INDIAN SEZs PREDICT MAJOR GROWTH IN EXPORTS

In order to prevail over some of the barriers to large-scale investments in the manufacturing sector, the Indian government enacted a Special Economic Zones (SEZ) law in February 2006 which covers issues pertaining to establishment, operation and fiscal oversight.

The main advantages of the SEZs are related to tax incentives offered to businesses established within such zones. Thus far the government has given in-principle approval to well over 250 applications for setting up new SEZs across the country, with 80 percent concentrated mainly in the northern and western regions (states of Haryana, Gujarat and Maharashtra).

It is hoped that the SEZs can act as an interim means of boosting investments in manufacturing and other industries until the government is able to improve the business environment on a country-wide basis. It is often noted that such a strategy was successfully undertaken by China and used effectively by the government in policy experimentation before being replicated on a larger scale.

Nonetheless, there are some concerns that the policy may not be nearly as successful in India given the relatively small size of the proposed SEZs (most are about 1 square kms compared to the mega-sized SEZs of 100 square kms in China).
The scope of SEZs is much wider and their linkage with the domestic economy is stronger as is the exact case in china. This is the secret of Chinese success. The SEZs provide supportive infrastructure such as housing, ports, roads and telecommunication and, as a result, have a wider industrial base. The 63 special economic zones (SEZs) that have been notified since February 2006 are expected to do a business of worth Rs. 21, 631.94 crore, revealed commerce ministry’s projections.

Meanwhile, the commerce ministry also predicted a 201 percent rise in export earnings from all the SEZs at Rs 67,299 crore. It was hovering around Rs 22,309 crore in 2005-06. However, out of the 63 notified zones that came into existence after the SEZ Act, it’s the Chennai-based Flextronics, electronic hardware, which has the top projection. The 440-acre zone, which so far has invested worth Rs 200 crore, has a projection of Rs 6,901 crore.

The second highest projection is for Essar-Hazira zone, which is in Gujarat. This zone, which is known for its engineering products, is spread over 247 acre and has seen Rs 2000 crore being pumped into the project. The projection for Essar-Hazira zone is pegged at Rs 3,300 crore.EON Kharadi Infrastructure zone near Pune for IT and ITeS, which is spread over 18-acre, has the third highest projection for 2007-08. With its current investment of Rs184 crore, it’s expected to do a business of Rs. 3000 crore.

Serum Bio-pharma park in Pune, Moser Baer SEZ in Greater Noida and Mundra port zone in Gujarat are the other special economic zones that are given top billing in export earnings. So far, Rs 13,435 crore has been invested in these 63 special economic zones (SEZs).While the exports of all those zones that came up before the SEZ Act in February, 2006 are expected see a growth of astounding 532 percent. That will take their earnings to Rs 20,117.68 crore in 2006-07 in comparison to compared to Rs 3,182.86 crore that they earned in 2005-06.

While SEZs may not be the magic potion that Indian policy makers hoped it might be and is clearly not a substitute for needed infrastructural, regulatory and institutional reforms on a macro-basis, these and other institutional innovations in India emphasize that the country’s policy makers are consciously attempting to improve India’s attractiveness as an investment destination and a global manufacturing hub.
The investment climate in India has undoubtedly become friendlier and investing in India is a much more attractive proposition today than before. A recent study on Indian manufacturing by KPMG has argued that “as awareness of India’s potential grows, so should the understanding of the business case for manufacturing investment in India.