India vs China Essay

To compete in the global market, the G e genuinelyplacenment of India (GoI) has liberalized exporting policies & licensing of engineering and implemented tax reforms providing non-homogeneous incentives. Special stinting Z unrivalled(a) (SEZ) insurance insurance is in any case one of the steps India has taken to boost scotch harvest-tide through outward looking approach. Special economic zona is a specifically vocation fee enclave and shall be deemed to be overseas grime for the purpose of trade operations and duties and tariffs. When SEZ constitution was introduced in the acres, it made headlines and people started considering it as a policy to create a tussle necessitous and investment friendly environment.The main objective of this research paper is to analyze SEZ policy in monetary value of export performance, FDI inflow, employment generation and everywhereall somatic and financial root word make. This research paper tries to investigate whether having thes e policies ar good for the country or non. SEZs ar a big variant of exportation Processing geographical zone (EPZ), thus performance of EPZ has withal been discussed briefly. It has been five eld now since all then vivacious EPZs pitch been converted into SEZs. Section II has been devoted to performance analysis of these mappingitions. by and by the misfortune of EPZs, a significant change has been made in the rules/regulations and a refreshful package of pecuniary and non- fiscal incentives is also being offered to developers and units. accord to Finance Msinistry, the brass has to forego about Rs. 90,000 crore in reign over and corroborative taxes over the adjacent four years on account of SEZs. Despite so many incentives, performance of these privileged enclaves over the brook five years indicates the failure of this dodging of rules. For instance, the sh atomic number 18 of exports from SEZs in the innate exports of the country has only increased from 4. 2% in 2000-01 to 5. 1% in 2004-05.Some economic experts are also visual perception it as a corporate wel far away(p)e synopsis and the possibility of a sharp decline in investments in SEZs cant be rule out as tax benefits are only for 10 years. Other issues of concern like the heavy economic cost, real e reconcile scam and moil policies are also discussed in the last section of the paper. Data are mostly turnary except the opinion of antithetical economists and the festering Commissioners (SEZ) has also been taken into account. The zones cannot be insu youthfuld from the broader refugeal and economic context of the country and be treated as an preservation within the providence.Zones are a part of the prudence and learn boilersuit improvement in the investment climate to ensure supremacy in the coherent run. They should not, therefore, be viewed as an alternative to the overall ontogenesis model. This is peradventure the reason why SEZs failed to fulfill the hab it of engines of economic growth in most countries on a sustainable basis. 3 Major Findings The union Govt has bygone a whopping Rs 39,704 crore of occupation under export promotion schemes during 2003-2004 accounting for 82% of customs duty collected in that year. The foreign convert clear by all the 811 units in the 8 zones put together came to only Rs. 8,309 crores, a mere(prenominal) 5% of Indias exports during the fiscal year 2004-05. During 1966-1980 average yearly export growth rates of EPZs was over 77%, whereas during the post 2000 period (2001-03) it came down to 7%. Total role of FDI investment in Noida SEZ in 1997 was 12. 3% and it went up by a mere 0. 4% in the six years. Total FDI share in 2003 was 12. 7%. A slew of tax privilege planned for SEZ to boost exports will erode Rs. 93,900 ($ 20. 62 cardinal) in disposal revenue over the next four years. Haryana Govt has offered over 1700 acres of land costly Gurgaon to RIL (Reliance) for about Rs. 60 crore while it is estimated that the land was charge viosterol0 crore and HSIDC had acquired this land by paying Rs. 300 crore in payment to the farmers. 4 Section 1 SEZ indemnity An Overview 5 1. 1 Introduction A Special stinting Zone (SEZ) is defined as a deemed foreign territory within a country with special rules for facilitating FDI for export-oriented production, and for purposes of trade and customs duties. These Zones (SEZs) are geographical region that accept economic laws different from a countrys typical economic laws. contrasting economic institution and government departments find defined it in different ways.As per Ministry of Commerce and Industry they are defined as Special economic zone is a specifically duty fee enclave and shall be deemed to be foreign territory for the purpose of trade operations and duties and tariffs. SEZs have been established in several countries, including the Peoples Republic of chinaware, India, Jordan, Poland, Kazakhstan, the Philippi nes and Russia. The archetype of having free trade zones, export oriented zones and SEZs dates back to 1970. In 1979-80, China opened up its economy to foreign investment with the establishment of Shenzhen SEZ.Situated close to the Hong Kong port, this footling fishing hamlet has today acquired the distinction of being the manufacturing hub of the world with a GDP of $20 one thousand thousand and an annual foreign trade of nearly $50 billion. Inspired by the success of Chinese SEZs our policy makers also tried to experiment with SEZs in India. Despite the failure of Export Processing Zones (EPZs) Murasoli Maran aft(prenominal)ward visiting China in the year 2000 introduced the SEZ policy very same year considering the need to upgrade foreign investment and promote exports from the country.The SEZ bill was passed by parliament in 2005 and the Commerce Ministry notified the Special Economic Zones law on February 9, 2006 and the rule came into effect from February 10, 2006 hardl y the rush of proposals for cross outting up SEZs had begun much earlier and by November 2005 some 61 SEZs were already esteemd. check to reports, so far, the giving medication has cleared around cl SEZ proposals out of around 200 received. The policy provides for setting up of SEZs in the public, cloak-and-dagger, joint vault of heaven or by reconcile Governments.It was also envisaged that some of the actual EPZs would be converted 6 into SEZ. harmonizely, the Government has converted all eighter EPZs into SEZs. Table 1. 1. 1 below shows all the EPZs which has been coveted to SEZs with their size Table 1. 1. 1 List of all the EPZs converted into SEZs with their size Location Kandla (Gujarat) SEEPZ (Mumbai) Cochin (Kerala) Surat (Gujarat) NOIDA (UP) Chennai (TN) Vizag (AP) Falta (WB) Size (Sq. KM) 2. 99 0. 38 0. 40 NA 1. 22 1. 04 1. 43 1. 