"A
golden milestone in the process of broadening and deepening India's export
base." This is how Kamal Nath, union minister for commerce and industry,
described the passage of the special economic zone (SEZ) bill in the parliament
last week. Golden it is, but not glittering. The sparkle has been robbed by
deletion of the labour laws clause. Succumbing
to the demand of the Left, the UPA government bartered exclusion of section
50 (b) of the bill for assurance of support to the SEZ bill. Section 50 (b)
of the bill proposed to vest the powers with the states to exempt SEZs from
provisions of state laws related to trade unions, working conditions, provident
fund, employers' liabilities, maternity benefits and invalidity and old-age
pensions. With this deletion, though the government seemed to have mollified
the Left for a while, it has slowed down the expected double-digit growth
rate, which these SEZs are expected to ring in. Nevertheless,
the fiscal sops announced seem lucrative. According to the bill, all SEZ units
will be eligible for 100 per cent tax exemption for the first 5 years, 50
per cent for the next five years and 50 per cent of the invested export profits
for the next five years. The developers of the SEZs will be eligible for a
100 per cent income tax holiday for 10 years in a block period of 15 years.
Industrial undertakings shifting base from urban areas will be exempted from
capital gains tax. A
finance ministry notification further exempts goods produced or manufactured
in an SEZ and brought to any other part within India from the 4 per cent additional
customs duty. The bill also provides single-window clearance and approval
mechanism for establish for establishment of SEZs as well as production units
inside the zones.
Last
fiscal, the country's exports touched $80 billion. For the year 2005-06, the
target is $92 billion. With the Special Economic Zone Act in force, it is
expected, according to Nath, to be able to attract foreign direct investment
to the extent of $2 billion in the next two years.
India
has nine SEZs operational in Surat, SEEPZ (Mumbai), Kandla, Kochi, Noida,
Vishakhapatnam, Chennai, Falta (West Bengal) and Indore. Several projects
are under development and some of them have been proposed. Some of these new
SEZs promise to be ambitious having their own infrastructure inclusive of
ports, airports, stations and inland container depots.
SEZ is a rather new concept in India. The role model was the Chinese economic
growth contributed mainly by the success SEZs. Realising this to be one of
the important instruments of giving thrusts to exports, the erstwhile commerce
minister, Murasoli Maran, had first proposed it in the Exim Policy 2000-01.
In a drive to move towards a SEZ model, away from the EPZ (export promotion
zone) which failed to achieve export targets, some EPZs were converted into
SEZs. Nonetheless,
these conversions did not work out optimally, as the required structural changes
were not looked into and taken care of. Conceptually, an EPZ is an industrial
estate, a SEZ is an industrial town. With supportive infrastructure SEZs have
the potential to generate industrial growth, employment and both domestic
and foreign investment to an extent which the EPZs could not. China
took the SEZ route to growth two decades ago and is reaping rich dividends
out of it. Their five primary SEZs managed to attract immense foreign investment,
first from non-resident Chinese from Hong Kong but later on from MNCs as well.
The Chinese central government formulated special policies and flexible measures
for SEZs. For decades now, there is special tax incentive for foreign investments
and independence on international trade activities. Economic policies and
activities are predominantly driven by the market and the products manufactured
are primarily for exports. These
apart, China also enjoys the benefits of liberal labour laws. Considered to
be a serious impediment for achieving a double-digit growth and catching up
with the dragon, several industries the readymade garments industry
being the most vocal have been voicing their concerns, which the government
has once again ignored for its convenience. In
India, under the current labour laws, companies with more than 100 employees
need to seek the permission of the government to fire employees. The companies
are also required to hire contract labourers, if they keep them for more than
three months. For the manufacturing sector this is quite a dampener. By
passing the bill, the ministry of commerce has given the initial push required
to invite foreign direct investment. The Foreign Investment Promotion Board
(FIPB) and the Foreign Investment Implementation
Authority (FIIA) too should follow suit to make SEZs a success. And hopefully
the Left, before its too late, will relent to add the glitter to the gold.
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