As interest wanes, time to scrap the policy
This newspaper has consistently opposed the government’s policy on special economic zones. The plethora of market-distorting tax giveaways, the liberal mix allowed of “processing” and other areas in a zone (which helped convert some into real estate projects rather than export zones), the minimum and maximum sizes stipulated without economic logic, the administrative difficulties that would be there in dealing with hundreds of “no-tax” zones, all these made this a thoroughly irrational policy that had little to commend itself. And if none of these arguments carried weight, there was the additional outrage that all that was required of the tax enclave was that it be foreign exchange-neutral! Even after the inevitable group of ministers tweaked the model, SEZs continued to be quite lucrative as real estate deals.
But all the criticism was papered over, citing the vast investment sums that were supposed to come to India as a result of SEZs being opened. Examples were trotted out to show that there was a large body of merchant capital that would invest in a country with tax incentives — if China gave incentives, the investment would go to China; if India gave incentives, it would flow to India. With these investments, the argument ran, there would be more exports, the absorption of technology, increased employment, and other such benefits. As for the tax losses, it was argued that these were only notional since, at the end of the day, exports are never taxed anyway; also, since there would be no investment without the zones, there would be no production and hence no taxes. In practice, the government declared large tax holidays for real estate and other development activity too.
If the policy has come unstuck, it is not because of the criticism or the lack of business logic but because of two stumbling blocks: the economic slowdown and the difficulties that many SEZs have faced in acquiring land. As this newspaper reported last week, almost half the proposals that the Board of Approval for SEZs examined last week were for cancelling licences (which the government had said initially was not even envisaged in the enabling law) or extending the dates by which the land was to be acquired. And, as Mahesh Vyas of the Centre for Monitoring Indian Economy (CMIE) pointed out in this newspaper on Monday, the rush for SEZs has been reduced to a trickle.
SEZs accounted for around a third of the new investments proposed in the quarter ended December 2006, but the figure is down to less than 5 per cent now. Just 42 SEZs have been completed so far, out of the hundreds cleared; they have an investment of Rs 48,776 crore — of which Reliance Industries’ Jamnagar refinery accounts for more than a half (Rs 27,000 crore). Ironically, Reliance is now keen to put an end to the SEZ status of the refinery since it wants to sell petroleum products in the local market! Perhaps this provides the right opportunity for formally recognising that the game is not worth the candle, and burying the policy for good.