Tehsils as Special Economic Zones

Since the 1960s, India has built eight Export Processing Zones to catalyse export-oriented investment, with very limited success. These are tiny plots enjoying duty-free entry of inputs. But duty-free inputs are now available to export oriented-units anywhere in India.

By contrast, China and some other countries have reaped enormous success with Special Export Zones (SEZs). Unlike India’s tiny plots, the world-famous SEZs are huge. The biggest is Hainan island in China, almost as large as Kerala! Chinese SEZs have captive world class infrastructure (power, water, ports and airports), and have become world-class manufacturing clusters.

To replicate this, Commerce Minister Kamal Nath announced a new SEZ policy in February. Participants in new SEZs will pay no tax for five years, get a 50% tax break for the next five years, and get a further five-year tax break for reinvested profits. Seven of the eight old EPZs were government built, but the new SEZs will be open to private and international developers, who will also get a tax holiday for 10 years. The policy does not mandate labour flexibility in SEZs: that is left to state governments.

Kamal Nath hopes this new approach will attract Rs 100,000 crore of investment. Alas, this badly designed scheme will probably yield investment diversion rather than investment creation. Many companies planning to invest anyway will migrate to SEZs for the tax breaks. This will not imply additional investment or exports. It will simply imply unwarranted tax holidays.

The scheme aims to encourage hundreds of small SEZs in every state. Alas, these will be tax shelters rather than world-class enclaves.

The minimum area for an SEZ for jewellery, infotech or biotech is just 10 hectares, smaller than even some schools. The minimum size for sector-specific SEZ (e.g. for chemicals) is 100 hectares, but reduced to 50 hectares in hilly special category states and the north-eastern states. For multi-product SEZs the minimum size is 1,000 hectares, reduced to 200 hectares for the small and hilly states. Just contrast these tiny plots with Hainan in China!

The government justifies this by saying it is difficult to find large parcels of land in hilly areas. That is precisely why SEZs should not be built in such areas. China does not build SEZs in Tibet or the Gobi Desert.

In India, cheap skills have long made infotech and jewellery world-beating industries, and extremely profitable ones. I find it scandalous that software companies, the richest and fastest growing corporations in India, pay virtually no corporate tax. The scandal is going to be extended by another 10-15 years, now that software companies can migrate to SEZs.

A sensible policy would aim at creating SEZs the size of an entire tehsil or district, as in China, each with its own port and airport. Shenzhen, the first and perhaps most famous SEZ, covers four small districts. It came up right on the border with Hong Kong to take advantage of Hong Kong’s port and airport. But soon afterwards, Shenzhen developed its own port and airport.

In India, major ports tend to be in major cities, where there is no spare land for a large SEZ. Exceptions are Jawaharlal Nehru Port Trust (JNPT) in Navi Mumbai, Paradip in Orissa and Haldia in West Bengal.

Two SEZs are now coming up in Navi Mumbai and Maha Mumbai, built by Reliance and the state government, covering 14,000 hectares in all. That’s a fair size, but these will depend on Jawaharlal Nehru Port Trust, which suffers from chronic congestion. That sounds bad.

Gujarat seems best placed for world-class SEZs. Since 1995 it has been developing 10 new ports in public-private partnerships. These are far away from big cities, so land is easily available for SEZs, airports and mega-power plants. Land is especially abundant (and population especially thin) around the semi-arid Gulf of Kutch.

The Adanis are building a 30,000-acre SEZ at Mundra port, with an airport and ultra mega-power station. Reliance plans similar facilities in its 25,000-acre SEZ at Jamnagar, where Chevron is a partner. In Kutch, private developers can buy thousands of acres directly from farmers, avoiding government acquisition that displaces thousands and causes riots (as in Orissa). New ports are coming up at Positra, Dahej, Hazira and Dholera.

These aim to be highly mechanized, with the fastest loading rates in India. The deep water of the Gulf of Kutch will enable the biggest tankers, bulk carriers and container ships to dock. Captive power plants in SEZs can use imported coal, and water will come from desalination. On top of this, the state government has promised labour flexibility in SEZs.

The Chief Minister says he wants Gujarat to become the SEZ capital of India. For that, he needs a much bigger vision. Why not convert, in stages, every coastal tehsil in the Gulf of Kutch into an SEZ? Then maybe Gujarat will outdo even China

What do you think?