12 prototypical Export advance Council. Ministry of Commerce, Government of India 1. Evolution of EPZs/SEZs in India The economic poli cy of 1960s which were geared towards selective import liberalization and export promotion, marked the culture of EPZs in the country. The first EPZ in India which was also the first in Asia was set up at Kandla in 1965. The proposal for setting up the Kandla free trade zone was mooted in 1961, with the objective of facilitating the development of the Kutch region, to ensure greater utilization of Kandla port and to create employment opportunities in the Kandla. The second EPZ in the country, the Santa Cruz Electronics Export Processing Zone (SEEPZ), was set up at Mumbai in 1974.This EPZ was developed specifically for adjoining electronics goods and was expected to generate employment opportunities and facilitate the technology transfer. SEEPZ was initially planed as case-by-case product zone for processing electronics goods and by 1986 it was made a ii product zone providing for gems and je rise upery tortuous as well. 7 Four more zones were set up in the mid-eighties at Noi da (NEPZ), Chennai (MEPZ), Cochin (CEPZ, Kerala), and Falta (FEPZ, West Bengal) and the seventh EPZ in the country was licensed at Vishakhapatnam (VEPZ, Andhra Pradesh) in 1994.Initially the telephone exchange Government was solely responsible for establishing EPZ, plainly this policy was amended in 1994 to enable bring up governments, autonomous agencies and the surreptitious orbits to participate in the development agencies and operation of EPZs. Following the implementation of this policy, one EPZ was developed by insular sector in Surat. A joint sector EPZ (now SEZ) has been approved for Greater Noida (UP). In price of export performance, employment generation and FDI inflow EPZs failed in India save considering the need of ameliorate export performance and stand building, important government came up with SEZ policy in 2000.Section II of this research paper has been devoted to analysis of the failure of EPZs in India. Without understanding the differentiate differe nce betwixt these devil similar policies it would not be fair to comment upon the future of SEZ scheme. 1. 3 How SEZs are different from EPZs ? SEZs are a big variant of EPZs. Both have a delineated battlefield and permit duty free import of great goods and raw materials both aim to get out foreign investment for setting up export-oriented units by providing developed infrastructure, conducive operating environment and a package of fiscal incentives.However, the objective of SEZs is much larger than mere promotion of export processing activities. While EPZs are industrial e nominates, SEZs are virtually industrial townships that provide supportive infrastructure such as housing, roads, ports and telecommunications hospitals, hotels, educational institutions, leisure and entertainment units, residential/industrial/commercial complexes, water supply sanitation and sewerage system and any other facility inevitable for development of the zone.The scope of activities that can be undertaken in the SEZs is much wider and their linkages with the domestic economy are stronger. Resultantly they have a diversified industrial base. Their role is not transient like the EPZs, as they are intended to be instruments of regional development as well as export promotion. Although the objectives 8 of SEZ policy are quite similar to the objectives envisaged by central government through EPZ policy in early eighties only if there is significant difference between these two policies in basis of tax benefits and rules and regulations.The table 1. 3. 1 below summarizes the difference between these two Table 1. 3. 1 resemblance between SEZ and EPZ Indias SEZ Restriction sectors on Open manufacturing, services concern activities Indias EPZ to Open manufacturing and trading considered SEZ vs. EPZ to While SEZs are and generally open to activities. all activities, EPZs more manufacturing and trading on utilitys whitethorn also be appear to focus Tax prerogative Companies in Companies in EPZs SEZs offer more tax thanSEZs sleep with a 5 were exempted from attractive year corporate tax corporate tax for a benefits holiday, by more years followed block of 5 years in EPZs 50% first 8 years of exemption for 2 operations. However, under section 10a of the income tax act, the concession was to be Retention foreign alter earnings of Retain earnings shift phased out by in control foreign 2009 century% Retain 70% foreign Companies in Exchange Earner Foreign Earner better funds over foreign exchange exchange earnings in SEZs would have 9 Foreign Currency forecast (EEFC). urrency relation purchase in to of Account (EEFC). imported inputs. Export performance (EP) Foreign Exchange exports (NFEP) & No minimum EP Minimum gather upd. Positive NFEP terminal NFEP (varies industries required (varies and EP and Companies in SEZ more across leeway in meeting export performance requirements. required. enjoy across industries and states) Earning as % of states) requirem ents Duty recovery in Duty recovery is Full duty recovery is Lesser penalty for case of failure to in proportion to imposed achieve positive shortfall NFEPDTA* sales Unlimited sales on replete duty Duty imported material free Allowed. raw duty qualify for DTA sales but SEZs achieve NFEP DTA Only 50% of exports SEZs enjoy greater access to domestic market These Allowed, duty More flexibility in and for in 1 stock list planning companies SEZs. Certifications of Imports on self- Imports imports certification basis attestation suppuration Commissioner require Simplified of customs procedures facilitate movement of 10 free free materials are to production utilized over failing to positive materials are to be years be utilized over 5 year. mports into SEZs springer inspection No routine Routine of inspections import/export cargo FDI Foreign promotion customs Expedited of movement SEZs investment Easier SEZs and for board quicker FDI flows manufacturing companies. of goods in an out of test import/export cargo by Cusoms FDI process approval nose candy% investment through automatic approval is required into route available for for FDI manufacturing companies character SEZ Authority, Ministry of Commerce and Industry, Government of India Available at sezindia. nic. in. Accessed on June 5, 2006 1. Objectives of SEZ envisaged by the Government of India The main objective of the SEZ scheme gibe to the pay and commerce ministries is to create delineated, duty free zones with world class infrastructure, internationally competitive production environment and fast track headroom system for attracting private investments, curiously foreign direct investment (FDI) for setting up export oriented unit. The broad objectives of the SEZ policy are Attract Foreign Direct Investment (FDI) Earn foreign exchange and contribute to exchange rate stability Boost the export sector, particularly on traditional exports Create jobs and raise standard of living Transfer new skills a nd expertise to local human resources Create backward & forward linkages to increase the output and raise the standard of local enterprise that supply goods and services to the zone Introduce new technology 11 Develop backward regions by locating such zones in these subject fields and attracting industries Provide a stimulus to the economy interrogatory key policy reforms in these pilot parts According to the Commerce Ministry, investment of the order of Rs. 00,000 crore over the next 3 years with an employment potential of over 5 lakh is expected from the new SEZs apart from indirect employment during the construction period of the SEZs. intelligent investments are expected in sectors like IT, pharma, bio-technology, textiles, petrochemicals, auto-components and so on With the Act and Rules in place, it is expected that many large format, multi-product SEZs that have so far been unable to achieve financial closure will now right away move towards such closure.It is anticipate d that this will trigger a large flow of foreign and domestic investment in SEZs, in infrastructure and originative capacity, leading to generation of additional economic activity and creation of employment opportunities. Fiscal and other incentives are being offered to woo investors and SEZ developers. Incentives like tax benefits, single window clearance, flexibility in export and import rules and regulations has made SEZs an important and most sought after destination for setting up the business concern empire. unlike most of the international instances where zones are primarily developed by Governments, the Indian SEZ policy provides for development of these zones by the government, private or joint sector. 