Article – SEZs need a proactive govt and a clear business model

19 June 2014
Santosh Tiwari
The Financial Express
The Professor of Economics, Jawaharlal Nehru University, Biswajit Dhar, says the government’s review of the Special Economic Zone (SEZ) policy should be done with a clear business model in mind, led by the small and medium enterprises (SMEs). Dhar tells Santosh Tiwari that the success of the SEZ policy would largely depend on how far the government succeeds in creating an enabling environment for the investors.
The commerce ministry is initiating the review process of the SEZ policy. This has been done in the past as well but the situation has not improved. Why?
Over the past few years, India’s SEZ policy has been reviewed several times, essentially from the point of view of evaluating the achievement of the stated objectives of the SEZs. This includes reviews by the Parliament’s Public Accounts Committee (PAC) in 2011 and 2012, which had provided broad insights about the fact that the SEZs have not been performing as was envisaged. The PAC had observed that there were significant procedural and other limitations that had resulted in loss of revenue to the exchequer. The committee had severely commented on the lack of an institutional mechanism to ensure that there was no misuse of the SEZ policy.
It may be pointed out that the PAC made its observations by focusing on the performance or otherwise of the SEZs, and not much attention was given to the structural issues pertaining to the SEZ scheme. Thus far, little attention has been given to the reasons why the SEZs have failed to deliver in India, while China has made these economic zones as the basis for developing itself as the “factory of the world”.
The SEZ policy review is part of the exercise to improve investor confidence. This will also involve other measures. Which are the major bottlenecks for SEZs in India? Is there a better alternative?
The SEZ policy has to be reviewed with a clear business model in mind. In my view, the government needs to develop this model through a planned involvement of the SMEs. There can be two ways of doing this. The first is by promoting SME clusters, which will help in generating positive externalities, thus contributing to economic efficiencies. The second model, which has been used very successfully in China, is the one in which foreign enterprises and domestic SMEs work in tandem, with the former acting as the “lead firms”. This model can bring tremendous medium-term benefits to India, as it has brought to China; for Indian SMEs can benefit from knowledge spillovers owing to the presence of the foreign firms. However, both these models presuppose the existence of a proactive government and its agencies (at the Centre and in the states), which would have to provide not only the enabling policy environment but also provide the necessary infrastructure. It may be recalled that the SEZ policy had stated that the government would provide “world-class” infrastructure, but this did not happen.
The government must ensure that investors find it worthwhile to invest in India. As experience over the past several years has shown quite clearly, mere pronouncements about India’s investment climate being investor-friendly will not persuade investors to invest in the country. The government will have to work towards providing an enabling environment for the investors and this would require a more proactive involvement by the state agencies at various levels. These agencies must ensure that the infrastructure and procedural bottlenecks are done away with, and with minimum delay. More importantly, the government must find ways of giving domestic investors all the necessary incentives since an overwhelming share of investment made in India has come/will come from domestic sources.
The administration and tax-related issues have plagued SEZs. How to solve these problems?
The tax incentives provided to the SEZs are quite adequate, but there is definitely a need to strengthen the administrative mechanisms. At the same time, the government would have to ensure that the loopholes are effectively plugged in order to prevent leakages.
Some changes are also required in the laws governing SEZs. What needs to be done to improve the clearance mechanisms and such laws?
At the heart of the SEZ policy enacted in 2005 was the “single window clearance”, with the Approval Committee set up for every SEZ taking the full responsibility to get the project off the ground. The Approval Committee, which was to be a multi-stakeholder forum, having representatives of the central government, the state government and the developer concerned must be fully responsible for implementing an SEZ. Accountability must be fixed on the Approval Committees for non-implementation of the projects within the given time schedule.
Which are the specific measures expected in the upcoming Union Budget to improve investor confidence?
In 2011, the government of India had announced a National Manufacturing Policy to increase the sectoral share of manufacturing in gross domestic product (GDP) to at least 25% by 2022; to increase the rate of job creation so as to create 100 million additional jobs by 2022; and to enhance global competitiveness, domestic value addition, technological depth and environmental sustainability of growth. Critical dimensions of this policy were specific interventions broadly in the areas of industrial infrastructure development, development of appropriate technologies especially green technologies for sustainable development and skill development of the younger population. These areas form the base on which the business interests can start building the manufacturing industry in the country.
The government should, therefore, set out a roadmap for supporting each of these areas in the forthcoming Budget.
There is also a need to look at how foreign trade agreements (FTAs) are being utilised. What should be the way forward here?
A comprehensive review of the FTAs is needed to analyse the reasons why India has not been able to utilise these agreements fully. Institutional and other capacities that are needed to better utilise the FTAs have to be identified in a time-bound manner so that India is better prepared to meet the demands that would be made by the ongoing regional integration agreements. The most significant such agreement is the Regional Comprehensive Economic Partnership (RCEP), which is being negotiated by the 10-member ASEAN bloc and its six partner countries—China, Japan, Korea, Australia, New Zealand and India.
Courtesy of the Financial Express

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