India's SEZ - the OECD Report
The OECD economic survey comments on our SEZs.
The success of software parks in stimulating the development of the information technology service industry has led the government to progressively introduce legislation to enable the development of Special Economic Zones (SEZs), oriented to the manufacturing sector.
The development of SEZs has, until recently, been slow. Even though India created the first such zone in Asia in 1965, only eight existed by 2004 and they provided only 5% of goods' exports, though the shares for jewellery was 55%.
The slow development of existing SEZs led the government to introduce a new policy at the beginning of 2006. The previous policy, while giving considerable tax advantages, had not overcome the administrative barriers to business that typifies India nor did it overcome infrastructure barriers, notably for road and electricity.
The new policy relies on private developers to create the zone and provide all infrastructure, with the objective of generating additional economic activity and creating employment. The new policy focuses on changes to the laws and regulations that govern SEZs and allows:
Single window clearance for development in the zone; simplified administrative procedures and exemptions from many restrictive policies; exemption from selected central laws.
Application of all municipal and many state laws by the SEZ Authority.
Separate court system with internal security provided by the SEZ Authority.
Labour laws have also been modified at the state level, with 14 states abolishing previous constraints, freely allowing contract labour, and a significant number deeming all enterprises in a SEZ to be public utilities and hence making wildcat strikes (i.e. those without due notice) illegal. Significant tax concessions have also been granted:
Total corporate tax exemption for five years, 50% for a further five years and a further exemption for reinvested earnings derived from exports, with developers allowed a tenyear window of tax exemption. Zone developers are exempt from the minimum alternate corporate tax and the dividend distribution tax.
Imports into the SEZ are tax and tariff free, but sales to the domestic market are regarded as imports into India.
By February 2007, while 234 SEZ projects had been approved, 162 projects have been given "in-principle" approvals. Of the 234 approvals, 91 have full legal approval. The fully approved projects cover 67 square kilometres. The total area for proposed SEZs is 1750 square kilometres, at most 0.11% of total agricultural land. Two major projects of a much larger size (greater than 100 square kilometres) had been approved under previous legislation in Maharashtra and Haryana. These zones will be on par with the size of two (Zhuhai and Xiamen) of the three largest SEZs in China, though only one-third the size of the Shenzen development.
At end-January 2007, the government had announced a temporary freeze on granting permission for new SEZs, but this freeze has been lifted in April 2007 with the condition that there would be no compulsory land acquisition by the state governments. This policy change followed demonstrations against a proposed car plant in West Bengal despite favourable land acquisition terms. Once a new policy on compensation for land acquired from farmers has been announced, state governments may be allowed to purchase land.
As a general rule, state intervention may be necessary to ensure that the totality of land in an SEZ is owned by the developer, so avoiding a few land owners blocking the development, as the SEZ area must be completely contiguous. The economic benefits of SEZ depend on the opportunity cost of the resources that are deployed in these areas. Where the capital comes mainly from abroad and if there is significant surplus labour in the economy, then SEZs have produced significant welfare gains to the domestic economy, notably in Asian economies at early stages of development. As the level of development increases the gains become less, mainly because of the much lower wage differentials in the zones. If, however, capital is drawn from the domestic economy, as has mainly been the case in existing SEZs, then tax concessions may negate other benefits.
In the case of India, the SEZs are designed to overcome many of the barriers to growth identified in this Survey (poor infrastructure, restrictive labour laws and excessive regulation). While an optimal policy might be to remove these restrictions countrywide, the current SEZ policy, if successful, could act as a catalyst for change in the whole economy. By the end of 2007, the government expects that foreign companies will have invested up to USD 6 billion in SEZs and created half a million jobs.