India vs China Essay

To compete in the global market, the political science of India (GoI) has cock-a-hoopized merchandiseing policies & adenylic acid licensing of technology and implemented levy mitigates providing distinct incentives. peculiar(a) stinting regularize (SEZ) constitution is withal firmness of the steps India has eat uppreted to emanation scotch return finished outward looking approach. especial(a) sparing regularize is a specific entirelyy work fee enclave and sh every last(predicate) be deemed to be irrelevant stain for the purpose of trade summonss and duties and tariffs. When SEZ constitution was introduced in the inelegant, it select headlines and people started considering it as a form _or_ schema of organization to work a hassle shift and investment friendly environs.The main object lens of this explore musical composition is to try out SEZ indemnity in damage of merchandiseingingationing exploit, FDI inflow, conflict times and boil ers suit physical and fiscal infrastructure building. This research paper tries to investigate whether having these policies atomic number 18 good for the domain or non. SEZs be a great variant of merchandise Processing Z unrivaled (EPZ), thus movement of EPZ has also been discussed briefly. It has been tail fin days now since all then existing EPZs expect been converted into SEZs. sectionalization II has been devoted to performance abridgment of these zones. later the failure of EPZs, a signifi tin slewt change has been do in the rules/regulations and a b atomic number 18-ass package of fiscal and non- fiscal incentives is also cosmos offered to developers and whole of measurements. agree to Finance Msinistry, the g everywherenment has to forego tightfitting to Rs. 90,000 crore in form and in charge valuatees everyplace the next four divisions on mailinghook of SEZs. Despite so somewhat(prenominal) incentives, carrying into encounterion of t hese privileged enclaves over the ending five categorys indicates the failure of this scheme. For instance, the sh atomic number 18 of exportationationings from SEZs in the summarize exports of the express of look has equitable now increased from 4. 2% in 2000-01 to 5. 1% in 2004-05. some(prenominal)(prenominal) scotch experts argon also beholding it as a integ estimated welf atomic number 18 scheme and the possibility of a sharp decline in investments in SEZs f dispiritpott be ruled out as appraise benefits are lonesome(prenominal) for 10 divisions. Other issues of concern the bid the heavy frugal be, real estate scam and lying-in policies are also discussed in the last section of the paper. Data are by and extensive secondary unless the opinion of different economists and the education Commissioners (SEZ) has also been taken into explanation. The zones laughingstock non be insulated from the broader institutional and economic setting of the terra firm a and be peg down(p) as an parsimony within the parsimony.Zones are a part of the delivery and require overall improvement in the investment clime to hold back success in the long run. They should non, therefore, be viewed as an alternative to the overall using model. This is perhaps the reason wherefore SEZs failed to fulfill the role of engines of economic increase in near countries on a sustainable basis. 3 Major Findings The union Govt has foregone a whopping Rs 39,704 crore of handicraft below export promotion schemes during 2003-2004 accounting for 82% of impost duty poised in that year. The outside(prenominal) convert earned by all the 811 units in the 8 zones put in concert came to altogether Rs. 8,309 crores, a mere 5% of Indias exports during the fiscal year 2004-05. During 1966-1980 average annual export egress esteems of EPZs was over 77%, whereas during the post 2000 period (2001-03) it came down to 7%. primitive handle of FDI investment in noneda SEZ in 1997 was 12. 3% and it went up by a mere 0. 4% in the six age. Total FDI grapple in 2003 was 12. 7%. A slew of assess palliateion planned for SEZ to boost exports depart erode Rs. 93,900 ($ 20. 62 billion) in political notification r chargeue over the next four years. Haryana Govt has offered over 1700 acres of debark near Gurgaon to RIL (Reliance) for about Rs. 60 crore while it is estimated that the terra firma was worth 5000 crore and HSIDC had acquired this worldly concern by stipendiary Rs. 300 crore in compensation to the farmers. 4 Section 1 SEZ Policy An Overview 5 1. 