1. 5 Establishing SEZs Procedures and Requirements According to Commerce Ministry and SEZ authority SEZs may be developed and managed in the private sector or jointly by state government and a private agency or exclusively by the State Government or their agencies.In the c ase of privately developed zones, the investors could be either Indian individuals, NRIs, Indian or foreign companies. New infrastructural development works such as construction of Standard Design Factory Building, operation and maintenance of infrastructure in the Zones may also be undertaken through private/joint/state sector in the Export Processing Zones, now converted into Special Economic Zones. Any person, who intends to set up a SEZ, may, 12 fter identifying the area can make a proposal to the Board of Approval (BOA) but will also have to obtain the concurrence of the State Government. SEZ developer will have to get a no-dispute certificate for that area where he wants to establish SEZ from the Chief Secretary of that state. After getting clearance from the state government BOA considers that proposal and if the proposal is within the purview of SEZ act BOA can approve the proposal. However if a state government wants to set up a special economic zone, after identifying the area can make a proposal directly to the board.The central government has prescribed the minimum area requirement for setting up SEZs. Table 1. 5. 1 shows the minimum requirement of area for various sectors. Table 1. 5. 1 Minimum area requirement for various sectors Sector Multi Product Green field attend to sector Bio-Technology InformationTechnology Gems & Jewellery All other sectors 10 100 Minimum area required (in hectare) 1000 1000 100 10 10 Source SEZ authority, Ministry of Commerce & Industry. Government of India.Available at sezindia. nic. in. Accessed on June 15, 2006 The area requirement for multi-product SEZs has been relaxed to 200 hectares and for sector specific SEZs to 50 hectares, for certain States (Assam, Meghalaya, Nagaland, Arunachal Pradesh, Mizoram, Manipur, Tripura Himachal Pradesh, Uttaranchal, Sikkim, Jammu & Kashmir, Goa) and Union Territories, keeping in view the difficulty in finding large tracts of next land in such states/union territories. According to the SEZ Act at 13 east 25 % area of the SEZ shall be used for developing industrial area for setting up of such units and the remaining 75% can be used for building infrastructures like roads, hotels, power generation station, educational institution and other facilities. 1. 6 Setting up Units Any person who wants to set up a unit for operating in a SEZ will have to submit a proposal to the development commissioner of that SEZ. Development commissioner submits the application to the Approval Committee and the Approval Committee may, either approve the proposal without modification, or approve the proposal with modification.A modification suggested by Approval Committee will be well within the purview of SEZ Act. 1. 7 Important Features of SEZ Policy and Incentives disposed to SEZ In India SEZs are deemed foreign territory within the country with special rules for facilitating FDI for export-oriented production, and for purposes of trade and customs duties. The key implication of being a deemed foreign territory is that individual units within the SEZ are allowed operational freedom in routine activities and not supervised by the customs authorities. Units may be set up in SEZ for manufacture of goods and rendering of services.To woo the investors to the zones, the Central Government has been offering a number of fiscal incentives and concessions. For instance, the zones are deemed as foreign territories as far as trade operation, duties and tariffs are concerned. The units (100% export oriented) also have full flexibility in operations. They are exempt from all direct and indirect taxes. No export and import duties, no excise duties, no central or state sales tax and no service tax. The units dont require license for importing capital goods and raw material.According to SEZ Act 2005, the firms are eligible for getting an extended Income Tax holiday for 15 years. Income tax exemption for 15 years is available for SEZ units as detailed below- 14 a) 100% of moolahs and gains from exports for the first 5 years b) 50% of profits and gains from exports for the next 5 years c) Amount not exceeding 50% which is credited to a reserve account Special Economic Zone Re-investment Reserve Account and utilized for business for the next 5 years. The only condition imposed on the firms is that they must have positive net foreign earning (NFE).The important fiscal and non-fiscal incentives wee-ween to SEZ developers and firms are as follows 100% FDI in the manufacturing sector permitted through automatic route1 except arms and ammunition, explosives, atomic substance, narcotics and hazardous chemicals, distillation and brewing of sousing drinks and cigarettes, cigars and manufactured tobacco substitutes. External commercial borrowings by SEZ units upto US$500 million in a year without any maturity restrictions through accepted banking channels. Facility to retain 100% foreign exchange receipts in Exchange Earners Foreign Currency Account.E xemption from Central Sales Tax and Service Tax Facilities to set up off-shore banking units in SEZs. Exemption from duties on import /procurement of goods for the development, operation and maintenance of SEZ. FDI to develop townships within SEZs with residential, educational, health care and volunteer(a) facilities permitted on a case-to-case basis. The full list of all the fiscal and non-fiscal incentives being offered to SEZ developers and units has been tending(p) in the (appendix-i). Apart from getting tax benefits from central government these zones are also getting tax benefits from state governments.TABLE 1. 7. 1 shows the list of tax benefits given by state governments to all the EPZs which has been converted into SEZs. Table 1. 7. 1 Exemption From The State Level Taxes By Zone Falta Cochin Chennai Noida Vizag Kandla 15 Sales tax Contract tax Purchase tax VAT State entry tax Octroi tax CESS Luxury tax Entertainment tax Stamp duty and fitting chages on land transfers Sta mp duty and registration charges on loan agreements/credit deeds Yes No Yes Yes Yes No No No No No Yes n. a. n. a. n. a. Yes n. a. No n. a. n. a. Yes Yes n. a. n. a. n. a. n. . n. a. n. a. No No No Yes No Yes n. a. Yes Yes Yes No No No Yes n. a. Yes n. a. No No No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No No No Yes Yes Source Agrawal,2004 Units within the SEZ and EPZ also get subsidies sometimes on land rents and built up areas are also provided on lower rental rate. In some countries utility services such as electricity, water, and telecommunication are also subsidized. Table 1. 