Industrial Estates and SEZs in India: Opportunities and threats in a post Covid Economy

In the year 2005 the then department of industrial policy and programs, Ministry of commerce, Government of India , initiated the SEZ act with was passed by the parliament on May 2005 and the president of India gave assent to it on 23rd of June 2005. The act preceded the earlier notifications on Free trade zones and the main objectives of the SEZ Act was to create and generate additional economic activity and promotion of exports of goods and services. The SEZs were deemed to be foreign territories with significant tax gains to industry and this was enabled by amending the Income tax and FERA/FEMA rules in addition to FDI rules. The larger objective was to set up industrial, service and trading units for the purpose of generating net foreign exchange and augment India’s share in the global exports. This idea was for replicating the export performance of China, where they converted large land masses as export zones a la Shenzhen and others. India was poised to be the next destination for global manufacturing companies competing with China with an advantage of an English speaking technical manpower which was China’s weakness. This initiative was widely accepted by the industry and as and when the Rules of the Act was promulgated in 2006, a plethora of industries came up for getting approval as a developer in different formats be it for a multi product one or an IT park or for a single product or even as a Free Trade Warehousing Zone. Today as per the information from government sources out of the 421 approved, 240 are operational with more than 5000 Units generating an export revenue of nearly Rs 6 lakh crore.

In a paper that I had published for the India development review in 2005 and an article in the Economic times in 2006, I had mentioned that the opportunity for India depends on policy consistency, time and global marketing . While many initiatives were taken by the State governments, especially Gujarat and the then undivided Andhra Pradesh , along with private capital, SEZs as a growth engine did not take off as expected, as we see from the numbers cited above. The major reasons for its tardy take off and retarded growth was due to several reasons. Firstly from the beginning of the Act, there erupted discrepancies in interpretation of rules between ministry of Finance and Ministry of commerce in the area of tax deductions and waivers. Secondly the Act demarcated the powers from the customary custom department to that of office of a dedicated commissioner for SEZ, bringing in a plethora of bureaucratic hurdles. Thirdly the post-tax benefits both in bottom line and unit cost basis were not significant for an investor to get attracted in setting up a unit. This was due to the fact that investors had many other standalone export incentives and opportunity to be declared as an export processing zone than getting into a rental premises of a developer. Fourthly land being a state subject, albeit many state government passing their own SEZ Act and rules, was an issue due to problems in land acquisitions and consequent political overtones. Fifthly private developers used the opportunity to owe land but did not invest the capital for adequate infrastructure and urban development making it much more of a real estate game. Few developers who invested , loaded the cost of infrastructure to the cost of land making acquiring these enclaves in lease was uneconomical compared to availability of private land else ware. Lastly the legal agreements of lease due to a lack of an all India regulatory framework, was tilted towards the developers mainly on clauses of lease extension and exit policies, decreasing the risk appetite of industrial investors. Recent developments on the increase in Free trade agreements between nations also offset the benefits. In short SEZs even after 15 years did not take off as expected.

It is in the above background that we need to see the emerging opportunity for Industrial investments in India in a post Covid world. Will the SEZ work again as a growth engine? It need to be understood that the trade conflict between China and the US has developed into a political entente. Organisations like the US-India business council and other American Trade agencies and representatives in India have already made representations to government of India through its investment promotion arm, Invest India. India’s other trading partners like Japan and South Korea have also generated similar interest. In this backdrop there are reports that the government of India wanted to earmark land parcels for incoming industries.

While opportunity is large in the new world, it need to be seen how India can make an integrated approach in attracting investment. Global firms have also targeted countries like Bangladesh and Vietnam which offers much cheap labor. It need to realized that it is not just earmarking land that matters but the feasibility of a project in terms of quantitative and qualitative value addition that is required. Quantitative value addition refers to the cost advantage at a particular location in relation to the input and capital cost which includes a favorable taxation system. In the recent experiences with the telecom companies on tax compliance and with regard to POSCO’s investment proposal we have seen the challenges that our system pose to an investment opportunity.

Qualitative value addition is in terms of providing a true single window system with policy clarity. India could never provide a true single window system as investors found multiple windows within one. Integrated approach should also look into having a holistic view of all current investment and FDI policies such that there are no contradictions within the policies and thus opportunities for bureaucratic hassles. The best bet is in redefining the Make in India campaign, with a new integrated policy thrust.

It also need to be understood that value addition to an investment is also related to its integrated logistic cost which means the cost of a product considering its origin to destination. It is here that the port, ware housing and rail-road logistic policies are to be re looked. Thus creation of an investment opportunity blue print has to be worked out considering India’s strengths as well as weaknesses. During this covid period which is expected to remain till September –October, Government of India and the public stake holders should debate on these issues through online conferences and recommend a tangible plan. This is not just a bureaucratic or political imagination but a core business plan which needs professional inputs .