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SEZ sizzle returns with economic revival

Published & Updated as on - 2010-06-02

With the domestic industry showing signs of steady recovery and merchandise exports stablising, special economic zones (SEZ) are again getting prominence in boardroom discussions and strategy plans of corporate conglomerates. Six new proposals for setting up SEZs would be coming up in the meeting of the Board of Approval (BoA) on June 8.

As many as 12 SEZ projects were surrendered between December 2008 and March 2009. But, no SEZ was surrendered since then.

According to experts, SEZs are no more seen as land-grab deals. Companies, too, are gradually realising the potential of investing in such long-term projects. Besides, SEZ will be the only scheme to offer tax rebates to exporters beyond March 31, 2011.

Since the beginning of the year, the Board, under the Ministry of Commerce and Industry, has met twice and has already granted formal approvals to more than 15 fresh proposals from various companies to set up sector-specific SEZs or multi-product SEZs.

In 2009-10, goods and services exports from SEZs rose 122 per cent at Rs 2,20,000 crore compared to 2008-09, according to the latest data compiled by the Ministry of Commerce and Industry. “The economy seems to be reviving all across the globe. Hence, the increase in activities in SEZs is but natural and it is a fairly well- settled issue, now that the SEZ business model is a sure way for export- led growth of the economy,” said S K V Srinivasan, executive director, IDBI Bank.

The government has so far approved 574 SEZs, of which 350 have been notified. More than 105 SEZs are operational and have contributed to the revival of the country’s exports to a large extent.

“SEZ activity has certainly picked up again and can pick up significantly if the true meaning and potential is exploited by building hassle-free infrastructure... It can add 1.5 per cent to 2 per cent per annum to GDP growth if India builds five full-scale SEZs in the country,” Nikhil Gandhi, group chairman, SKIL Infrastructure Ltd, told Business Standard.

Besides tax benefits, companies are also finding it easier to set up shops in SEZs due to a single-window clearance mechanism. Finance Minister Pranab Mukherjee also vowed to give greater thrust to the development of SEZs in his Budget speech, which has also made several firms sit up and take notice of the government’s stance towards the policy.

“If one notices carefully, the SEZ policy would be the one such scheme where tax benefits could be obtained after March 31, 2011, while others would become invalid. The government has also not shown any indication towards extending the STPI (Software Technology Parks of India) scheme, which means more IT companies would now look at SEZs,” said Hitender Mehta of Vaish Associates Advocates, a Gurgaon-based law firm.

According to Cushman & Wakefield, out of 80 million square feet of commercial office space supply, 32 per cent was demanded by SEZs in 2008. In 2009, the demand came down to 26 per cent. But, with demand for SEZs increasing, it is expected to go up to 29 per cent in 2010 and 50 per cent in 2011.

“There was complete gloom in demand for office space in SEZs in the last two years, which seems to be changing now. People are gradually seeing the financial viability of these projects and demand is only going to increase now,” said Anurag Mathur, managing director, Cushman & Wakefield India.

Agrees Anshuman Magazine of CB Richard Ellis India, who says demand for office space in SEZs is slowly increasing, especially in the IT and ITeS sectors. However, he also said the demand is not anywhere near to what it was before the global economic recession.Source: BS 2/6/10

The rise of special economic zones

Is the time ripe for taking a fresh look at the SEZ policy?

Special economic zones (SEZs) in India have always been controversial. The controversy got more intense after the United Progressive Alliance (UPA) government of Manmohan Singh enacted a special law for such zones in 2005. With a slew of fiscal incentives and other concessions made available for setting up these zones, there was a virtual race among India’s top companies to seek necessary approvals from the government and jump the SEZ bandwagon.

Large tracts of land were handed over to companies so that they could set up their units under the SEZ scheme. In several cases, farmers and their families had to give up their cultivable land so that the government-approved zone could come up in an area. Often the government acquired such land at ridiculously low prices fixed under the law and then sold that to the company setting up the zone at below-market prices. Initially, there was no policy on rehabilitating and resettling those who were displaced by such land acquisition.

The UPA government woke up to it only after popular protests against such land acquisition gained ground. The Nandigram agitation in West Bengal and minor protests in several other locations fuelled the movement against the SEZ idea. It soon became a political hot potato. The UPA government came under attack from the Left and even from Mamata Banerjee’s Trinamool Congress. In response, the UPA government mooted a new law on rehabilitation and resettlement of people displaced by land acquisitions for industrial projects, including those to be set up under the SEZ scheme.