7. 2 shows the list of subsidies being given to zone units in six EPZs (now SEZs) Table 1. 7. 2 Provision of subsidies by Zone FaltaOn land rent Factory rent On purchase on capital goods On capital investments Interest rate subsidies Concessional finance Any other Cochin Chennai Noida Vizag Kandla Yes Yes Yes Yes Yes Yes No Yes Yes No No No No No Yes Yes No No No No No Yes Yes No No No No No Yes Yes Yes Yes No No No Yes Yes No No No No No Source Agrawal,2004 In name of fiscal and other benefits we are ahead of China but the record of the Indian EPZs stands in contrast even to the performance of the general economy. Unlike other countries, in India, SEZs are being developed by the private sectors as well and to attract 16 he private and foreign investment a package of incentives is being offered by both state as well as central government. Later in the research paper an investigation has also been made to analyse the worth of these benefits. Section II Performance abridgment of EPZs & SEZs 17 Introduction What is a successful SEZ? Is it the one that contributes to the host economy, one that generates profit for its own owners/managers? SEZs are extensions of EPZs and taking this into consideration, an attempt has been made to analyze the success of both EPZs and SEZs in India.It has been in force(p) five years since the introduction of the SEZ policy in India. Some econ omists believe that its withal early to comment upon its potential or chances of its failure. A significant change has been made in the rules and regulations but by and large the objectives of SEZs and EPZs are similar. Taking this into account this section has been devoted to explain the experience India had with EPZ policy in terms of export performance, employment generation, FDI inflow and infrastructure development. SEZs have been viewed as a tool to attract FDI and boost the export sector, which will 8 further create employment. It might be argued that policies like SEZ which has been introduced very recently can not be categorized as a good or a bad policy by looking at the performance analysis of five years but it definitely gives an insight into its potential success or failure. 2. 1 Share in Total Exports merge Analysis Exports from SEZs grew by 16. 4% from 2000-01 to 2004-05. In the same period, heart exports in India grew by 12. 1%. This clearly indicates that despite getting special treatment, performance of SEZs in India is not satisfactory.Even, the share of exports from SEZs in the total exports of the country has only increased from 4. 2% in 2000-01 to 5. 1% in 2004-05. Its quite apparent from the draw that Domestic Tariff Area is also more or less witnessing the same rate of growth. Exports from SEZ touched(p) the figure of 18,309 crore in 2004-2005 which is just a mere 5% of the total exports from India. prefigure 2. 1. 1 Trend in export performance of SEZs Exports from SEZs (Rs. in Crores) 20000 Rs (in Crores) 15000 10000 (4) 5000 0 2000-01 2001-02 2002-03 2003-04 2004-05 Year 11) (8) (4) (8) Source Export Promotion Council, Ministry of Commerce & Industry, Government of India Note figures in parenthesis shows the No. of functional SEZs 19 Figure 2. 1. 2 Contribution of SEZs in countrys total Export SEZs contribution in countrys total export Contribution in percentage 6. 00% 5. 00% 4. 00% 3. 00% 2. 00% 1. 00% 0. 00% 4. 20% 4. 40% 4. 7 0% 5. 10% 3. 90% 2000-01 2001-02 2002-03 2003-04 2004-05 Year Source CII report, 2005 Study shows that initially EPZs also witnessed high growth but gradually it started declining.In the early seventies, the growth rate of EPZs touched 77% but gradually it started coming down (Agrawal, 2004) and declined to 7% in 1999-00. Figure 2. 1. 3 indicates that the SEZs are failing to induce dynamism in the overall export performance of the economy. As the figure shows, despite a high growth of overall exports, SEZ contribution has remained constant over the years despite various other benefits. However, this may be counter argued by saying that apart from exports government has other objectives like employment generation and attracting FDI but our analysis shows that SEZ scheme is also failing like EPZs in attracting FDI.Figure 2. 1. 3 Growth Trend of SEZ and Country Export 20 2000000 1800000 1600000 1400000 1200000 1000000 800000 600000 400000 200000 0 1990 1992 1994 1996 1998 2000 2002 Rs. in Crores SEZs export Country export Source sezindia. nic. in, Ministry of Commerce & Industry. Government of India 2. 2 FDI inflow and Employment India had a very slow expansion in the initial phases of EPZ policy. e motorateness in the zones started picking up in the 1980s in terms of employment but total investment remained unmeasurablely low till the late 1980s8.In the 1990s, investment also started increasing. Growth rates in employment slowed down considerably in the late 1990s but in terms of investment EPZs in India continue to be dominated by domestic investment. This was despite its edge in terms of wear out costs, availability of trained men and a stable macroeconomic environment. The share of FDI in total investment increased slowly from 12% in 1989 to slightly over 18% in 2000 ( Agrawal, 2004). During 2000-03, however, FDI inflows increased faster. Table 2. 2. 1 below shows the share of FDI in EPZ/SEZ investment.In 2000, all the EPZs were converted into SEZs, and w ith new rules and incentives it was expected that FDI will pour in but a more detailed study of Noida SEZ shows a mere 0. 4% growth in FDI investment in six years while in Chennai it just went up by 2. 3%. Despite this, new SEZs are becoming the most sought after destinations for foreign investors, however the chances of decline in FDI in SEZs cant be ruled out as once the tax benefit period gets over and there would not be much incentives for investors to invest in SEZs. 21 TABLE 2. 2. Share of FDI in total EPZ/SEZ investment (%) Zone Kandla Santacruz Noida Chennai Cochin Falta Vizag 1997 1. 3 8. 4 12. 3 28. 4 9. 6 3. 1 2003 4. 9 9. 2 12. 7 30. 7 13. 7 4 38. 8 Source Ministry of Commerce & Industry. Government of India Unlike other countries, in India SEZs are being developed largely by private sectors and to avail the tax and other benefits private players are rushing in but it would be interesting to check into if Govt doesnt extend the benefits again once the period gets over , will they be still interested in investing and building infrastructure.Employment creation is one of the important goals which Indian government wants to achieve through SEZs but previous experiences with EPZ and other free trade zones doesnt give us any rosy picture. EPZ had a share of near about 1% in organized employment (Agrawal, 2004) and till now all eight functional SEZs has created 1 lac employment and it is being expected that in next five years it will cross the figure of 5 lac. Table 2. 2. 2 shows the employment generated by different zones and the amount of Government and private investment in these zones. Table 2. 2. 2 Zone wise employment and Investment upto 31. 3. 