three per cent of the total exports of India. Contrast to Indian experience, China started its Special Economic Zones (SEZs) policy way back in 1979 and has created six massive SEZs all along the coastline. They have already assumed to be the engines of growth by contributing nearly 12 per cent of China's GDP, striving to provide best quality infrastructure and scale economies to support export-oriented units. Buoyed by the success of Chinese experiment with SEZs, Indian Government also wants to emulate. The old EPZ policy was replaced with the SEZ policy in 2000. It enacted the SEZ act in 2005 and the SEZ rules were notified in February 2006 converting all the existing EPZs to SEZs. Besides, simplifying clearance procedures for facilitating speedy approvals, many freebies have been offered including tax holidays and external commercial borrowings.

Semantics apart, there is little in common between Indian and Chinese SEZs. Indian government has formally approved 303 SEZs and has granted in-principle approval to another 161 SEZs in a shortspan of less than six years. This is in stark contrast to the six SEZs that are promoted over more than 25 years in China. The average size of a SEZ in India is in the region of 300 hectares which is less than one per cent of the average size of the Chinese SEZ. The Chinese SEZs were developed by the government whereas Indian SEZs are mainly developed by private developers. These stark differences lead to apprehensions as to whether the Indian SEZ policy is good enough to meet its set out objectives of investment and export promotion. In recent days SEZ policy is mired in controversy for more than one reason such as, land acquisition - how much for each individual SEZ units, government mediation - whether the government should directly facilitate in the acquisition process, lack of clear and adequate compensation mechanism.

Critiques view the present SEZ policy is no more than a land grabbing opportunity for the real estate developers which defeats the very purpose of investment promotion. Their concern seems to be justified considering that SEZ policy allows for up to 65 per cent of the total land to be used for residential and commercial purposes. Further, the policy allows relocation of existing industries to SEZ areas with no real increase in employment or exports. The supporters of the policy are optimistic and are expecting a three fold increase in revenues from nearly US$8bn to US$24bn, a ten fold increase in employment from 0.2 million to 2 million, and an eight fold increase in investments from nearly US$9bn to US$70bn by the year 2010-11. A closer look at Chinese success story does suggest that the flexible labour laws played an important role in attracting foreign investment in China, and the absence of which may turn out to be a major handicap in reaping the benefits of SEZs in India. The SEZ policy tried to make up the disadvantages by offering attractive fiscal sops. Provision of tax holidays of 15 years for SEZs in India are longer and steeper than those given by China. In the process the cost on the exchequer turns out to be huge with government loosing an estimated Rs9, 39,000 million over the next four years.

The worldwide experience shows that successful SEZs are aided by government capital. SEZs may be a great strategic move for governments but private firms hardly make money out of it and have long gestation period to be at break-even profit. It is yet early days to see how things are shaping up in India and the results of SEZ as export promotion strategy. Nevertheless, it is quite perplexing to see a mad gold rush to acquire land and get approvals for setting up SEZs in India.

WATCHPOINT: SEZs may be a great strategic move for governments. But firms may hardly make money out of it and have long gestation period to be at break-even profit. It is early days to witness SEZ outcomes as an export promotion strategy. Yet, it is quite perplexing to see a mad gold rush for setting up SEZs in India.

 

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