Tamil Nadu's SEZ policy meets its flip side

Long-term leases have meant that many companies are sitting on the land allotted to them without creating any infrastructure

Most states may be struggling to get special economic zones, or SEZs, off the ground, but in Tamil Nadu they are thriving. Of the 199 operational SEZs in the country, 39 are located in the state, making it the top SEZ destination in the country.

Tamil Nadu's ranking got a boost after Andhra Pradesh, which earlier had the most number of SEZs, was divided into two last year. Now the new state of Telangana, along with Maharashtra and Karnataka, occupies the second spot, each with 25 SEZs, while Andhra Pradesh has been relegated to the third spot with 19 SEZs.

What is more, Tamil Nadu has also overtaken Karnataka in the volume of exports from these economic zones to take the second spot after Gujarat in 2014-15. While Gujarat exported goods worth Rs 1,07,602 crore, Tamil Nadu sent Rs 35,847 crore worth of merchandise abroad.

What has given the southern state a head-start when it comes to SEZs is its foresight in introducing a policy for SEZs way back in 2003, much before the Centre came up with its own SEZ Act and Rules in 2005. The state government, through its organisations like the State Industries Promotion Corporation of Tamil Nadu and the Electronics Corporation of Tamil Nadu, played an active role in setting up SEZs in Chennai, Trichy, Madurai, Salem, Tirunelveli, Hosur and Coimbatore, among other cities. Tamil Nadu's proactive steps came at a time when the IT boom was still in a nascent stage, and this paid off with the state managing to attract big companies like Infosys, Cognizant and others to its SEZs. Among other benefits, land leases were offered for 99 years, signaling to industry that the state was keen on creating long-term value, says Bargavi Natesan, partner, SPR & Co Chartered Accountants. Natesan, along with SEZ expert NR Sharavanan, played an active role in bringing companies like Infosys, Cognizant and Syntel to Tamil Nadu.

However, that selling point is now exhibiting its flip side. Long -term leases have meant that many of these establishments are sitting on the land allotted to them without creating any infrastructure. As a result, many SEZs in Tiruneveli, Naguneri and Hosur are struggling to take off. Then, there are other issues related to obtaining clearances and sanctions. An official, who does not want to be named, says, "This is a major roadblock because of which rapid growth is not taking place in SEZs."

The smaller companies have been hit hard as a result. Large IT companies can develop their own infrastructure and mid-size companies can lease expensive rented spaces inside a privately developed SEZ, but the smaller ones - those with fewer than 250 employees - are left with little choice as they can neither afford costly rentals nor build their own infrastructure.

Analysts says one way out of this mess is to rope in private players to develop SEZs in Tier II and III cities. This would require the state to offer a helping hand in the form of fast-track and single-window clearance, and empowering the development commissioners of SEZs to act as labour commissioners so that labour-related issues can be resolved at the SEZ level itself.

The demand for SEZ remains high in the IT business, say Anita Arjundas, managing director & CEO of Mahindra Lifespace Developers, which set up Mahindra World City across 1,500 acres near Chennai. Almost half of these have been taken up by IT-related companies. Due to continued growth in software exports, Nasscom, the trade association of the Indian IT industry, predicts Tamil Nadu will be one of the key hubs for the business. But the tax benefits that IT industry enjoyed earlier have now been diluted. Many believe it is simpler to set up offices outside SEZs, where there is more flexibility, than inside an SEZ. As far as manufacturing is concerned, the demand for exports is not strong, and there are little or no tax advantages of being in an SEZ, says Arjundas.