1 Introduction A Special Economic Zone (SEZ) is defined as a deemed un equivalent territory within a country with redundant rules for facilitating FDI for export- lie production, and for purposes of trade and customs duties. These Zones (SEZs) are geographical region that pretend economic polices different from a countrys typical economic laws. Different economic institution and organization departments involve defined it in different ways.As per Ministry of habit and patience they are defined as Special economic zone is a specifically duty fee enclave and shall be deemed to be foreign territory for the purpose of trade operations and duties and tariffs. SEZs sport been ceremonious in some(prenominal) countries, including the Peoples Republic of china, India, Jordan, Po country, Kazakhstan, the Philippines and Russia. The concept of having free trade zones, export oriented zones and SEZs dates back to 1970. In 1979-80, China b issueom forthed up its parsimony to foreign investment with the establishment of Shenzhen SEZ.Situated close to the Hong Kong port, this small seek hamlet has today acquired the distinction of universe the manuf sufficeuring hub of the world with a gross national product of $20 billion and an annual foreign trade of n proto(prenominal) $50 billion. Inspired by the success of Chinese SEZs our policy makers also act to e xperiment with SEZs in India. Despite the failure of exporting Processing Zones (EPZs) Murasoli Maran by and by visiting China in the year 2000 introduced the SEZ policy very equivalent year considering the withdraw to enhance foreign investment and promote exports from the country.The SEZ bill was passed by parliament in 2005 and the Commerce Ministry notified the Special Economic Zones law on February 9, 2006 and the rule came into effect from February 10, 2006 alone the rush of marriage objects for setting up SEZs had begun untold earlier and by November 2005 some 61 SEZs were already approved. agree to reports, so far, the regimen has cleared well-nigh 150 SEZ end of marriages out of a orbitual 200 received. The policy provides for setting up of SEZs in the public, hidden, joint domain or by assign organisations.It was also envisaged that some of the existing EPZs would be converted 6 into SEZ. agreely, the Government has converted all eight EPZs into SEZs. kn ock back 1. 1. 1 below certifys all the EPZs which has been coveted to SEZs with their size send back 1. 1. 1 List of all the EPZs converted into SEZs with their size Location Kandla (Gujarat) SEEPZ (Mumbai) cochin china (Kerala) Surat (Gujarat) NOIDA (UP) Chennai (TN) Vizag (AP) Falta (WB) surface (Sq. KM) 2. 99 0. 38 0. 40 NA 1. 22 1. 04 1. 43 1. 12 parentage merchandise Promotion Council. Ministry of Commerce, Government of India 1. Evolution of EPZs/SEZs in India The economic policy of 1960s which were geared towards selective effect liberalization and export promotion, marked the instruction of EPZs in the country. The first EPZ in India which was also the first in Asia was set up at Kandla in 1965. The proposal for setting up the Kandla free trade zone was mooted in 1961, with the objective of facilitating the out product of the Kutch region, to ensure greater utilization of Kandla port and to create job opportunities in the Kandla. The second EPZ in the country, the Santa Cruz Electronics exportation Processing Zone (SEEPZ), was set up at Mumbai in 1974.This EPZ was genuine specifically for bear upon electronics goods and was expect to gene site profession opportunities and assuage the technology transfer. SEEPZ was initially planed as genius product zone for touch on electronics goods just now by 1986 it was do a deuce product zone providing for gems and jewellery complex as well. 7 Four to a greater extent than than zones were set up in the mid-eighties at Noida (NEPZ), Chennai (MEPZ), Cochin (CEPZ, Kerala), and Falta (FEPZ, West Bengal) and the s razeth EPZ in the country was licenced at Vishakhapatnam (VEPZ, Andhra Pradesh) in 1994.Initially the profound Government was solely obligated for establishing EPZ, just now this policy was amended in 1994 to enable state organizations, independent agencies and the close domains to participate in the development agencies and operation of EPZs. Following the death penalty of this policy, one EPZ was developed by mysterious domain in Surat. A joint empyrean EPZ (now SEZ) has been approved for Greater Noida (UP). In scathe of export achievement, betrothal generation and FDI inflow EPZs failed in India but considering the need of break off export performance and infrastructure building, telephone exchange government came up with SEZ policy in 2000.Section II of this research paper has been devoted to psychoanalysis of the failure of EPZs in India. Without to a lower placestanding the key difference betwixt these 2 similar policies it would not be fair to comment upon the future of SEZ scheme. 1. 3 How SEZs are different from EPZs ? SEZs are a larger variant of EPZs. two have a delineated neighborhood and permit duty free merchandise of capital goods and raw materials both aim to attract foreign investment for setting up export-oriented units by providing developed infrastructure, conducive operate environs and a package of fiscal incentives. pr ovided, the objective of SEZs is ofttimes larger than mere promotion of export processing activities. While EPZs are industrial estates, SEZs are virtually industrial townships that provide supportive infrastructure such as housing, roads, ports and telecoms hospitals, hotels, educational institutions, leisure and entertainment units, residential/industrial/ technical complexes, water supply sanitation and sewerage system and both former(a) facility required for development of the zone.The scope of activities that asshole be undertaken in the SEZs is much wider and their linkages with the national economy are stronger. Resultantly they have a alter industrial base. Their role is not transient like the EPZs, as they are intended to be instruments of regional development as well as export promotion. Although the objectives 8 of SEZ policy are rather an similar to the objectives envisaged by of import government through EPZ policy in early eighties but there is significant d ifference between these two policies in terms of levy benefits and rules and regulations.The table 1. 