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Beyond Borders: Question mark on SEZs

Posted by Ramoo on January 11, 2007

Piyush Tiwari
Posted online: Friday, December 15, 2006 at 1103 hours IST
Updated: Friday, December 15, 2006 at 1238 hours IST
The question that has confused the debate regarding SEZs is whether these are greenfield real estate development activities or incentive led industrial (including service sector) promotion related development activities? Who among the private sector is spearheading the development developers or industries?
The scale is big. There are 14 operational SEZs. Up till June 2005, there were 53 approved SEZs but since then government has gone into an overdrive mode. Board of Approvals (Department of Commerce) has granted formal approvals to 237 SEZs by October 2006 and additional 166 have received in-principle approvals. The total land under formally approved SEZs would be around one lakh acres or around 350 sq km with a potential of adding another three quarters of the area to it if all in-principle cleared vprojects receive formal approvals, making the total to around 600-650 sq km.
This total area under formally approved and in-principle approved SEZs would be 33 per cent more than the whole area of Greater Mumbai.
The scale is so large that the land acquisition has become a contagious issue. Sceptics have already started to view this as a mean of land grabbing. The scale worries even optimists like me. A rudimentary back of the envelope calculation would inform us that the total built-up area in the approved SEZs would not be less than 350 million square meters. A daredevil would add another 30 per cent to this number to reflect the total space if in-principle approved SEZs also reach the stage of formally approved.
Speculative element
Time line for the addition of this space: 5- 10 years! Even with strong economic fundamentals, does industry see itself growing at a rate to absorb this space in next 5- 10 years? Probably not. Is there then a speculative element? May be. Let’s look at the nature of SEZs that are coming up. Nearly 60 per cent of approved SEZs are designated specifically for the IT/ITES sector. Indian IT/ITES industry employs 1.3 million people. In order to absorb the space created by IT/ITES SEZ, this sector would need to add around 20 to 25 times its current workforce. Can this be achieved? Logic does not seem to add up to this number. IT/ITES sector is linked closely to the international economy. Based on the World Bank data, the signs for the future indicate that the economic growths in high-income economies like the US and Western Europe would stabilise. This may have implications for the growth of IT/ITES sector in India.
SEZs (also often referred to as duty-free zones, export processing or high technology zones, or free trade areas) have existed in more than 80 countries. They exist in advanced, developing or transition economies. In our own country, the first EPZ was set up in 1965 in Kandla, Gujarat. Santacruz EPZ came in operation in 1973. These were operating at a time when India had restrictive FDI policies and the overall regulatory environment was quite restrictive. Following 1991 reforms, SEZs were permitted with liberal regulations and fiscal incentives for industries to locate there. The first converts to SEZs were existing EPZs like Noida, Falta, Chennai, Vizag, Kandla, Santacruz, Cochin, Surat etc.
Chinese example
As a policy SEZ Act and Rules are no doubt favourable for export promotion despite the fact that as a share of total exports from India, SEZs have contributed only about 5.1 per cent in 2004-05. There is an argument about the potential here, which seem tremendous. SEZs partition the economy in two parts: one that has lower tariffs and the other that is constrained due to trade barriers. Theoretically, Schweinberger argues that SEZs may have colonisation effect due to foreign investment but the benefits to the economy from SEZs far outweigh any losses due to foreign investment. The overall value of output of a country rises at world market prices. China’s experiment with SEZs is illustrative. During 1980-97, the real annual GDP growth of Chinese economy was 8.2 per cent but the real GDP of Shenzen SEZ was growing at 28.5 per cent per annum. The structural adjustment costs of opening up of the whole economy to free international trade are tremendous.
In 1984, the Chinese government established five SEZs (Shenzhen, Zhuhai, Shantou, Xiamen, Hainan Province) where investment laws are relaxed so as to attract foreign capital. Since the 1990s, SEZs and similar concepts have been expanded to other cities, including Shanghai and Beijing, but in number terms they are only a few.
Total area under approved and in-principle approved SEZs is 33% more than Greater Mumbai
Even though theoretically it makes sense to have SEZs, it is important to have a clear understanding of the sectors, which can attract FDI and those, which have huge export potential from India and SEZs. The main sectors of exports out of SEZs in 2002 were gems and jewellery (42%) and electronics and IT (34%).
Only three gems and jewellery SEZs have been approved and two given in-principle approvals until October 2006, probably because these were the numbers proposed. The fundamental question is: a sector, which is the largest exporter out of SEZs requires only few SEZs, why do then we need so many SEZs, particularly for IT/ITES sector? There is an argument about the potential of IT/ITES but it looks like that the argument is being stretched too far particularly when it comes to the establishment of SEZs.
Author is Senior Lecturer, (property) at University of Aberdeen Business School, Scotland

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