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Nov, 01 2006

SEZ IMBROGLIO

WITH a view to provide an internationally competitive and hassle-free environment for exports, the Centre introduced a policy on April 1, 2000, for setting Special Economic Zones (SEZ) in the public, private, and joint sector, or by the state governments.

WITH a view to provide an internationally competitive and hassle-free environment for exports, the Centre introduced a policy on April 1, 2000, for setting Special Economic Zones (SEZ) in the public, private, and joint sector, or by the state governments. The minimum size of an SEZ is put at not less than 1,000 hectares. The minimum area requirement is, however, not applicable to product specific and port/airport-based SEZs. This measure is expected to promote self-contained areas supported by world-class infrastructure and oriented towards export production.

Units for manufacturing goods and rendering services can be set up, and full freedom is allowed in allocation of developed plots to approved SEZ units on purely commercial basis. At least 25 per cent area of the SEZ is to be used for developing an industrial area for setting up such units. Zones are proposed to be set up by the private sector or by the state government in association with the private sector. The private sector is also invited to develop infrastructure facilities in the existing SEZs.

As on March 31, 2005, there were 811 units in operation in the eight functional SEZs. Investment by the units in these zones were of the order of Rs 1,830 crore, and the units provide employment to over a lakh, out of which one-third are women. So far 212 SEZs have been cleared by the Board of Approvals and those with in-principle approval have risen to 152.

The finance ministry estimates that the SEZs could lead to a revenue loss of Rs 1,75,000 crore in direct taxes, custom and excise duties over the next five years. Units working outside the SEZ would also move into the zone to take advantage of the concessions, leading to more revenue loss. On the other hand, the commerce ministry says that SEZs would lead to Rs 44,000 crore revenue gain in a year.

Quite recently, the SEZ policy has undergone certain changes, including ban on more SEZs, and reallocation of land following the farmers' agitation. To aggravate the problem, the RBI hiked the risk weightage on SEZs, directing commercial banks to treat SEZs at par with real estate projects.

Major industries have warned that frequent change in SEZ policy could prove to be costly for the country as multinational investors may look towards other countries. Most players are now adopting the policy of wait and watch.

The idea of taking the industry to undeveloped areas through SEZs is laudable. However, industries have their own requirements. They need a congenial environment with basic facilities to grow and survive stiff competition.

The farmers' protest against the government's move to forcibly acquiring their land at cheap rates for setting SEZs, has resulted in the virtual ban on SEZ on fertile land which will hit the proposed growth of the industry, more so in Punjab, as it does not have any uncultivated land. The government will, simultaneously, have a tough time in convincing the industry to relocate the projects to backward areas. This may slow the expected 8 to 10 per cent GDP growth which hinges clearly on China-type cluster of industries coming up with flexible labour laws and tax concessions.

To further the growth of Indian industry, we need to speed up urbanisation and create new jobs. This can be achieved by directing the flow of manpower from the agriculture sector, which consists of 65 per cent of the population, to other industry segments. Thereafter, encouraging manufacturing on a huge scale would require more land. The SEZs will provide employment to hundreds, considering the need for infrastructure for the industry, including residence, schools, hospitals, entertainment centres and multiplexes.

Though the units operating in SEZs are supposed to be oriented towards exports, a huge chunk of the produce is likely to be diverted to the Indian domestic market. The units working outside SEZs will be threatened with closure due to their failure to compete with cheap smuggled products from SEZs.

There is little doubt that so many SEZs will invite industry not only from within the country but also from around the globe. The apprehension is that the land may be used for purposes other than for which it has been allotted. The SEZ policy seems to be good at promoting realtors and builders, but not any good at promoting exports and development of small industries.

SMEs that have just started their operations cannot invest huge sums on infrastructure to shift base to SEZs. The need today is for the larger industries to help small entrepreneurs by dedicating a part of their facilities in SEZs to the beginners. Simultaneously, the government should simplify RBI rules to help SMEs in acquiring loans.

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