2005 close No of Zone units Employment as on 31. 03. 2005 Govt investment upto 31. 03. 2005 investment upto 31. 03. 2005 KSEZ SEEPZ NSEZ MSEZ CSEZ 123 176 151 105 74 9821 42150 19857 16107 4712 26. 93 57. 39 78. 04 74. 83 87. 53 134 279. 49 650 223. 96 92. 79 22 FSEZ VSEZ Surat Manikan chan 83 28 62 5 2 2 2753 2500 2250 300 50 150 82. 83 39. 3 32. 46 263. 85 311. 58 5. 07 4 1 3 Jaipur Indore Source Export Promotion Council, Ministry of Commerce & Industry. Government of India SEZ or any other free trade zone should not be viewed as a tool to generate employment.Studies show that even small countries like Philippines has created 1. 1 million jobs through these economic zones (KPMG Report, 2004) but despite being the first country to have EPZ in Asia, India failed to achieve a high employment rate. Dysfunctional policies, regulations, leave out of single window clearance facilities, poor attitude of the officials, centralized governance, stringent savvy laws, poor physical and financial infrastructure, all accounted for an undesirable investment climate and thus EPZ failed to create employment. SEZ should have witnessed much higher growth in exports and employment but it is not happening either.If SEZ policy is really an example of decentralized governance, is it capable to strengthe n our physical and financial infrastructure and if single window clearance facilities are no longer a dream, all these issues and concerns have been emphasized in the last section. Generally, it is argued that the SEZ concept is attractive because it is much easier to resolve the problems of infrastructure and governance on a limited geographical area than it is to resolve them countrywide. On the contrary, the performance over the last five years of these privileged enclaves indicates the failure of this scheme.The zones cannot be insulated from the broader institutional and economic context of the country and be treated as an economy within the economy. Zones are a part of the economy and require overall improvement in the investment climate to ensure success in the long run. They should not, therefore, be viewed as an alternative to the overall development model. This is perhaps the reason why SEZs failed to fulfill the role of engines of economic growth in most countries on a su stainable basis. 23 Section III A comparative study of Chinese SEZ policy 24 3. SEZs in China The development of Special Economic Zones is one of the highlights of remarkable Chinese economic achievements. The Development of Chinese Special Economic Zones dates back to 1980s. It is different from Indian practice SEZ in China is classified in two levels by their scales. SEZ is the strong city even whole province opened to special financial, investment and trade policy, while Economic and Technological Development Zones (ETDZ) is a relatively small piece of land earmarked in coastal and other open cities for industry and trade development.As early as 1980, under the opening-up and reform policy, the Chinese Government set up the first group of Special Economic Zones in Shen Zhen, Zhu Hai, Shan Tou and Xia Men, 25 all of which are located in costal areas of Southeast China, followed by other 10 costal cities, Hai Nan Province and Pu Dong area in Shanghai as the second group. To furth er open to the outside world and to spread successful experiences of SEZs, at the beginning of 1984, the government decided to establish ETDZs along coastal line on the basis of successful experiences of and favorable policies granted to the SEZs in the previous period.Consequently, Chinas first group of 14 National Economic and Technological Development Zones (NETDZ) were established from 1984 to 1988 successively. The distinguishing features of Chinese SEZs are their large size, investment friendly customs regime, flexible labour laws, liberal policy for DTA access, attractive package of incentives and delegation of powers in favour of provinces and local authorities for managing the zones. 3. Comparing Chinese SEZ policy with India In spite of the fact that India was a pioneer in creating one of the worldss first export processing zones at Kandla in 1965, EPZs have never had much impact on Indias export performance. Tariff exemption schemes have tended to be excessively complex a nd encourage a licence raj mentality at the operational level. Both economies are large emerging markets that had rather similar profiles in 1978. Today, China ranks number one as the worlds preferred foreign investment destination. Closer examination of the FDI statistics suggests that Indias performance has been abysmal in comparison to China.India lags behind for a number of reasons. These include a high tariff regime, poor infrastructure (power, ports, roads and railways), and a regulatory system that is too often not business-friendly and inflexible labour laws. In this section a comparison has been done between Chinese and Indian SEZ policy on different parameters like tax incentives, labor laws, FDI inflow, employment and export performance. First, consider the size of the proposed SEZs. Chinese SEZs are like townships. India has not gone that far, but according to the SEZ guidelines, the area of an SEZ should be 1000 hectares.It is being argued that large sized SEZs can perf orm better as they will have a larger scale of economy but on contrary to that the best performing SEZ in Mumbai has an 26 area of 93 acres only. It is being considered that one of the chinas success factors was large size of SEZs. For instance, entire Hai Nan Island has been declared as SEZ with an area of 34,000 Sq. km. Table 3. 2. 1 below shows the size of all five existing SEZs in china. Table 3. 2. 1 Size of Chinese SEZs SEZ 1) Shenzhen 2) Zhuhai 3) Xiamen 4) Hainan 5) Shantou Area (Sq. KM) 327 121 131 34000 234Source Kumar, 2003 There is no doubt that SEZs have an edge over rest of the economy in terms of investment friendly environment and its quite obvious that if we have an investment friendly environment in a larger area, economy would do well. Rather than enforceing the theory of having larger scale of economy we should focus on an overall hassle free environment for export and this can be done only by extending the SEZ policy to whole country where every small and big e xport oriented manufacturers will have the access to business friendly environment.One counter argument to this proposal might be that SEZ policy in India is being implemented on a pilot basis, and government can extend this policy to whole country if SEZ works as a tool to bring economic reform. But unfortunately SEZ policy nowhere talks about extending the same hassle free system to rest of the country. It means that carrying out businesses in hassle free environment would still be a dream for rest of the country, so infrastructure else where in the country would not improve.The performance of SEZ also depends on the inner infrastructure and how can we weigh of a great performance from SEZs when rest of the economy still suffers from the same unfriendly environment. 