Re-imagining SEZs: What actually should be special in them

Illusions & Delusions

The government is contemplating replacing the SEZ Act (2005). It is worth recalling that the first SEZ in Kandla dates back to the mid-1960s. Subsequently, more SEZs and stand-alone Export Oriented Units came up. Despite this growth, it was felt by the noughties that although the economic liberalisation policy of 1991-92 had produced tangible gains in India, it was outclassed by the Chinese growth miracle anchored on their SEZs. The SEZ Act of 2005 was thus an attempt to re-vitalise export production.

It aimed at incentivising private investment in industrial infrastructure. SEZ developers and EOUs located within them were given various tax exemptions, including a 15-year tax holiday on profits and exchange control benefits. Seven different types of SEZs (basically restricted enclaves for multi-product, single product, single sector export production, etc.) were envisaged to allow for clustering and economies of scale. SEZ developers were also allowed to create private townships within these zones. So, a large and varied collection of SEZs of various sizes, ranging from ten to thousands of hectares, came up.

However, over the years, there has been a growing realisation that, unlike in China, even these measures have not really transformed our SEZs into engines of modernisation or economic growth. Exports from SEZs have rarely crossed 20% of total exports and almost 100 SEZs have applied for denotification in the last decade. It is in this backdrop that once again, a new enactment is being contemplated.

The China saga dates to the late 1970s when Deng Xiaoping, as part of his re-issuance of the ‘Four Modernisations’, launched the Chinese SEZ programme. The location selection was based on ‘the most likely to succeed’ criterion, i.e., proximity to Hong Kong. The Chinese SEZs were basically province-sized territories exempted from the application of various domestic laws, rules, and procedures by giving each SEZ chief, usually a senior trusted party leader, wide discretion to adopt international best practices and set up European-style cities and industrial areas.

This approach initially experienced internal political and bureaucratic resistance and severe criticism about corruption and the wastage of public money. Nor did it result in immediate successes. In fact, it encountered severe criticism in the 1980s. However, Deng did not allow the criticism to prevail, and he was vindicated when the SEZs finally took off in the nineties, creating the Chinese miracle.

Some critics have voiced that it is the large size of the Chinese SEZs that led to their success. The Indian SEZs do not really permit such scale. While this is true, it is not the entire story. A more important feature, often overlooked, is that the Chinese experimentation was with introducing modernisation -- by permitting exemptions to the entire set of longstanding domestic laws, but in a specific, limited belt. It is worth emphasizing that the Chinese land acquisitions and building programmes occurred in a period prior to the Informatics Revolution, in areas remote from the country’s centre, where no worthwhile State or private investments in industrial and urban infrastructure existed. This enabled easier greenfield development.

On the other hand, both the Indian State and our private sector have continuously acquired industrial land piecemeal, post-independence. A Niti Aayog report (2017) highlights the existence of 1,850 industrial estates, parks and SEZs owned by the Centre and states, spread over four lakh hectares, though admittedly the quality of supporting infrastructure and occupancy varies considerably. Private sector SEZs and industrial parks are separate. Neither are fully occupied. Thus, physical land availability is not necessarily a part of the real story. Nor are land acquisitions the only way forward.

Further, the 40-plus years post the original conception of the Chinese SEZs have witnessed the maturing of the informatics and logistics revolutions and significant breakthroughs in Automation, AI and 3D Printing, etc. These, taken together, have altered the dynamics of production and product costing. We thus need to look beyond.

We need to understand the complexity of domestic laws in a post-colonial setting. Several experts have written about the Indian complexity. Illustratively, a recent report by ORF (‘Jailed for Doing Business: The 26,134 Imprisonment Clauses in India’s Business Laws’), highlights 1,536 laws involving 69,233 compliances that govern doing business in India. These compliances need to be communicated to the governments through 6,618 annual filings. Chinese domestic laws, given that a Communist revolution had also intervened, would undoubtedly have been as complex, if not more. Deng’s SEZ strategy was designed to simply circumvent this complexity. We also need to think along similar lines.

Further, if employment generation is an important sub-goal, we need to also look beyond manufacturing. The International Labour Organisation’s databases indicate that the employment share of manufacturing has been declining not only in the developed world but also in China and Brazil, while that of health and education services are rising. These sectors require heavy investments and, often, technology transfer. The new policy could thus be made more universal and delinked from mandatory fiscal relief and export commitment. The primary focus should be on quality of infrastructure and avoidance of ambiguously complex laws.

Illustratively, the hill states are starved of healthcare and, often, high-quality educational services. A willing state government could be allowed to declare itself to be a SEZ for new establishments of a certain minimum amount and size and promote growth by attracting high-end educational and health tourism, instead of having to grapple with the environmental complexities of manufacturing.

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