SEZ Policy in India was introduced with much of enthusiasm and optimism and was considered as panacea for all the problems faced by Indian Industries, more particularly export driven industries. However immediately after of passing of SEZ Act-2005 and SEZ Rules-2006 in Feb-2006, SEZ Policy and SEZ Projects were marred by lot of controversies, mainly related to land acquisitions and so called revenue loss to Government exchequer due to tax breaks allowed to SEZ developers and SEZ Units. At one end Commerce ministry was looking SEZ policy as a major step to boost exports- both goods and services and rapid development of Export oriented industries, Finance ministry always viewed this is a sham for tax evasion and a major loss of revenue.
Acquisition of farm lands for SEZ development is a source of major controversy. No wonder, SEZ developers were greeted with opposition from farmers whose lands were acquired by state Govts for allotment to SEZ developers. Except Gujarat, almost all the states have faced this problem.
Within 5 years of launch of SEZ Policy and with 500+ SEZ approved, once a darling of private developers and policy makers, now SEZ Policy has became hot potato, no one want to touch.
With this background, its necessary to understand what has gone wrong with SEZ Policy in India and why it failed miserably. To find out answer to these questions, a brief study of successful SEZs worldwide is undertaken to understand right prescription and critical aspects of SEZ Development. We had considered and studied following factors as important for success or otherwise of SEZs;
- configuration of the SEZ including critical size, location, infrastructure etc;
- fiscal and non fiscal concessions and support provided by governments
- Development modes- Private sector / Public Sector /Joint sector and role of Government and Support extended for development of SEZs
- Financial viability and self-sustainability of the zones
- Social cost-benefit analysis
- Typical gestation period and phasing of the project
- Impact on national economy in terms of contribution to GDP, Export, Employment generation, FDI etc
- Investment required, employment and industrial output generated
Purpose of this brief study is to understand what are the main factors that contributed success of SEZ in other countries and what has gone wrong with SEZ Policy in India.
Following are some of the most successful zones worldwide viz.
- Shenzhen Special Economic Zone, China
- Thailand Singapore 21 Industrial Park, Thailand
- Batam Bonded Economic Zone, Indonesia
- Jebel Ali Free Trade Zone, UAE
- SAIF Zone, UAE
A brief study of Shenzhen Special Economic Zone is undertaken hereunder.
Chinese administration had realized that its vast and cheap work force and untapped natural resources can help its economy grow at rapid speed but controlled economy and stringent laws are a major reason for keeping international companies away from it. With a view to achieve rapid industrial growth and attract foreign companies, Govt has decided to implement SEZ Policy. In July 1979, the State Council of China granted special economic powers to Guangdong and Fujian Provinces to create a special economic zone in Shenzhen city. The State Council gave the privilege of expanded authority over economic planning, investment decision making and the conduct of foreign trade to these two provinces. Guangdong and Fujian provinces were chosen as the testing grounds for bold and far-reaching economic reforms and policies.
Shenzhen is located in the south of Guangdong Province with Hong Kong to its south. It is a coastal city with floor space of 2020 square kilometers with total coastal line of 230 KMs
Important characteristics of Shenzhen SEZ made it a Industrial Powerhouse
- Located in Port city
- Excellent location on the east coast suitable for trade expansion
- Well developed economic foundation
- Abundant availability of labor
- Proximity to overseas Chinese business communities in Hong Kong, Macao, Taiwan – with a clear intention to attract them to Shenzhen
Shenzhen is the largest SEZ in China with a total area of 327.5 square kilometers or 32,750 Hectors or 80,000 acres of land (approximately one-third the size of Hong Kong and more than half the size of Singapore).
In 2010, area of Shenzhen SEZ was expanded to cover entire city of Shenzhen and thus the area of the economic zone increased from 327.5 square kilometers to 1,952.8 square kilometers. This make Shenzhen SEZ expanded to 6 times then its original size
Configuration and Management
Shenzhen City is under the direct administration of the Guangdong Provincial Government and consists of two geographical areas, the SEZ and the non-SEZ.
Shenzhen SEZ offers many options for foreign and domestic investors for investing in the SEZ. These options include free trade or bonded zones, a high-tech industrial park and a large industrial estate, which offer competitive grants and incentives.
Shenzhen SEZ has attracted large number of industries, most important of which are as under:
- Edible Oils, agriculture, dairy and food industries.
- Logistic and Warehousing
Infrastructure development at the Shenzhen SEZ was essentially carried out with support from the central and the provincial government, since the fiscal revenues from the existing industrial and commercial sector was very small. The support from the government was as high as 48 percent in the initial years and subsequently reduced to 24 percent of total capex when the SEZ was able to raise funds from internal and external sources.