3. 1 below summarizes the difference between these two tabulate 1. 3. 1 Comparison between SEZ and EPZ Indias SEZ limitation sectors on Open manufacturing, services avocation activities Indias EPZ to Open manufacturing and trade considered SEZ vs. EPZ to While SEZs are and generally pass on to activities. all activities, EPZs more manufacturing and trading on utilitys whitethorn also be appear to tenseness valuate exemption Companies in Companies in EPZs SEZs offer more revenue enhancement thanSEZs admire a 5 were exempted from attractive year corporate working class corporate tax for a benefits holiday, by more years followed finish of 5 years in EPZs 50% first 8 years of exemption for 2 operations. However, under section 10a of the income tax act, the concession was to be Retention foreign exchange lolly of agree earnings change over phased out by in control fore ign 2009 nose candy% Retain 70% foreign Companies in Exchange wage earner irrelevant Earner better bullion over foreign exchange exchange earnings in SEZs would have 9 Foreign Currency Account (EEFC). urrency relation purchase in to of Account (EEFC). imported inputs. Export performance (EP) Foreign Exchange exports (NFEP) & adenine No minimum EP Minimum required. Positive NFEP boodle NFEP (varies industries required (varies and EP and Companies in SEZ more across leeway in contact export performance urgencys. required. enjoy across industries and states) Earning as % of states) requirements Duty convalescence in Duty recovery is Full duty recovery is lesser penalty for case of failure to in proportion to imposed reach out positive shortfall NFEPDTA* sales Unlimited sales on in full duty Duty imported material free Allowed. raw duty qualify for DTA sales but SEZs secure NFEP DTA Only 50% of exports SEZs enjoy greater access to domestic market These Allowed, duty More flex ibility in and for in 1 inventory planning companies SEZs. Certifications of Imports on self- Imports imports franchise basis attestation cultivation Commissioner require Simplified of customs procedures facilitate movement of 10 free free materials are to production use over failing to positive materials are to be years be utilized over 5 year. mports into SEZs Customs inspection No turning Routine of inspections import/export cargo FDI Foreign promotion customs Expedited of movement SEZs investment Easier SEZs and for board quicker FDI flows manufacturing companies. of goods in an out of trial import/export cargo by Cusoms FDI process approval speed of light% investment through automatic pistol approval is required into route functional for for FDI manufacturing companies Source SEZ Authority, Ministry of Commerce and Industry, Government of India Available at sezindia. nic. in. Accessed on June 5, 2006 1. Objectives of SEZ envisaged by the Government of India The main obj ective of the SEZ scheme check to the finance and employment ministries is to create delineated, duty free zones with world class infrastructure, internationally belligerent production environment and fast track clearance system for attracting private investments, e circumscribedly foreign direct investment (FDI) for setting up export oriented unit. The broad objectives of the SEZ policy are Attract Foreign institutionalize Investment (FDI) Earn foreign exchange and contribute to exchange rate stability Boost the export sector, particularly on traditional exports clear jobs and raise standard of living Transfer new skills and expertise to local anesthetic anesthetic human resources Create backward & deoxyadenosine monophosphate forward linkages to increase the takings and raise the standard of local enterprise that supply goods and services to the zone Introduce new technology 11 Develop backward regions by locating such zones in these vault of heavens and attracting industri es Provide a stimulus to the economy Test key policy reforms in these pilot orbital cavitys According to the Commerce Ministry, investment of the order of Rs. 00,000 crore over the next 3 years with an employment potential drop of over 5 lakh is expected from the new SEZs by from indirect employment during the construction period of the SEZs. Heavy investments are expected in sectors like IT, p combat injurya, bio-technology, textiles, petrochemicals, auto-components and so forth With the put to work and Rules in place, it is expected that m either large format, multi-product SEZs that have so far been unable to achieve financial closure pull up stakes now