India's economic zones not yet special
enough By Siddharth Srivastava
NEW DELHI - A debate ensues whether
special economic zones (SEZs) could be a solution
to India's foreign direct investment (FDI) and
infrastructure woes. State governments ranging
from West Bengal, Rajasthan, Andhra Pradesh,
Haryana, Punjab, Uttar Pradesh and Orissa, among
others, have been jostling to attract the
attention of private investors, offering tax
breaks, flexibility in labor norms, and unfettered
land holdings and FDI in the SEZs.
Hyderabad is competing aggressively with
Bangalore to attract new investments. And
recently, in a very unlikely event, Buddhadev
Bhattacharjee, the leftist chief minister of West
Bengal, laid out the red
carpet for Reliance Industries chairman Mukesh
Ambani, who announced new investments in the
state.
The federal and state governments
have received more than 150 applications since the
new SEZ policy was announced in February. The
federal government estimates that these SEZs can
provide immediate employment to almost a million
people; 30 of these multi-product SEZs will
attract an investment of Rs1.2 trillion (US$25.5
billion). The new legislation provides a uniform
SEZ policy and comprehensively covers all aspects
of establishment, operation and fiscal oversight.
In the relatively small state of Haryana
(a particular favorite of the Japanese), a total
of 22 SEZs are expected to be established in the
near future, including at sought-after
destinations such as Faridabad, Gurgaon and Kudli
(Sonepat). Companies such as Wipro, Reliance,
Infosys, Satyam, Bajaj, Biacon, Adani Group,
Bharat Forge and DLF have finalized plans to set
up SEZs.
Dubai-based real-estate developer
Emmar Group has secured approval for setting up 10
such zones. Last month, India's largest private
entity, Reliance Industries (RIL), and the Haryana
government signed an agreement to set up India's
single largest multi-product SEZ, involving an
investment of nearly $9 billion. RIL will pump in
more than $5.5 billion in the joint venture to be
spread over 10,000 hectares at
information-technology (IT) hub Gurgaon and
adjoining Jhajjar.
The project is expected
to attract overall user investment of more than
$22 billion when completed within five to 10
years. The state government estimates the SEZ
could add 500,000 jobs in the next decade. The
support facilities planned include a 1,500-hectare
private airport (which could become what Gatwick
is to Heathrow in London) and a 2,000-megawatt
power plant.
"The project will catapult
India on the world stage in terms of attracting
global investment and we intend to compete with
China, Singapore, Malaysia, Indonesia and other
nations," Ambani said after signing a pact. The
project is modeled on the enormously successful
Shenzhen SEZ in China that spreads over 32,700
hectares.
RIL has also said two other
proposed SEZs in Mumbai would contribute $10.7
billion to the country's exports. RIL estimates
that the SEZs, to be set up with an initial
investment of $5.4 billion, will see further
investment of $5.4 billion over the next decade
and create employment opportunities for 2.5
million people. RIL's 12,000-hectare SEZ project
near Mumbai, which is the largest in terms of
size, is a merger of Navi Mumbai SEZ and Maha
Mumbai SEZ.
The question is: Will the SEZs
provide a window to solve India's FDI and
infrastructure woes?
Indian Express editor
Shekhar Gupta wrote: "The governments in Rajasthan
and Madhya Pradesh are building intra-state road
networks in public-private partnerships at
breakneck speed. The chief ministers of
Chhattisgarh, Rajasthan, Punjab and Haryana are
all bending over backwards to attract corporate
investment, to build infrastructure, to
corporatize agriculture, towards contract farming.
There is only one way of economic governance. You
can call it center-right if you wish. This is the
way India has been changing over the past 15
years."
Analyst Ila Patnaik said: "An
effective SEZ policy could bolster India's growth,
by making a dent on urban infrastructure and labor
reforms. It could as a consequence have big
payoffs in terms of employment and GDP [gross
domestic product] growth."
Analysts say
the bulk of FDI into China is due to the SEZs.
However, some say there is more to be done.
"While SEZs appear to be a right concept
to encourage the manufacturing exports, the
existing policy lacks much needed push,
particularly in the small-and-medium-enterprises
sector," a recent report by global investment
banking major Morgan Stanley said. "A large number
of new SEZs in the pipeline are primarily aimed at
gaining tax benefits."
No serious efforts
are being made so far to build "real" large SEZs,
the report said. One of the key purposes of SEZs
is to build scale-related advantages, but most of
the proposed SEZs are minuscule (the two by
Reliance are medium-scale), said Morgan Stanley's
India-based senior economists Chetan Ahya and
Mihir Sheth in the India-focused report of the
US-based firm.
The top three SEZs in China
cover 326 square kilometers in Shenzhen, 132
square kilometers in Xiamen and 122 square
kilometers in Zhuhai, compared with 119 square
kilometers for RIL's project near Mumbai and 98
square kilometers for the Haryana SEZ.
"The new SEZ law may have resulted in
significant rise in applications, but many of
these proposed investments could be mere
substitution of investments that would have
otherwise taken place outside the SEZ area," the
report said. "The new SEZ investments are unlikely
to provide the much-needed fillip to Indian small
and medium manufacturing-sector competitiveness.
We believe the government needs to rework the SEZ
policy to push the 'real' large SEZs."
Then there are questions about flexibility
in hiring practices. Though the original draft of
the new SEZ law allowed for implementation of
flexible labor laws, the government was forced to
drop this clause in the face of leftist
opposition. However, states can formulate
independent clauses, if they wish.
There
is a long way to go. Global consulting firm
McKinsey & Co has estimated that India needs
more than $250 billion in infrastructure
investment in the next decade to ensure basic
services to a nation of 1.1 billion people. The
Planning Commission has said the country needs and
can absorb $16 billion of FDI annually. Describing
this as a "reasonable target", it maintains this
can be achieved in the 11th Plan period,
commencing 2007-08.
The commission has
said the FDI inflow worth $5.4 billion annually
achieved in the 10th Plan was still below the
country's potential. During 2005-06, the FDI
inflow was $8.2 billion, substantially higher than
the average of $3.7 billion during the Ninth Plan
period. With companies such as IBM ($6 billion),
Microsoft (close to $2 billion), Intel ($1
billion), Cisco ($1.1 billion) and Vodaphone ($1.5
billion) committing investments in India, the
future looks good.
Commerce Minister Kamal
Nath recently said investment opportunity of $500
billion would emerge in major economic sectors in
India.
But there is hope. Despite a
volatile stock market, the real-estate sector
continues to boom in India, a reflection of rising
income and demand. A corpus of more than $4
billion belonging to various realty funds is ready
to enter the segment, with almost $1 billion
approved and already in place.
The FDI in
this sector is expected to be nearly $16 billion
over the next five to six years. The rate of
return is expected to be conservatively 20-25% and
optimistically 30-35%. According to a 2005 survey
by Merrill Lynch, organized retail, which accounts
for 2% of the $250 billion sector, will grow from
$4 billion to $15 billion by 2010. Real estate is
expected to grow from $12 billion to $50 billion.
There is no doubt SEZs will have to be an
important cog in India's overall growth picture.
Siddharth Srivastava is a New
Delhi-based journalist.
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2006 Asia Times Online Ltd. All rights reserved.
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