Special Economic Zones in India suffer from policy flaws

NG Junior Luwang

INDIA’S Special Economic Zone Act, 2005, and the rules thereunder, will require substantial revamping if the country’s SEZ policy is to succeed. The Act, as it stands today, does not bear any semblance of a well thought out legislation.
One serious flaw in India’s present SEZ policy is allowing service sector SEZ units. India’s service sector, which otherwise is accounting for almost 50% to India’s GDP, does not need SEZ concessions for its growth. Just as China has used SEZs for its ‘manufacturing sector’ export earnings, India too should follow suit by focusing more on its weaker sector, i.e. manufacturing industry. India, being already a software giant with impressive export earnings of around $18 billion, software industry does not need SEZ fiscal incentives to withstand global competition.
As regards fiscal incentives, same fiscal incentives are given to both SEZ developers and SEZ units, which obviously is a major policy lacuna. Within the present legal framework, in the absence of any private SEZ developer coming forward, state governments can always take the initiative of setting up SEZs, and hence, fiscal incentives are not required for SEZ developers and co-developers.
The Centre has committed another policy blunder in Rule 5(2) of the SEZ Rules, 2006 by prescribing 1,000 hectares as the minimum required area for multi-sector SEZs, except in the seven North-Eastern states, Himachal Pradesh, Sikkim, Uttaranchal, Goa, Jammu & Kashmir and the Union Territories, where such a minimum required area is 200 hectares. However, for sector-specific SEZs, the prescribed size is even smaller—for SEZs in electronics, hardware, information technology, software, biotechnology, non-conventional energy sector, gems and jewellery sector, the prescribed minimum area is just 10 hectares; for free and warehousing SEZs, it is 40 hectares. India’s SEZ policy thus permits SEZs as small as 10 hectares.
Worse, in April, 2007, a Group of Ministers took a decision to cap the maximum area of a SEZ at 5,000 hectares. Although the commerce minister has gone on record to say that the present maximum area cap of 5,000 hectares can be relaxed on a case-to-case basis, the cap itself is ‘bad economics’. Such small SEZs will only dilute their profitability as business units, apart from extra pressure on infrastructure, land etc. and the new policy of reserving 50% of the SEZ area for processing/manufacturing activities may not help things improve much. The fact that 5,000 hectares is too small, viewed against monolithic SEZs like the 300 square kilometers Subic Bay Freeport in the Philippines, 32,700 hectares SEZ in Shenzen in China, 375 square kilometers Aqaba SEZ in Jordan, 100 square kilometers Jebel Ali Free Trade Zone, Dubai etc. Another flaw with the present SEZ legal framework is that it leaves enough room for ‘pilferage’ of ‘SEZ goods’ to the DTA area. Apart from the prescribed restrictions on removal of SEZ goods to DTA, deterrent penal provisions, including revocation of licence, forfeiture, fines and imprisonment of the responsible officials of the SEZ units, should be provided for. A strict exit system for SEZ units should be put into place.
On April 5, 2007, the Centre declared that no state government can compulsorily acquire land for SEZs from farmers through the Land Acquisition Act, 1894, and that only SEZ promoters can buy from owners willing to sell, at the market rate. Such a blanket ban will surely be knee-jerk reaction as in some circumstances, intervention of state governments may be required. One such circumstance is when most (say, 80%) of the land required has been acquired and the owner of the remaining portion (20%) refuses to sell the required land. In such circumstances, for the remaining 20% of the required land, state government should be empowered, subject to reasonable restrictions, to acquire the remaining 20% in public interest. For eco-nomic development projects like SEZs, provisions for compulsory acquisition of land/infrastructure should be kept open under certain prescribed circumstances.
In almost all other offshore financial jurisdictions, IFSC is a full-fledged institution with nothing to do with SEZs, but Section 18 of the SEZ Act, 2005 contemplates an IFSC within a SEZ. Though such a departure is technically fine, the independent identity of the proposed IFSC may get diluted in the highly competitive multi-billion dollar offshore financial services market and hence, it should make better sense to give IFSC its definite identity, visible without being a part of any other zone. The SEZ Act is a 2005 Act, but IFSC is yet to see the light of the day.
In other jurisdictions, offshore banking units (OBUs) operate within IFSCs, but India’s SEZ Act, 2005, practically provides for two different sets of OBUs – one within IFSCs and another within SEZs, but outside the IFSC, the former for meeting the financial requirements of the SEZ units and the latter for offshore residents in offshore currencies. Such a duplication is not required, as of now, as OBUs within the proposed IFSC can very well serve SEZ units as well as the offshore residents. The present SEZ policy needs substantial
changes—economic considerations rather than political ones should only matter. (The author is Senior Partner, Corporate Law Group)