A Chinese idea that stripped India of growth

Nearly two decades ago, special economic zones (SEZs) fired up several dreams in India. Many believed SEZs, a borrowed idea from Shanghai and Shenzhen, would fuel the country’s manufacturing growth. In March 2001, on a week-long media trip to the two Chinese cities, we had an exclusive peek at how Chinese do the mind-boggling mass-market production at an incredibly modest cost. A Cabinet minister in the Narendra Modi government, who joined the junket as chief financial officer of the sponsoring private company then, was, of course, gung-ho about SEZs and the prosperity they promised to bring in.

India’s first SEZ project in Positra (Gujarat), envisioned by Sea King Infrastructure Ltd (Skil), the company that sponsored the trip, remained on the drawing board. Later, the company tried its hand in Maharashtra to set up an SEZ in Navi Mumbai. Distraught at the delay in acquiring land, Skil finally sold the project to Mukesh Ambani and his friend Anand Jain of Jai Corp, hoping that their financial muscle could pull it off. But nothing could change its fate.

SEZs were conceived as huge export-oriented units, with tax incentives to start off. Demarcated as duty-free territory, they were deemed foreign territory for the purpose of trade operations. But every SEZ developer faced roadblocks in land acquisition. Ensuring contiguity of the land was a mandatory rule.

Over the next few years, the government introduced the minimum alternate tax (MAT) and dividend distribution tax (DDT) for SEZs, making them economically unviable.

Ambani and Jain found it difficult to set up a unified zone as the Navi Mumbai SEZ (NMSEZ) land lay scattered. They were wary of investing heavily in infrastructure such as bridges and underpasses to ensure contiguity in the 2,140 hectares of land approved for the SEZ as roads, rails and human settlements fell within the zone.

In April 2013, the government announced key changes to the country’s Foreign Trade Policy, which included reduction in minimum contiguous land area requirements for multi-product and sector-specific SEZs by half and complete removal of minimum area requirements for IT/ITeS SEZs, apart from an exit policy for SEZ units.

The NMSEZ developer finally split the proposed zone into eight smaller SEZs – a multi-product SEZ, two multi-services SEZs, a gems and jewellery SEZ and four IT/ITeS - to get over the contiguity problem. Even after half-a-dozen extensions, they have not started work on the ground amid local protest. Nearly three months ago, the validity has been extended for another three months, which will expire in a few days from now.

The scene is not different with other SEZs in India. The land allotted to most of them remains idle and the government has suffered huge revenue loss. A CAG report in November 2014 pegged the government's revenue foregone at Rs 83,000 crore between 2007 and 2013, adding that the very purpose of SEZs was defeated with no significant increase in employment. A performance audit revealed that ineligible tax deductions were extended to companies in a few operational SEZs. Worst still, the report said there was an overall decline in manufacturing in these zones.

As China is marching ahead with its bustling economic zones, SEZs in India have run out of steam. Two top Chinese cities of Shanghai (having $399 billion of GDP) and Shenzhen ($302 bn), both built on the SEZ model, contribute a lion’s share to the Chinese economy.

The writer is editor, DNA Money. He tweets @AntoJoseph