How many SEZs?

How many SEZs? This is a question that's been puzzling me for sometime now. Every other day, a new SEZ is approved. As on October 10, 2006 the no. of SEZs with formal approval is 212 and the ones with in-principle approval, 158. What will it stop with? OK, OK, I agree SEZs are a way forward for the rapid industrialization of our economy (though not the only one, I dare say). The SEZ Act 2005 came into force on February 10, 2006. It is expected to facilitate large flow of foreign and domestic investment to the SEZs, and contribute to improvements in infrastructure and productive capacity, generation of additional economic activity and creation of employment opportunities. The important point is that there is enough flexibility built into the proposed system with respect to labour laws, taxation, etc.

Even before SEZs, we had EOUs, EPZs, (and so many other acronyms) etc. But the SEZ policy, in the lines of the Chinese model, has seen an unprecedented demand. The main incentive this time around is that there are tax breaks for the developers of SEZs as well. Almost all industrial houses worth its name has announced an SEZ. However, it needs to be highlighted that almost all SEZs announced are in states which are already in the forefront of industrial activity in India - Gujarat, Maharashtra, Haryana and Tamil Nadu, to name a few. That raises the question: if the incentives are available to everyone everywhere, why this scramble for the top states? Already the space available in such states is less. Where will the land for SEZs come from? This is one of the sore points - at least to the Left and the so-called activists: will it lead to eviction of farmers from their lands? Yet, the fact remains that only less than 10 SEZs have come into operation; and no farmer has been evicted for SEZs! Only one or two SEZs are proposed on farm lands. But that's enough to raise the hackles of the activists!

Another concern is to do with the fiscal impact of SEZs. The Ministry of Finance estimates that Rs 90000 Cr will be forgone in tax and other incentives. There is also the fear about a real estate scam. As far as I know, the first shot was fired by the RBI. The RBI had this to say on SEZs in its Annual Report for the year 2005-06, “The SEZs are envisaged to act as catalysts for growth. The simplification of the procedures for development, operation and maintenance of the SEZs and the fiscal incentives are expected to spur investment and promote industrial activity. At the same time, there are concerns that the SEZs could aggravate the uneven pattern of development by pulling out resources from less developed areas. Revenue implications of taxation benefits would also need to be factored. The revenue loss for the Government in providing incentives may be justified only if the SEZ units ensure forward and backward linkages with the domestic economy.” It has now advised commercial banks to treat SEZs on par with real estate projects and this will jack up the cost of funds for the parties concerned. Then there is the tussle between Ministry of Finance and Ministry of Commerce. The Left, which is on an all-out effort to woo big industrialists to West Bengal, too has joined the chorus demanding a relook into the SEZ Act.

As always, the absence of a good debate on the stakes involved is badly felt. Now we have two opposing sides: one, which has the activists and the Left which says that SEZs be done away with (well, almost there) and the other, which wants the status quo to be maintained. Some like Business Today (dated October 22, 2006) have ludicrously suggested that SEZs could be India's future metros! Talk of letting your imagination run riot! Not even one year into the implementation of the Act and you're talking of metros.

The bottom-line: As is with almost all acts and policies of govts in India, the SEZ Act too was passed without much thought going into it. The result is that there is absolutely no clarity on anything. The statement of ICICI Bank Chairman KV Kamat is pertinent: he's said that till everything is cleared up, his bank will not be joining the bandwagon of SEZ-financiers.