Are SEZs Specially Useless Zones?

Nearly a decade after the Special Economic Zones Act was brought into force, it is evident that the move has not helped industrial development.

After examining SEZs in terms of background and objectives, fiscal incentives and facilities, approval process and administration, as well as life cycle, State-wise distribution and overall performance, parts of a recent CAG report even question the very objectives of SEZs as promoters of growth, investment and employment generation.

Over time, the growth curve of SEZs had indicated a preference for urban agglomeration by industry, undermining the objective of promoting balanced regional development. Another significant trend has been the preponderance of the IT/ITES industry. In India, 56.64 per cent of SEZs cater to the IT/ITES sector; only 9.6 per cent cater to the multi-product manufacturing sector.

Domestic value addition of manufacturing units in SEZs dropped from 25 per cent to 18 per indicating that most of what is sold in DTA — domestic tariff area — or exported, undergoes little value addition in our manufacturing units.

These facts make for a dismal situation. Further, the CAG observed that SEZs required many approvals; just 38.78 per cent of SEZs became operational after notification. Seventeen States did not match the central SEZ Act with State-level legislation, which rendered the single window system ineffective.

Of all the SEZs approved, 75 per cent are in six developed States: Maharashtra, Andhra Pradesh, Tamil Nadu, Karnataka, Haryana and Gujarat. Of the 625 SEZs approved so far, only 63 per cent (392) have been notified and only 24 per cent (192) are operational.

The CAG report is based on a sampling of 152 SEZs. It found non-performance on targets in employment (ranging from 65.95 per cent to 96.58 per cent), investment (ranging from 23.98 per cent to 74.92 per cent), and exports (ranging from 46.16 per cent to 93.81 per cent).

Land appearsto be the mostattractive component of the SEZ Act. Out of 45,635.63 ha of land notified for SEZ purposes, operations commenced in only 28,488.49 ha (62.42 per cent) of land. The report notes that developers approached the government for allotment and/or purchase of vast areas of land in the name of SEZ, but only part of the acquired land was subsequently notified for SEZ.

Of the 39,245.56 ha of land notified in Andhra Pradesh, Gujarat, Karnataka, Maharashtra, Odisha and West Bengal, 5,402.22 ha (14 per cent) were de-notified and diverted for commercial purposes in several cases. Many tracts were acquired under the ‘public purpose’ clause, and cannot be used for a purpose other than the purpose for which they had been acquired.

In Andhra Pradesh, Karnataka, Maharashtra and West Bengal, 11 developers/units had raised loans to the tune of ₹6,309.53 crore by mortgaging SEZ land; three of them had utilised the loan amount (₹2,211.48 crore) for other purposes as there was no economic activity in the SEZs concerned.

Mortgaged land belonging to the government cannot be securitised by banks, in case of a default by the lessees.

The SEZs availed ₹83,104.76 crore worth tax concessions between 2006-07 and 2012-13. Exemptions/deductions worth ₹1,150.06 crore were granted to ineligible companies, and systemic weaknesses to the tune of ₹27,130.98 crore exist in the direct and indirect tax administration.

The income tax department accepted that imposition of Minimum Alternate Tax affected the cash flow of SEZ units/developers but they did not show any signs of tax planning to encourage productivity and innovation. So, there is loss to the exchequer in terms of ‘tax foregone’ but not in terms of ‘sum lost’, as some would like to interpret.

The CAG feels that the monitoring framework of SEZs requires strengthening. There are no mechanisms for internal audit or cross-verification nor is there a system to monitor service tax or stamp duty exemptions.

The report’s finding lends credibility to the parliamentary committee’s estimate of tax concessions worth ₹1.76 lakh crore.

Policymaking should entail a series of steps, including evaluation and monitoring, with each cycle improving the policy, and leading to higher achievement.

The report highlights the need for such mechanisms, and emphasises monitoring and controls, largely from the perspective of preventing irregularities and also for learning and evidence-based policymaking.

An economic policy instrument should not be overloaded with enormous social objectives such as employment at the cost of technology and product value chain or regional development at the cost of manufacturing efficiency.

Coordination at all levels is crucial for success.

The lack of a robust policy design, efficient implementation and effective monitoring have seriously jeopardised India’s effort to industrialise through SEZs.

The writer is with the Institute of Economic Growth, Delhi