27 SEZs were established by the China to encourage foreign investment, bringing jobs, technical knowledge, and future tax revenues in return for significant tax concessions at start-up of the operations and over a num ber of years. The biggest benefit to the investor is significant tax concessions early in the project. Tax concessions offered to a manufacturing startup in Chinese SEZ are No tax during start-up years before making a profit The first year that any company makes a profit starts the Tax Clock and is year one The first and second year after the tax clock starts, there is no tax. For years three and four, there is 1/2 of the normal tax rate. In the fifth year, the company pays the full normal tax rate In terms of tax benefits we are ahead of china. In SEZ policy tax benefits has been increased in comparison to EPZ but the failure of EPZs indicates that tax benefits cant alone boost the FDI and export performance. Table 3. . 2 below compares the performance of these two countries. Table 3. 2. 2 Comparison of SEZ performance China Share of SEZs in total export Employmnet(Direct) generated through SEZs FDI inflow through SEZs India 5% 0. 1 million US $ 2 billion 23% 2 million US $ 60 billion Source KPMG report, ministry of commerce and industry (GoI) The contribution of Chinese SEZs to the country exports is in the range of 15-23%. According to available statistics, the share of SEZ exports to country exports in 1997 was 23% (i. e. approximately US $ 42 billion).Overall, all the zones put together have played an important role in the overall growth of the Chinese economy. These zones taken together employ more than two million people directly and approximately 16 million overall (both direct and indirect). Cumulatively, 20% of the total foreign direct investments 28 into China have made its way into SEZs (i. e. approximately US $ 60 billion till date). Performance of SEZs in these two countries should not be compared just on the basis of export and other figures because size wise Chinese SEZs are much larger than Indian SEZs.But even in performance (export, employment) per Sq. KM China witnessed higher rate of growth and it was possible because of their liberal good example of SEZ policy. As regards labour laws, it is difficult to imagine that a communist country like China has relaxed these laws by allowing a hire and fire policy for the SEZs. This single measure went a long way in attracting foreign investment to these zones. After investors gained confidence in the productivity of Chinese workforce, the hire and fire policy was substituted by the guide system.There is ample justification for adopting in India a flexible labour policy in India, not just for these exporting enclaves but also for rest of the country. Rigid and outdated labour laws hinder the economic development and it sets the rationale for having a labour reform. According to section 5B of the labour work out any registered firm, that is employing more than 100 people, is required to seek permission from the state government to retrench its workforce. The country budget of March 2002 promised a change in the legislation to raise the level to 300 but due to coalition g overnment it never happened.The result is that formal-sector firms (those that are registered and that pay their taxes) loath to take on new employment, and the vast majority of Indias employment is informal, in small, tax-evading, inefficient enterprises. The policy in India on these critical issues is lukewarm. It just mentions that the laws of the land will apply and that the zones can be declared as public utilities under the Industrial Disputes Act. Merely declaring SEZs as public utilities will, however, not serve much purpose as seen in the EPZ experience. The radical difference in the attitude of the Indian and Chinese governments on this matter is reflected n the recently published investors guide for Special Economic Zones in India. It states the labour laws of the land will apply to all units inside the Zone. However, the respective State Governments may declare units within the SEZ as public utilities and may delegate powers of the Labour Commissioner to the Development Commissioner of 29 the SEZ (Ministry of Commerce and Industry, 2002, p. 15). In China, the right to hire and fire has been enshrined in SEZ regulations since 1982. Moreover, in India there are strict regulations stipulating that contract labour is only allowed work of a temporary nature.By contrast, the World Bank survey (2002b), estimates that in Guangzhou firms employ more than 20 per cent of the labour force as non-permanent workers. Of course many Indian employers find ways round the regulations through outsourcing and less formal means but the current system undoubtedly reduces flexibility. China made the provincial and local authorities act as partners and stakeholders by designate them powers for approbative foreign investment. The SEZ authorities in China can approve investment proposals up to $30 million. This has been a significant feature of the Chinese policy and a key contributor to the success of SEZs.The Indian policy only enables the State governments to set up SEZ s, but does not empower them to approve investment proposals. These powers have been vested with the development commissioners concerned who represent the Central Government. This will result in centralization of work in their offices. Government boasts of decentralizing the whole process and talks about single window clearance but anybody who goes through the SEZ act can figure out how complex and centralized this policy is. Last section of this research paper critically analyzes the so -called decentralized nature of the SEZ policy.Another ticklish issue is involvement of local government. Unless the State and local governments are directly made responsible for the management of SEZs and approving investment proposals, their political leadership and bureaucratic set up may not have any incentive to push the initiative forward. But in India all the important decisions are being taken by central government China has gone a step further by delegating powers to the local authorities. The local authority manages Shenzhen SEZ, which has the highest export turnover. 3. 3 Current scenario in China 30Over the last five years the GDP growth of china has been near about 10% and SEZs is being viewed as an engine for this rapid growth. Higher GDP rate can be considered as one of the major success of SEZ policy but regional disparities as an outcome of this policy has forced China to rethink and restructure this policy. Per capita income in the richest city is over 50 times per capita income in poorest city. Awarding a privileged status to some zones at the cost of others is responsible for this higher disparity. For instance, china had received the additive amount of US $ 128. billion of FDI between the year 1979 to 1995 and the coastal areas accounted for over 90% of all the FDI received in this period. It might be argued that there is no harm in developing country in pockets but how we can forget that these areas were developed by tax money paid by everyone. Governmen t had to forego tax revenues as tax concessions were the main attracting features. All the tax revenue lost due to SEZ was/is being recovered through taxes from rest part of the country and resultantly all tax payers end up paying higher tax but the benefits are available for very few of them.I see this as the one of the main causes for high income disparity in China. To combat this problem even China has given emphasis on balanced development and tax benefits accorded to foreign