During the period 1985 to 1995, the SEZ accounted for more than 90 percent of the investment in production and non-production activities in Shenzhen City.
Of the total investment of RMB 17.23 billion (US$ 2.07 billion) made into Shenzhen City for infrastructure development, RMB 15.72 Billion (US$ 1.89 billion) was accounted for by the infrastructure development at the SEZ for production and non-production purposes. The production related investment category included projects in agriculture, industry, construction, and transport and communication sectors. The investment in the non-production category includes urban utilities, education and recreation facilities, health care, residential and the R&D sector.
Investments and Sources of Funds for investment
SEZ had to essentially depend on government support since the economic base of Shenzhen City was very small and therefore insufficient for development needs of the SEZ. The investment scenario however changed considerably in the following years with more emphasis on foreign investments, self-financing schemes and domestic loans. The State Appropriation, which was initially to the tune of more than 40 percent, was reduced to nil in the 1990's. The self raised funds made the maximum contribution (of more than 50 percent) to the investments made in the SEZ.
Labour reforms were introduced in the SEZ, A significant relaxations is allowed from otherwise stringent labour laws applicable in other parts of China.
The Shenzhen Development Company acts as an SEZ agent in negotiating land leases, and receiving foreign investment and is also responsible for the overall administration of the SEZ. Parallel to the Company, the Municipal Government headed by the Mayor assures a high level of contact with the Provincial Government of Guangdong for the SEZ.
Performance of the SEZ
The Growth Pattern and Economic Structure of Shenzhen SEZ
Shenzhen SEZ has grown rapidly since 1980. While the Chinese economy grew at a rate of 9.6 percent, the SEZ grew at a rate of 40 percent during 1984 to 1998. The growth of Shenzhen SEZ can be divided into the following broad phases:
- The initial phase of construction (upto 1984)
- The second phase of downswing (1984-1986)
- The third phase of major development (1986 onwards)
The rate of real GDP growth was very high (averaging 75 percent) during the initial phase of development in SEZ, mainly due to low base effect. The high growth rate during this period was due to the construction and real estate boom, expansion activities in the SEZ and a weak base from which the SEZ was carved out. The second phase of development was a major downswing for the SEZ; the growth rate fell from about 69 percent to less than 25 percent in 1985 and by 1986 reached an all time low of 2.7 percent. This sharp decline was due to the policy changes, which took away the investment interest of the foreign investors.
The State Council approved the plan of expanding the Shenzhen Special Economic Zone to the entire city of Shenzhen in 2010, and thus the area of the economic zone increased from 327.5 square kilometers to 1,952.8 square kilometers. Just see the size. Area of Mumbai including New Mumbai is 603 Sq.Mtrs whereas area of Delhi NCR is 177 Sq.KMs,(source Wikipedia) i.e area of Shenzhen SEZ is almost 11 time than entire Delhi NCR.
ACHIEVEMENTS OF SHENZHEN SEZ
- In 2009 GDP of Shenzhen SEZ hit 820 billion yuan ($120 billion), from $0.12 billion, 979 times greater than total output value in 1979, or an year on year average annual growth rate of 25.8 percent for a period of 30 years This is nothing short of a miracle. Starting with the construction of urban infrastructure facilities, the stunning speed of economic development in the Shenzhen SEZ has drawn worldwide attention over the past 30 years.
- Shenzhen is among the top cities in China with its per-capita GDP in 2009 reaching $13,600, equal to the world-acknowledged standard of moderately developed countries. The GDP per capita, in India was last reported at $3582 in December of 2010.
- Over the past 30 years, the city has undertaken a large number of urgently needed projects for economic and social development in such sectors as transportation, communication, energy, and municipal facilities, as well as industrial projects that drive the city's economic growth. Today Shenzhen boast of best social and industrial infrastructure, comparable to any European or American City.
- Residents' savings deposits rose from 37 million yuan ($24.6 million) in 1979 to 572 billion yuan ($84 billion) in 2009, with per-capita savings deposits growing from 118 yuan ($78) to 64,223 yuan ($9,444), according to Chinanews.com. This might be highest per capita Saving Deposit worldwide.
- Currently, Shenzhen is home to 167 top 500 companies worldwide. List of companies in Shenzhen includes Wal-Mart, General Electricals, Sony, Toshiba, Mitshubushi, Huawei Technologies and so on They lead the city's industrial upgrading efforts and promote Shenzhen's development into an international metropolis
Shenzhen SEZ is a vivid example of what a rightly configured and developed SEZ do to Economy and wellbeing of the citizen of Country. It is the time for Indian Government to wake up and take a call for revival of SEZ in India.