It is an irony and a reflection of the vicissitudes of Indian politics that even though the government is yet to get the rehabilitation and resettlement law passed by Parliament, the controversy over SEZs has died down. Worse, almost without anybody noticing this, the government has resumed its meetings to consider fresh SEZ applications and it seems that the country is all set to witness a fresh race among industrial houses to set up new SEZ units. Mind you, as many as 574 SEZs have already received formal approvals from the government, of which 350 have been notified under the SEZ Act.

The increasing significance of SEZs is also evident from the fact that at present 105 zones are operational, where 2,761 units have received permission to set up their projects. Total investment in these zones is estimated at Rs 1.28 lakh crore and the number of workers employed there is close to 490,000. More significantly, these units are now accounting for an increasingly larger share in India’s total merchandise exports.

Consider the following figures. India’s total merchandise exports in 2007-08 were estimated at $163 billion, which went up by 14 per cent to $185 billion in 2008-09. The following year, thanks to the global economic downturn, India’s total exports fell by about 5 per cent to $177 billion. At the same time, the share of SEZ exports in India’s total exports has been rising. At $16.5 billion in 2007-08 and $22 billion in 2008-09, SEZ exports were about 10 to 11 per cent of India’s total exports in this period. The sudden jump took place in 2009-10, when SEZ exports rose to $46.51 billion, accounting for over 26 per cent of the country’s total exports.

In other words, SEZs are now accounting for more than one-fourth of the country’s total merchandise exports, making a substantial contribution to India’s foreign exchange earnings. Look at it another way. If you exclude SEZ exports, India’s total exports in 2009-10 shrank to $130 billion, a 20 per cent fall over the comparable non-SEZ exports of $163 billion in 2008-09. Analysts might argue that the mushrooming growth of SEZ units has triggered a major diversion of exports from domestic tariff areas to these zones because of the availability of attractive fiscal concessions and other incentives under the SEZ Act.

However, can such incentives be so attractive that they would cause such a big diversion to raise the share of SEZ units in India’s total exports from 12 per cent to 26 per cent in one year? Or, is there any merit in Commerce Secretary Rahul Khullar’s recent comment on a television channel that the rising share of SEZ units in India’s total exports should make everybody sit up and wonder if the SEZ policy was pilloried for the wrong reasons? And is the time ripe for taking a fresh look at the SEZ policy, revamping it if necessary, making sure that it has no adverse consequences for farmers and, finally, preventing industry from grabbing land in the name of setting up these zones? Source: BS 19/5/10

SEZs fail to click in Uttarakhand

A couple of proposed special economic zones (SEZs), both in private and government sectors, in Uttarakhand have failed to make any headway.

Though Parsvnath and other private players have put on hold their SEZ proposals, the government is also not showing any enthusiasm. Officials here claimed that private players were not finding market conditions conductive to setting up of SEZs. Parsvnath is building a SEZ at Sahastradhara Road here.

The government is also yet to enact its own SEZ Act and take final decisions on its proposed SEZs at Sitarganj and Dehra Dun. Already, it has shelved its proposal to build an SEZ at Pantnagar.

For preparing the draft SEZ Act, a committee was set up under the additional chief secretary. But so far the committee has failed to take shape since the post of additional chief secretary is lying vacant.

State Infrastructure and Industrial Development Corporation of Uttarakhand Limited is keen to develop SEZs, both at Sitarganj and Dehra Dun. “We are trying to revive these proposals. We hope that some decisions would be taken in the next one month,” said a government official.

According to top officials, there is a need to study SEZ rules in other states and adopt a suitable model for the hill state in the wake of SEZ controversies in West Bengal and elsewhere in the country. Earlier experiences of Special Purpose Vehicles and PPP modes should also be taken into consideration, they added. Source: BS 14/5/10

Manufacturing zones promise triple bonanza for SEZs

The biggest advantage would be easy regulatory clearances.

Several special economic zones (SEZs) may have run into rough weather, but there is a ray of hope now.

The proposed national manufacturing and investment zones (NMIZs), the draft of which was released last week, actually promise a triple bonanza for SEZs: Easier access to land, flexible labour policies and various concessions proposed by the Department of Industrial Policy and Promotion (Dipp) in the manufacturing policy. The biggest advantage would be getting regulatory clearances easily.

According to a discussion paper on NMIZs, export-oriented units (EoUs) and SEZs can be located within the NMIZs. An SEZ located in NMIZs will also enjoy the incentives under the SEZ Act.

