India’s tax-free industrial enclaves for exports, called Special Economic Zones (SEZs), are likely to miss their export targets due to the ongoing global economic slowdown, which has resulted in muted demand from markets abroad. SEZs, which enjoy a slew of tax incentives for exports, are perceived to be insulated from the economic turmoil.

Based on projections received from SEZs, the commerce ministry had expected exports from the zones to be about Rs 1,25,950 crore (see table) in 2008-09. A major chunk of this was to be contributed by new SEZs, set up after February 2006, when the SEZ Act of 2005 became operational. “But going by reports from these zones, it seems that the target would not be achieved,” said a commerce ministry official.

“The situation is bad. Though we have not quantified the slowdown, the signs are ominous. Not only existing orders are getting cancelled, but future orders are getting postponed,” said a Development Commissioner of an SEZ based in South India. “SEZs may get tax incentives. But to whom will they sell to if there is no demand from abroad,” he said.

Meanwhile, exporters based in SEZs are cutting prices to sell their goods overseas and even laid off workers to deal with the slowdown. “We have cut prices by 75 per cent. Our entire export orders have been cancelled. We had to lay off about 175 unskilled workers as we have cut production by about 50 per cent,” said an exporter based in the the Noida Special Economic Zone in Delhi, who wished not to be identified.
 

According to commerce ministry estimates prepared earlier this year, exports from nearly 60 SEZs set up after the SEZ Act of 2005 came into force were estimated to be around Rs 52,876 crore, which would have been a 10-fold increase from Rs 5,195 crore in 2007-08. With money-lending institutions like banks becoming risk averse, many of these zones are not able to access funds for development of zones. As a result, many SEZs may not become functional in 2008-09.

Moreover, from the seven existing government SEZs, exports worth Rs 42,898 crore were expected in 2008-09, up by 9.22 per cent from Rs 39,275.11 crore in the previous year. In addition, exports from 12 SEZs, set up prior to the SEZ Act, were expected to be Rs 30,175 crore, an increase of 36.12 per cent from Rs 22,167.44 crore. Most of the functional units are based in these zones, and are getting adversely impacted by the economic slowdown.

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