SEZs on pause mode

The government’s reported decision to put a cap on the number of special economic zones (SEZs) is welcome, given that the recently notified rules for SEZs have met with opposition from within the government. The pause would allow the government to debate the contours of incentives for SEZs, and even the very need of such islands, to encourage exports-oriented investments. Ever since the new SEZ rules came into force early this year there has been a deluge of announcements. Many of these look suspiciously like land-grab attempts seeking to make the most of generous incentives and the ongoing real-estate boom. The various tax concession have only made the appeal irresistible. Economic theory, too, is dismissive of the relative merit of tax incentives in attracting investments. Indeed, our own experience — the 15 functioning SEZs have attracted private investments of only about Rs 2,200 crore and their share in exports is dismal — highlights the failure of SEZs to yield the desired results. Investments located in SEZs are distortionary or sub-optimal as they give undue weightage to fiscal incentives, to the exclusion of other relevant parameters such as location or the availability of labour. All this learning is lost on the latest policy, which showers numerous direct and indirect tax incentives on net forex earners in SEZs. The question is, with Indian exports finding their feet in global markets do they need such props. The justification of SEZs rests primarily on China’s outstanding success with such zones. What is overlooked is that tax benefits in China’s SEZs were available only to foreign investments, not exports.
With tariffs coming down fast, it’s not only the exporters, but even local industry that needs access to good infrastructure, cheap capital, deliverance from red-tape and more friendly labour laws. So, limited tax benefits could be made available, if at all, only to the SEZ developer. The units located therein should not get any tax incentives. For, if the SEZs come anywhere close to delivering what they promise the units located there would in any case get an enormous competitive edge.


-- The Economic Times Editorial