The basic difference between NMIZs and SEZs lies in the scale of operation. "SEZs could be a smaller entity within the NMIZs and would be governed by the SEZ Act. NMIZs, on the other hand, will be much larger in size," said a senior official in Dipp.

One of the major roadblocks for setting up SEZs has been land acquisition and it is here that NMIZs are likely to have an advantage. "The biggest challenge to SEZ is the ability of the private promoter to get a good parcel of land. The government will aggregate land to create manufacturing zones," said Chintan Patel, associate director, Ernst & Young.

While a single-product SEZ requires 100 hectares, a multi-product zone requires 1,000 hectare, except for the 'special status' states such as the north-eastern states, Jammu and Kashmir, Himachal Pradesh, Goa and all Union territories. In these states, the minimum area requirement for multi-product SEZs is 200 hectares.

Patel said that given what the government was offering in NMIZs, there was no reason why an SEZ would not like to locate in the NMIZs. "These manufacturing zones would be very large and there might not be too many of them anyway," he added.

NMIZs are designed to push the share of manufacturing in the Gross Domestic Product to 25 per cent by 2022 from about 15 per cent at present.

"The government is looking beyond SEZs and EoUs. In NMIZs, the focus is not just on exports but manufacturing," said Chetan Bijesure, additional director of the Federation of Indian Chambers of Commerce and Industry. They are being encouraged for value addition and for that special incentives, concessions and infrastructure facilities which are not available outside would be provided. The government may come out with notifications on these, though it is not clear whether the proposed zones will be backed by legislation like the SEZ Act.

While there is still a certainty of policy in the case of SEZs, some industry experts believe the policy around EoUs is not very certain and benefits to these may be withdrawn. It, therefore, makes sense for future EoUs to come up in NMIZs.

In terms of other major advantages, Bijesure pointed out that the manufacturing policy proposes reduction in regulatory compliance, ranging from labour, environment and forest, registration and taxation. On the flexibility of labour laws, he said it was not that the new zones would be detrimental for labour. He cites the example of the Employees' State Insurance. "If the ESI benefits are not available to employees, there is a provision for them to get adequately compensated. Similarly, instead of an exit policy that gives rise to litigation, the policy proposes an insurance scheme which a manufacturing unit can subscribe to and use in case of closure of a unit," added Bijesure. These flexibilities are not available in the case of SEZs, except in a few states where they have been brought under essential services.

Another advantage the NMIZs might provide is the single-window clearances. "The single-window mechanism in SEZs has not worked especially at the state level, where there are a number of problems.

States like Haryana and Orissa have tried to do some work in this direction. NMIZs promise faster clearances," said Bijesure. Each NMIZ will be run by a special purpose vehicle, which will be empowered to issue or expedite approvals and pre-approvals.

Availability of finances for an NMIZ is also proposed to be cheaper. The policy proposes subvention of interest on working capital by 4 per cent to create parity with international counterparts. Viability gap funding through existing schemes would also be considered.

Wherever necessary, requisite budgetary provisions for creation of these linkages through the public sector will also be made. These make the proposed zones better investment havens than even the SEZs. Source: BS 12/4/10

Govt scraps 12 special economic zones

The government has scrapped 12 special economic zones (SEZs) located in Delhi, Orissa, West Bengal, Gujarat, Haryana, Maharashtra, Tamil Nadu and Andhra Pradesh, Parliament was informed today.

"Requests for de-notification by the developers have been received from 13 SEZs located in the states/Union territories of Delhi, Orissa, Gujarat ... Of which 12 have been approved by the Board of Approval," Minister of State for Commerce and Industry Jyotiraditya Scindia said in a written reply.

Board of Approval (BoA), a 19-member inter-ministerial group headed by Commerce Secretary Rahul Khullar, approves the SEZ projects.

Scindia said that the final de-notification is allowed only on refund of duties or benefits, "if any, availed by the developer."

The SEZs, which have been denotified by the BoA includes four IT-ITeS zones of realty major DLF in Haryana, Gujarat, and Orissa.

On the de-notification of three SEZs in Goa, the minister said that the state government "may have compensate the developers". However he said that the developers have approached judiciary and the matter is sub-judice.

"Goa government had recommended 15 proposals for setting up of SEZs. Out of these, 7 proposals were accorded formal approval by the BoA and notifications were issued in respect of three cases," he said.

Source: BS 10/3/10

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