SEZs in India – The Dream Unlimited

The dawn of 2003 brought a special status for Madras Export Processing Zone (MEPZ), now labeled a Special Economic Zone – a deemed foreign territory from January 1, 2003. On 4th January East Delhi supplement with Hindustan Times reported on the likely SEZs in the National Capital Region. On 6th January, the Commerce Ministry has again contended that in the light of special and differential treatment available to India under WTO, concessions can be provided to units set up in FTZs and SEZs. Referring to the Kelkar committee’s recommendation to withdraw exemptions granted to establishments in free trade zones and special economic zones, the commerce secretary has stressed the need to have a stable fiscal policy stating that potential investors have taken a decision to invest only after evaluating their long term options and therefore, now to suddenly even contemplate withdrawal of the exemptions promised earlier may deal a severe blow to our expected investments in SEZs. On 8th January, there appeared a feature presentation on Indore SEZ in The Economic Times terming the zone a paradise for free enterprise.

Above news buzz pictured the SEZ bubble on its full bloom. But bubble might have burst. Why? - Merely because of a few simple looking but disastrous factors.

The issue is not much that of economic logic behind SEZ program in the Indian context. Assuming the behavior of some specific variables as stipulated, SEZ is a very powerful economic tool for catalyzing the growth process during restructure and liberalization of an economy. Critiques may argue otherwise, but the success of Chinese SEZs is exemplary.

The decisiveness of the central and state governments, as pointed out by the Commerce Minister of India himself in his keynote address in a special session on ‘Sharpening our Competitive Edge Post WTO-India Unbound’ as part of platinum jubilee celebrations at FICCI, in this regard is definitely crucial and efforts by the central and the state governments are complementary to each other.

The Predicament

The heart of dream unlimited, i.e. successful SEZs in India, lies in one simple proposition - smart economic policies require smart planning and smart implementation by smart people to become a smart success. There is no scope for zero-sum game. It means walking on the edge of sword and dancing on stilts.

The developmental cycle of SEZ from conceptualization, establishment and operation to its expansion involve about twenty-five steps and each step is crucial for success. Greenfield SEZs in India, today, have merely achieved six to seven steps that include obtaining the in-principle approval from the Ministry of Commerce and commissioning techno-economic feasibility studies. Very few have gone a step further and invited private developers. Indore SEZ, with already developed area of 138 hectares, looked for high pitch marketing simultaneously with detailed engineering for remaining land and searching for a developer. A visit to the zone gave slight comfort feeling because of developed 138 hectares, but fingers are crossed at future. Techno-economic feasibility reports for various SEZs like Kanpur Integrated SEZ, Bhadoi SEZ and Taj Economic Zone has been prepared long back but a few of them are able to tap private developers.

Only with this infinitesimal but euphoric progress, the problems have started cropping up. Positra, the self claimed pioneering green field SEZ in India has already turned controversial. Others are also struggling to get private developers and strategic investors.

In fact, the planning for SEZ program in India has some very specific gray areas. The stated primary objective of India’s SEZ Program is to ensure the export-led growth by attracting FDI and other private sector investments and thus, using SEZ as catalyst in the process of reforms, economic development, employment creation, and regional development. But the dream to achieve the quantum of FDI flow equivalent to or more than China seems far fetched because of the perceived poor standing of India by multinationals as reflected from trans-nationality index and perhaps, an inadequate marketing of the country ‘as a profitable investment destination’. This coupled with the ad-hoc approach towards the holistic planning for Indian SEZs to strategically position them as complementary to each other and not competing will make it very difficult to attract FDI and private developers and investors.

Not only SEZs compete with each other for FDI and private investment, but many other schemes and projects of the Central and State governments asks for their share of the cake imposing an uncertainty and competition to the SEZ program. For instance, Uttar Pradesh is planning to develop a SEZ as well as an Apparel Park in Kanpur. Kanpur, earlier known as Manchester of India, has got quite a big textile and leather industry cluster. But now, SEZ and Apparel Park, both the projects are relying upon the same industry players in the cluster for investment and thus competing with each other.

The concept of SEZ embodies the business planning including strategic positioning of the zone in the world markets by leveraging on the strong backward linkages with hinterland/Domestic Tariff Area (DTA) and physical planning covering provision of world class enabling infrastructure. Therefore, the planning for SEZ requires multi disciplinary expertise in areas of business, economics, finance, legal and urban & infrastructure planning. In this context, two aspects are critical. First, inspired by the Chinese success and experiments with SEZs in many other countries, efforts for developing SEZs in many States of India are at full pace. Almost every State is aspiring for SEZ – the dream unlimited and, at least this time, bureaucratic hassles seem not to play negatively. But sparing top layer bureaucrats, remaining official machinery at the State level seems to practice the same ‘easy going’ attitude that has hunched many progressive policy initiatives of the Government earlier. As on earlier occasions, once again, the proper internal marketing of the government’s policy initiative is missing. Second, in Indian context, the concept of SEZ being a relatively new phenomenon, coupled with the demand for brains that can strategically plan and position the individual SEZs, is facing short supply of requisite real planning expertise. The situation gets more aggravated when any Tom-Dick or Harry starts claiming the expertise and the mechanism to avail and hire the real expertise is faulty. The experiences with the bidding for award of Techno-Economic Feasibility study and preparation of detailed project engineering of two SEZs are quite interesting in this regard. In the absence of standardized globally accepted criteria that gives due weight to the technical expertise of the consulting entities and even followed by international funding agencies such as World Bank and Asian Development Bank, some incapable consulting entities get short listed as technically qualified SEZ planners and put the claim of doing the assignment, surprisingly, at a price ten times lower than the technically sound but the higher price bidders! Of course, it is not a bad idea to select the expertise through competitive bidding, but in order to conceptualize and plan the SEZs as an undefeatable value bundle and marketing them as robust business proposition to the prospective developers and investors requires an impeccable blend of expertise that, definitely, can be hired but at a respectable price.

The Darning

As with some earlier ambitious programs of the government, SEZ program asks for even more effective internal marketing- marketing aimed at training and motivating the internal customers, i.e. government officials, for successful implementation of the SEZ dream.

Further, the planning for SEZs requires a holistic approach addressing two aspects specifically. First, all proposed SEZs should be strategically positioned as complementary to each other to the extent possible and serving their own market niches respectively. It requires monitoring by the central agency i.e. Ministry of Commerce that provides in-principle approvals to new SEZs on the basis of pre-feasibility reports being submitted by the respective State governments. Second, the SEZ scheme should be synchronized with other schemes for development of specialized industrial parks such as Apparel Park in Kanpur.