Policy Watch: The Indian Export Dream

Maran's great export dream is taking concrete shape. But does the concept have what it takes for export-led growth?

It's the Union Commerce and Industry Minister, Murasoli Maran's great Chinese dream. And it seems close to becoming a reality. Less than two months after he announced the setting up of Chinese-style special economic zones (SEZs), the Finance Ministry has issued the necessary notifications for making them operational. That's creditable, given the snail's pace at which the government usually works.

Maran's Export-Boosting Mantra

SEZs are defined as foreign territory for duties and taxes.

Duty-free import of goods by unit resident in SEZs are allowed.

Unit in SEZs can manufacture all items, including those reserved for small-scale sector.

All products in SEZs have to be exported. But goods may be sold in the Domestic Tariff Area (DTA) after paying full Customs duty.

Units are allowed to make dollar transaction. Salaries and payment on expenses should be in rupees.

Goods brought into the SEZs are not to be physically checked, but assessed on the basis of documents furnished by the individual unit.

Exports to be allowed on the basis of self certification and consignment not to be examined.

Sale of goods by units in SEZs will not attract central excise duty or sales tax.

The notifications proclaim the SEZs to be foreign territory for the purpose of duties and taxes, and promise a hassle-free operating environment (See Maran's Export-Boosting Mantra). Says Director-General of Foreign Trade (DGFT), N.L. Lakhanpal, 57: ''We have tried to fix the two major problems of exporters-high taxes and a complicated regulatory system.'' Maran sees the units ''acting as magnets attracting Foreign Direct Investment (FDI)''. This, in turn, is expected to propel export growth, estimated at 18 per cent this fiscal.

The lure has worked. If all goes well, India should have 10 SEZs over the next few years. Four existing Export-Processing Zones (EPZs) at Santa Cruz, Kandla, Vishakhapatnam, and Cochin are to be converted into SEZs. The other six are new proposals: one from the Gujarat government for an 800-hectare zone at Positra; the second from the Tamil Nadu government for a 1,012-hectare zone at Nangunery; the third from Orissa, which has proposed a 500-hectare zone near Paradeep Port; the fourth from West Bengal which wants a 800-hectare zone at Kulpi; and the last two from Maharashtra (Dronagiri) and Andhra Pradesh each of which wants a second zone.

The SEZs at Nangunery, Positra, and Dronagiri are to be set up through joint ventures. The Positra SEZ will be developed by Positra Port Infrastructure, a joint venture between the Ahmedabad-based Sea King Infrastructure and the Gujarat government. Its partners will include Sumitomo Corporation and the Singapore government. Modelled on China's Shenzen SEZ, this Rs 10,000 crore project, which will cover a sprawling 24,000 hectares, will have an airport, a five-star hotel, a residential complex, playgrounds, and hospitals. Other plans: a fibre-optic network and 160 km of world-class roads. The zone, the company claims, will attract FDI to the tune of $6.5 billion, employ five lakh people, and generate exports worth $5 billion a year.

Shenzen is the inspiration for the Dronagiri SEZ too. The Maharashtra government's City and Industrial Development Corporation (CIDCO) plans to convert the 400-hectare Dronagiri Hardware Park into an SEZ. CIDCO, which has already spent Rs 500 crore on the project, plans to pump in Rs 800-1,000 crore more. Says Suhas Thakar, 45, General Manager: ''With quality infrastructure, there will not be any problem attracting foreign manufacturers despite competition from Dubai's Jebel Ali Free Port.'' The Nangunery SEZ, which is being developed by the Tamil Nadu Industrial Development Corporation (TIDCO) already boasts committed investments of US $30 million from several US-based companies. TIDCO expects this to swell to $160 million over the next six years.

There's scepticism about the ability of SEZs to boost India's exports. The history of India's export enclaves hasn't exactly been glorious. The first EPZ was started at Kandla in 1965, before SEZs were even a gleam in China's eye. Five more were established over the years at Santa Cruz, Chennai, Cochin, Falta, and NOIDA. Together, though, they have never contributed more than four per cent of the country's exports. Asserts the former additional DGFT and former Director-General, Federation of Exporters' Organisation (FIEO), R.K. Dhawan, 64: ''The EPZs have been more of export production enclaves for domestic entrepreneurs than magnets for foreign investment.'' Put otherwise, domestic entrepreneurs flocked to EPZs to escape cumbersome procedures.

It didn't quite work that way. Units in the EPZs had to conform to rigid export obligations, input-output rules, and wastage norms-all of which led to constant interference from DGFT and customs officials. There were other problems too. Units in the EPZs were dependent on state governments for various clearances (from building plans to pollution control), which were often delayed. Admits S.K. Mishra, 55, Development Commissioner, NOIDA EPZ: ''A lot of time was wasted in all this.''

The SEZ initiative is expected to address these issues. Concurs Anil Swarup, 41, Export Commissioner, DGFT: "The SEZs will provide a hassle-free environment for exporters.'' And by placing the onus of developing these SEZs on the state governments, the Government Of India has tried to take care of problems on that front. Yet, doubts remain. Quizzes Dhawan: ''How are the SEZs different from the EPZs in the absence of a hire-and-fire policy and a different exchange rate?'' That's a valid argument: Units in EPZs are expected to follow the same labour laws as those elsewhere. And the government isn't willing to consider the Raunaq Singh Committee Report (1985) that recommends a different exchange rate, or currency, for SEZs (following the argument that an undervalued currency would boost exports).

The result? Indian SEZs are a pale imitation of their Chinese counterparts which benefit from location and differential treatment. Agrees S.P. Gupta, 71, Member, Planning Commission: ''There were three initial conditions behind the success of the Chinese SEZs-strong ties with Hong Kong, cheap labour, and the global reach of Hong Kong entrepreneurs.'' Thus, the first four Chinese SEZs were close to regions with a high concentration of overseas Chinese. Three, Shenzhen, Zhuhai, and Shantou, are located in the Guangdong province near Hong Kong and Macao. The fourth, Xiamen, is in Fujian province, close to Taiwan. ''Nearly 80 per cent of the investment (in SEZs) was from the overseas Chinese,'' adds Gupta.

The icing on the cake was the sops. Foreign-funded enterprises in the Chinese SEZs had to pay a uniform income-tax of 15 per cent against the standard 33 per cent. Profits were tax-exempt for the first two years. And a maximum of 50 per cent of the profits between years three and five were taxable. India, in contrast offers no such tax breaks.

China also used a different exchange rate system in the initial years to kick-start investments (a unified exchange rate was introduced in 1994). These apart, the governor of the SEZs in China has enormous powers, including the right to approve projects involving investments up to $ 30 million, and grant concessions and incentives to foreign players. Foreign companies in the Chinese EPZs enjoy tremendous flexibility in terms of labour laws. Employment is contractual, the wages- subject to a minimum between 120 per cent and 150 per cent higher than state-enterprise wages-are fixed by the companies themselves, and retrenchment is permitted.

In India, the only ray of hope for units in SEZs is that the Development Commissioner of the zone (who is appointed by the Commerce Ministry) will double up as the Labour Commissioner. This is expected to minimise the time taken to settle labour disputes. That's small comfort, given the country's rigid labour laws. Can these SEZs still be the cornerstone of India's re-oriented policy of export-driven growth? It's a long shot, but Maran is bullish. ''It's a major step forward,'' he boasts. It is, provided it doesn't remain just that one step.