By the top of July 2020, there have been 357 notified SEZs, along with 7 Union authorities and 12 state authorities/non-public SEZs that have been established earlier than the SEZ laws of 2005. There have been 5,524 models in SEZs. Nonetheless, by finish March 2020, solely 248 SEZs have been operational. Most non-public operational SEZs have been in IT/ITES and enthusiasm for SEZs tapered off round 2017.
In absolute phrases, development in exports from SEZs might sound spectacular, however as a share of exports, they by no means turned the motive force they have been anticipated to be.
Within the World Financial institution’s Logistics Efficiency Index (primarily based on customs, infrastructure, worldwide shipments, logistics competence, monitoring and tracing and timeliness), India’s rating and rating have persistently improved. However logistics isn’t solely about what occurs on the port; additionally it is about transport infrastructure. That’s, additionally it is about what occurs inside borders, although for IT/ITES, bodily infrastructure is much less of a difficulty.
If one ignores Himalayan states and the North East, main coastal states are Andhra, Gujarat, Karnataka, Kerala, Maharashtra, Odisha, Tamil Nadu and West Bengal. Whereas it’s tough to unambiguously determine any export as originating from a particular state, one would anticipate exports (at the least the merchandise selection) to originate from these states and never from landlocked states like Assam, Bihar, Chhattisgarh, Haryana, Jharkhand, MP, Punjab, Rajasthan, UP, Telangana or J&Ok.
Aside from the uncommon or perishable merchandise, air freight makes exports uncompetitive. Certainly, 70% of exports originate from Maharashtra, Gujarat, Karnataka, Tamil Nadu and Telangana. At greatest, one can ask, why don’t Andhra, Kerala, Odisha and West Bengal carry out higher?
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Whether or not it’s a latest export preparedness rating executed of the states, or Financial Survey’s knowledge, we may have Gujarat, Maharashtra and Tamil Nadu on the prime. As soon as one takes away the USP of fiscal concessions, for many exports, aggressive benefit solely exists alongside the coast, the place seaports are.
That’s the explanation, as a part of the Sagarmala Challenge, the concept is now to have coastal financial zones (CEZs), coastal financial models (CEUs) and port-led industrial growth and exports. That is what SEZs ought to have been within the first place, as the primary lot of Export Processing Zones have been.
With tax concession-induced SEZs out of the way in which, these CEZs (at the least the primary set) shall be in Gujarat, Maharashtra, Goa, Karnataka, Kerala, Tamil Nadu, Andhra, Odisha and West Bengal, with particular hyperlinks to ports and manufacturing catchment areas in particular districts.
Any enclave-driven liberalization must have focus, like CEZs, and can’t be indiscriminate, like SEZs. To know this shift, we’ve got to first look at why India’s coverage makers selected to blindly comply with the Chinese language mannequin.
The early days
China’s SEZs (Shenzen, Zhuhai and Shantou in Guandong province and Xiamen in Fujian province) have been established in 1980 with goals of stimulating exports and attracting international direct funding (FDI) and new expertise. The target wasn’t the transformation of the fishing village of Shenzhen. That was an oblique consequence. In these early years, China liberalized selectively, in enclaves.
As liberalization unfold, a complete province like Hainan, not only a geographical space inside a province, turned an SEZ. As liberalization unfold additional, coastal cities have been added to such enclaves, although these weren’t de jure SEZs. The adjective “coastal” is essential. SEZs and these cities have been alongside the coast, near Hong Kong and Macao.
Chinese language SEZs have been profitable by any yardstick (shares of exports or FDI inflows). However as liberalization prolonged past enclaves, these shares declined. The Chinese language did it in 1980. India sought to do it in 1965. Kandla Free Commerce Zone (FTZ) was inaugurated by the then Prime Minister Lal Bahadur Shastri in March 1965.
The famous civil servant, Nagarajan Vittal, spent a part of his profession as Growth Commissioner for Kandla FTZ. His spouse, Gita Vittal, wrote her memoirs (in 2007) and talked about what N. Vittal mentioned when he was provided a submit 13 others had refused. “For 9 years the zone has been a failure. If I am going and fail, I shall be another on the listing of failures, but when I succeed, I’d have executed one thing worthwhile.” Regardless of Vittal bettering issues a bit, Kandla failed, in comparison with what it was anticipated to realize.
Apart from Kandla, we had Santacruz Electronics Export Processing Zone (EPZ) in 1973, Chennai, Falta (in West Bengal) and Cochin in 1984, Noida in 1985 and Visakhapatnam in 1989 (it turned purposeful in 1994). We frequently neglect there was restricted import liberalization in 1976. We definitely neglect that in 1976, Union Cupboard turned down a proposal to start out EPZs in Calcutta, Chennai (Madras) and Cochin.
The argument superior towards the EPZ proposal was no completely different from a difficulty confronting us at the moment. If there may be common import liberalization, elimination of QRs (quantitative restrictions) on imports and discount in tariffs, what’s the purpose of FTZ/EPZ? However no matter that 1976 Cupboard query, EPZs did end result.
So, what’s the distinction between free port, FTZ, EPZ, SEZ And FTWZ (free commerce and warehousing zone)? The phrases are sometimes used as synonyms. If nomenclature is rigorously used, a uncommon prevalence, FTZ is a duty-free space, primarily for warehousing and distribution, corresponding to for re-exports. Ergo, FTZs are usually close to ports or airports.