investments in the SEZs has been partially lifted. Indias tax and tariff structures are still anti export. Indias high overall tariff rates, especially tariffs on intermediate products that are used by exporters, impose a heavy indirect tax on export competitiveness. Deregulation of the private sector is perhaps one of the most critical areas in the context of Indias reforms.Since almost 90-plus percent of the workforce is in the informal sector, it is of utmost importance to exempt the private sector so a s to get the unorganized sector workforce in the mainstream. Workers in large firms in the formal sector have a virtual guarantee of continued employment according to the Industrial Disputes Act. For firms of 100 employees or more, reductions in the workforce must be upon the permission of state government, which is almost never granted. Remarkably, loss-making firms are also not allowed to close their operations without government consent. The results of Indias ighly correct labor markets have been devastating. Formal-sector employment in India is shockingly low, in large part 31 because so much urban employment is carried on outside of formal registration. Out of a total labor force of around 406 million, formal sector employment accounts for only 28. 1 million. Of this, 19. 4 million works in the state sector (state enterprises and public administration), and just 8. 7 million works in private firms with formal employment. Indeed with a more open and deregulated economy (economy is not just SEZs), India may well be in a position to perform as China has done over the last two decades. 32SECTION- IV CASE prove NOIDA SPECIAL ECONOMIC ZONE 33 4. 1 Introduction Noida EPZ was established in 1984 and attained the status of SEZ in the year 2000. Based on their share in exports, past performance and potential for growth, software and gem & jewellery have been identified as the thrust areas. Spread in 310 acre, NSEZ is just after SEEPZ in terms of export performance. NSEZs proximity to Delhi sets it apart from other SEZs. Being close to national capital it has an easy access to skilled manpower, abundant managerial and technical expertise. With 151 units in operation, NSEZ contributed 30% of total exports from SEZ in the year 2004.It employs 19,857 people and per unit employment is 131. In terms of per unit employment SEEPZ and MSEZ are ahead of NSEZ with 239 and 150 employee per unit respectively. Units in NSEZ get the tax benefits according to SEZ act but at the same time they have been exempted from the payment of opinion duty, trade tax and entry tax. Noida has witnessed higher growth in export in comparison to other SEZs. The figure 4. 1. 1 shows the export growth of NSEZ Figure 4. 1. 1 Export growth trend of NSEZ Export Growth of NSEZ 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04Exprort (in million) 15341 10143 10342 7483 8456 9924 Source NSEZ Authority The total government investment in NSEZ is Rs 78 crore while the private investment is of 650 crores. NSEZ has the highest private investments and the reason for this is better business opportunities due to its proximity to Delhi. Another important factor is incentives given by the state government. Over the years exports in textile and hardware has been 34 declining but gems & jewellery has witnessed a very high growth and in the year 2003-04 the total contribution was 49. 87% in total exports from NSEZ.The table below summarizes t he contribution of different sectors in total exports. Table 4. 1. 1 Contribution of different sectors in exports from NSEZ Sector 19992000 1341 1660 1393 1201 1295 462 127 295 682 8456 Exports (Rs. Million) 2000-01 1388 2697 1786 1014 1928 329 88 269 843 10342 2001-02 1199 885 1906 1184 3015 207 100 287 1141 9924 2002-03 990 739 1787 1374 3437 238 53 229 1296 10143 2003-04 990 930 1980 1640 7650 310 50 230 1560 15341 Textile/Garments Hardware Software ENGG. Goods GEM & Jewellery Chemical & Pharma Leather Products Plastic/prophylactic/Synthetic Miscellaneous TotalSource NSEZ Authority 4. 2 The reasons for NSEZs success A) Proximity to Delhi One of the set reasons of NSEZs success is its proximity to Delhi. Noida has better transport and other infrastructural facilities in comparison to others SEZ. Noida was developed as an industrial area and therefore, the whole environment is business friendly. Noida is just 24 KM away from Delhi and it comes under national capital territory (NCT ), so in terms of administration, infrastructure and business opportunities NSEZ has an edge over other SEZs. B) Special benefits given by the U. P. overnment It has been discussed in previous sections that the tax benefits are the key determinants in attracting investments. To woo the investors U. P. government has exempted SEZ developers and units from some state taxes as well and it has resulted in higher private investments in NSEZ Exemptions from the payment of entry tax, trade tax and stamp duty makes NSEZ the 35 most sought after destination for setting up the units. due(p) to these exemption units in NSEZ export more to reap the benefits given by the state government at the fullest. 36 Section V Policy Analysis A Critical Approach 37Without doing the cost benefit analysis when a government establishes any economic policy which affects all the people in a direct or indirect way, it becomes important to raise some basic questions like whether the benefits of that policy woul d outweigh their costs, is it good for the country in the long run? SEZ policy has been enacted by parliament but ironically no cost benefit analysis was done before announcing it. As discussed earlier the prepare objective of this scheme is to boost the export sector and a package of fiscal and non fiscal incentives are being offered to developers and units to achieve the objectives.One way to quantify the rationale for having SEZ policy is to investigate what would have been the performance of the economy in the absence of this policy. Anticipating this would not be an easy task. Export performance of our country has been abysmal and there was a need to take some measures but according to me, preferential treatment should be the last measure and firstly any government should root out all those evils which are hindering the growth of export or for that matter whole economy.Rigid tariff regime highly regulated labour market, centralized governance are some major problems which obs truct the growth of the export sector and this also makes the investment climate unfriendly. Deregulating the labour market and decentralizing the whole process should have been the first priority of the government and making the whole country hassle free for investments and business opportunities would automatically boost the export sector. Establishing SEZs is a very complex task encompassing a wide range of policy, legal and regulatory issues.SEZ policy was praised initially as a well drafted policy but inter ministerial conflicts, heavy economic costs and recent cases of migration from DTA to SEZs actually highlights the blind spots of its designers. 5. 