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High expectations and doubts

Although the policy for setting up Special Economic Zones (SEZs) was mooted way back in April 2000, it is only recently, at the implementation stage, that it is coming under close scrutiny. The SEZ Act was passed in 2005 and the rules were notified in February this year. Since then there has been support as well as criticism of the scheme. SEZs are specially demarcated areas, whose developers and units locating there enjoy substantial tax concessions and other incentives, aside from a proactively helpful regulatory environment. Units coming up — early applications are from information technology and other services sectors with a few in manufacturing — will have access to world class infrastructure that is to be developed simultaneously. There is no change contemplated in the labour laws, however. China and a few other Asian countries have made their versions of SEZs a big success. As critics have pointed out, conceptually and in mode of implementation, there are many differences between India's proposals and the schemes elsewhere. For instance, the geographical size of an average SEZ in China, unlike in India, is very large and China's success story is attributed substantially to this factor.

More than 110 proposals have been cleared. There are high expectations as to the quantum of investments that would flow into the SEZs and the number of new jobs to be created over the next five years or so. Sceptics, however, point out that the experience with export processing zones created to boost exports and generate jobs in a similar fashion does not support such optimism. It is entirely possible that some of these concessions are challenged by an importing country under the WTO rules. Much of the criticism has been about the means. The SEZ strategy is bound to create fiscal distortions and ultimately affect revenue buoyancy. In the past too, similar incentives meant to influence investment decisions such as concessions for setting up units in backward areas led to sub-optimal resource allocations. There is also the real possibility of existing units in the domestic tariff area moving to the SEZs, proving the point that large scale diversion of investments rather than fresh investments will take place. The Government however has promised to plug this loophole. It is possible for a unit to move from one SEZ to another within a block of 15 years and enjoy preferential tax treatment in perpetuity. More broadly, the criticism that the new export promotion strategy is intended to create tax shelters for some influential sections cannot be wished away. The emphasis on infrastructure upgradation is laudable but the selectivity embodied in it will probably lead to a postponement of the much-needed effort for the country as a whole. Also, the relatively developed States will get the bulk of the new SEZs.

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