EPZs incentivize not simply re-exports, but in addition exports. A unit in an EPZ can even sometimes promote within the home tariff space (DTA). Recognizing hyperlinks between commerce and investments, SEZs goal inward FDI. A free port is a big geographical space that encompasses all these goals. In 1980-81, the 100% export-oriented unit (EOU) scheme was began, duplicating each incentive FTZ/EPZ possessed, with out locational restrictions.
China’s profitable method
Why did SEZs reach China? In a protracted listing of solutions, there shall be proximity to coasts; networks, and never simply proximity, with Hong Kong and Macao; de facto greenfield infrastructure and actual property growth; easy procedures; FDI; and low-cost and versatile labour provide due to China’s “hukou” system (till 1995, China lacked primary labour rights).
India’s FTZs/EPZs have been constrained by lack of hyperlinks to something like Hong Kong or Macau, inferior infrastructure, difficult procedures, inflexible labour legal guidelines and non-availability of expert labour. For example, restrictions on gross sales to DTA led to extra procedural hassles and didn’t simplify issues. Consequently, labour-intensive manufacturing and exports by no means took off.
As with China, if liberalization extends elsewhere, enclaves grow to be much less engaging. So, 100% EOUs might be arrange wherever, nearer to uncooked materials sources, the place ecosystems, suppliers and expert labour existed, the place infrastructure was higher. One shouldn’t neglect, one among Kandla FTZ’s goals was industrializing a backward area, hardly what FTZ was anticipated to do in every other nation.
In 1980, the Tandon Committee on export methods criticized the then solitary FTZ for being unclear in goals, a bane of subsequent EPZs too. Not surprisingly, until 2000, the share of all FTZs/EPZs in India’s exports progressively elevated to round 4.5%, a lot decrease than anticipated.
As a substitute, 100% EOUs thrived, till withdrawal of direct tax exemptions in 2012 made the scheme unattractive. (GST eliminated customs obligation and excise advantages, to not converse of EPCG and obligation disadvantage, out there for non-EOUs too.) Withdrawal of such fiscal incentives tilted the steadiness in direction of SEZs.
SEZs have been first talked about in Exim Coverage for 2000-01. A number of sentences from the then commerce minister Murasoli Maran’s speech will determine the rationale.
“I’m proposing a serious step of creating, as in China, SEZs in numerous components of the nation…The concept mainly is that in these areas export manufacturing can happen free from the plethora of guidelines, and rules governing import and export…Any State Authorities or company entity or particular person can furnish proposals for organising such zones…In the mean time, additionally it is proposed to transform the present Export Processing Zones into SEZs .”
In 2000, we considered an enclave concept China had given up.
The cases the commerce minister gave of easier guidelines have been about taxes and tax-related concessions. Within the tax reform agenda, each direct and oblique, fiscal concessions have been on their manner out, even when implementation of the agenda took time. Subsequently, except there was another aggressive edge, like 100% EOUs, SEZs have been certain to wither away.
As well as, with a need to incentivize states to push the export trigger, state governments have been allowed to have their very own SEZs, with some promised fiscal help. There was point out of IDA (Industrial Disputes Act), however there was by no means any query of labour legal guidelines in SEZs being completely different from common labour legal guidelines. Article 14 of the Structure doesn’t allow “hukou” or differential labour legal guidelines between an enclave and the remainder of the nation.
The labour difficulty
It was unrealistically hoped (in 2000-01) that SEZs would have distinct and extra versatile labour legal guidelines. That’s not doable. However there’s a caveat. That is doable beneath Article 243Q(I) of the Structure, for an industrial township. Nationwide Funding and Manufacturing Zones (NIMZs), distinct from SEZs/CEZs on grounds of governance construction and exit insurance policies, characterize that concept.
A number of NIMZs have been authorised. I’m sceptical of these situated away from DMIC (Delhi Mumbai Industrial Hall) and DFCs (Devoted Freight Corridors). There isn’t any getting away from bodily infrastructure. The others are prone to comply with the failed SEZ route.
Three many years in the past, at a seaport, I watched cargo (food-grains) being loaded on a ship. Labourers carried them up on their backs, in gunny luggage. I had anticipated extra mechanization. Once I requested, I used to be informed imports have been extra mechanized. Why? “Gravity makes it simpler,” mentioned one knowledgeable. “We mechanized imports throughout PL-480 days, however not exports,” mentioned one other. Each self-proclaimed specialists may need been improper. However the anecdote has a degree.
There’s an export tradition in India that transcends insurance policies. Insurance policies traditionally inspired import substitution and fettered this tradition. Subsequently, the act of exports required subsidies and monetary concessions. In a broader context, we face the problem of devising World Commerce Organisation-compatible incentives, since export subsidies aren’t WTO-compatible. Within the narrower enclave liberalization context, SEZs/CEZs will even need to look past tax concessions. The states want to acknowledge multiplier advantages from exports; and never have an interest just because there may be central fiscal help.
In that sense, the correct classes nonetheless have to be discovered from SEZs elsewhere on the earth, together with China of the 1980s.
Bibek Debroy is chairman, Financial Advisory Council to the Prime Minister
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