1 Heavy Economic Costs According to SEZ Act 2005, the firms are eligible for getting an extended Income Tax holiday for 15 years. Firms and developers have also been exempted from excise duty and custom duty. A loss of Rs. 39,704 crore of duty under export promotion schemes during 2003-04 (CAG Report, 2004) which accounts for 82 % of customs duty collected that year gives an idea of how costly this whole affair is.According to an internal assessment by the 38 Finance Ministry, the Government may have to forego about Rs 90,000 crore in direct and indirect taxes over the next four years on account of SEZs. 5. 2 Corporate Welfare Very recently an article written by M. Bhardwaj appeared in Business Standard which alleges that Haryana government acquired over 1700 acres of land from farmers at Rs. 300 crore and offered this land to Reliance for 360 crore in the name of SEZ while it was estimated that land was worth 5,000 crore. This is a perfect example of corporate welfare.Its true that the value of land goes up drastically when market anticipates the introduction of any such scheme into that particular area but taking away the land from farmers at a much lower rate cant be confirm. According to the SEZ Act any state government can set up SEZ jointly with private sector. This can be called public private parti cipation. Theoretically everything sounds good, so where is the problem. Now if any company has link with top politicians of a state, the possibility of favoured treatment cant be ruled out. Even in terms of incentives state can also offer a package of tax benefits.Imagine a situation where two firms which produces the same good, are operating from two different states and one of them gets an edge over another just because of preferential treatment by the state. Would you call it a fair competition? SEZ act enables the state government to offer land at a much lower rate and to provide extra incentives and what do we expect that the state governments would not ill-treat these powers? 5. 3 Migration from DTA to SEZ To avail all the facilities and incentives offered by SEZs, small firms and even big companies are shifting to these privileged enclaves.SEZs have encouraged inward migration. One of the prime objectives of this policy was to attract FDI but the share of FDI in investments in SEZs is very low and due to inward migration very few new manufacturing units have been set up in the SEZs. 5. 4 Real Estate Play 39 State governments are offering land to SEZ developers at concessional rates. For real estate developers SEZ policy has come as an opportunity to grab the scarce land near cities. Ideally SEZs should be established in unlike areas but due to lack of infrastructure the concentration of SEZs are near by cities.According to SEZ Act at least 25% of the total acquired area would be processing area and in the remaining area developers can build commercial complexes, malls, hospitals, hotels, educational institutions etc. Minimum area requirement for setting up SEZ is 1000 hectares and according to SEZ guidelines developers get a tax break even on all the buildings on the 750 hectares. On going real estate boom has shifted the focus from export to building residential complexes and commercial malls. Developers can always make huge profit from selling or l easing the buildings and this is where real estate play comes in.Land deals and compensation payments are known to be hot-beds of corruption so no wonder if farmers are being displaced from their place in the name of SEZ without giving adequate compensation. goal Considering the need to boost export sector and attract FDI, government announced this policy but ironically the performance of SEZs in exports highlights the failure. When government should liberalize overall policy, government has decided to focus on one or two areas. The real attraction of SEZs is the tax holiday promised and to grow the business in hassle free environment firms are just shifting to these privileged enclaves.To compete with China a package of fiscal and non fiscal incentives are being given but this has been overlooked that tax benefits in chinas SEZ were available only to foreign investments, not exports. All exemptions and fiscal incentives should go in the process of overall tax and labour reform. Gi ving preferential treatment to any particular area in the name of exports cant be justified in the democratic set up. Even if government wants to continue with this policy, only developers should be given the tax benefits if they are developing any SEZ in the remote area.The whole process is still centralized and government should minimize their role. 40 References 1. Official Website of SEZ. http// sezindia. nic. in. 2006, accessed on 23 May 2006 2. Ministry of Commerce. 2005. Annual Report2004-05. 3. CII report. 2005. Special Economic Zone Engines for Growth. Available at http//www. ciionline. org/Northern/regionalfocus/836/images/sez. pdf. Accessed on 23 June 2006. 4. Bhardwaj, M. 2006. No review, RIL mega SEZ signing next week, says Haryana CM. June 13. Business Standard 5. Aggarwal, A. 2004. Export Processing Zones in india Analysis of the ExportPerformance. ICRIER Working paper No. 148. 6. Jain, S. 2006. Killing SEZs, making a killing. 22 May. Business Standard 7. Tondon Comm ittee (1982) The Committee on Free trade Zones and 100% Export oriented Units, Apponited by the Ministry of Commerce, Government of India, September 1981. 8. IIPM Editorial. 2006. The Great Indian obsession. 9. The Hindu. 2005. Lok Sabha passes SEZ Bill. 11 May 10. Suchitra, M. 2006. The high cost of easy foreign exchange. 9 March. India unitedly 41 Annexure-1 (List of all the fiscal and non-fiscal benefits given to SEZ developers and units) i. 00% income tax exemption for a block of five years and an additional 50% tax exemption for two years thereafter ii. 100% FDI in the manufacturing sector permitted through automatic route, barring a few sectors. iii. External commercial borrowings by SEZ units upto US$500 million in a year without any maturity restrictions through recognized banking channels. iv. Facility to retain 100% foreign exchange receipts in Exchange Earners Foreign Currency Account. v. 100% FDI permitted to SEZ franchisee in providing basic telephone services in SEZs. vi. vii. No cap on foreign investment for small scale sector reserved items.Exemption from industrial licensing requirements for items reserved for the SSI sector. viii. No import licence requirements 42 ix. Exemption from customs duties on import of capital goods, raw materials, consumables, spares etc x. Exemption from Central Excise duties on procurement of capital goods, raw materials, consumable spares etc. , from the domestic market. xi. xii. xiii. No routine examinations by Customs for export and import cargo. Facility to realize and repatriate export proceeds within 12 months. Profits allowed to be repatriated without any dividend-balancing requirement. xiv. xv.Job work on behalf of domestic exporters for direct export allowed. Subcontracting both domestic and international is permitted this facility is available to jewellery units as well. xvi. Exemption from Central Sales Tax and Service Tax Facilities to set up off-shore banking units in SEZs. Exemption from duties on import /procurement of goods for the development, operation and maintenance of SEZ. Income tax exemption for a block of 10 years in 15 years. Exemption from Service Tax 43 FDI to develop townships within SEZs with residential, educational, health care and recreational facilities permitted on a case-to-case basis.