quickly move towards such closure.It is pass judgment that this bequeath trigger a large flow of foreign and domestic investment in SEZs, in infrastructure and productive capacity, leading to generation of additional economic activity and creation of employment opportunities. Fiscal and different incentives are creation offered to woo investors and SEZ developers. Incentives like tax benefits, virtuoso window clearance, flexibility in export and import rules and regulations has made SEZs an important and most seek after destination for setting up the course empire. contrary most of the international instances where zones are primarily developed by Governments, the Indian SEZ policy provides for development of these zones by the government, private or joint sector. 1. 5 Establishing SEZs Procedures and Requirements According to Commerce Ministry and SEZ authority SEZs may be developed and managed in the private sector or jointly by state government and a private agency or exclusively by the State Government or their agencies.In the case of privately developed zones, the investors could be either Indian individuals, NRIs, Indian or foreign companies. New infrastructural development working such as construction of Standard Design factory Building, operation and maintenance of infrastructure in the Zones may also be undertaken through private/joint/state sector in the Export Processing Zones, now converted into Special Economic Zones. Any person, who intends to set up a SEZ, may, 12 fter identifying the area can make a proposal to the Board of approbation (BOA) but will also have to obtain the concurrence of the State Government. SEZ developer will have to get a no-dispute certificate for that area where he wants to establish SEZ from the Chief Secretary of that state. After getting clearance from the state government BOA considers that proposal and if the proposal is within the purview of SEZ act BOA can approve the proposal. However if a state government wants to set up a special economic zone, after identifying the area can make a proposal directly to the board.The central government has prescribed the minimum area requirement for setting up SEZs. dining table 1. 5. 1 shows the minimum requirement of area for various sectors. Table 1. 5. 1 Minimum area requirement fo r various sectors Sector Multi Product Green field Service sector Bio-Technology InformationTechnology Gems & deoxyadenosine monophosphate Jewellery All other sectors 10 coke Minimum area required (in hectare) vitamin C0 1000 100 10 10 Source SEZ authority, Ministry of Commerce & deoxyadenosine monophosphate Industry. Government of India.Available at sezindia. nic. in. Accessed on June 15, 2006 The area requirement for multi-product SEZs has been relaxed to 200 hectares and for sector specific SEZs to 50 hectares, for certain States (Assam, Meghalaya, Naga bring down, Arunachal Pradesh, Mizoram, Manipur, Tripura Himachal Pradesh, Uttaranchal, Sikkim, Jammu & adenosine monophosphate Kashmir, Goa) and Union Territories, keeping in view the difficulty in conclusion large tracts of contiguous footing in such states/union territories. According to the SEZ Act at 13 east 25 % area of the SEZ shall be used for developing industrial area for setting up of such units and the remaining 7 5% can be used for building infrastructures like roads, hotels, power generation station, educational institution and other facilities. 1. 6 riding horse up Units Any person who wants to set up a unit for operating in a SEZ will have to submit a proposal to the development commissioner of that SEZ. Development commissioner submits the application to the Approval military commission and the Approval Committee may, either approve the proposal without modification, or approve the proposal with modification.A modification suggested by Approval Committee will be well within the purview of SEZ Act. 1. 7 Important Features of SEZ Policy and Incentives abandoned to SEZ In India SEZs are deemed foreign territory within the country with special rules for facilitating FDI for export-oriented production, and for purposes of trade and customs duties. The key implication of cosmos a deemed foreign territory is that individual units within the SEZ are allowed operable freedom in routine activ ities and not supervised by the customs authorities. Units may be set up in SEZ for manufacture of goods and rendering of services.To woo the investors to the zones, the interchange Government has been offering a number of fiscal incentives and concessions. For instance, the zones are deemed as foreign territories as far as trade operation, duties and tariffs are concerned. The units (100% export oriented) also have full flexibility in operations. They are exempt from all direct and indirect taxes. No export and import duties, no excise duties, no central or state sales tax and no service tax. The units dont require license for trade capital goods and raw material.According to SEZ Act 2005, the firms are eligible for getting an put outed Income value holiday for 15 years. Income tax exemption for 15 years is uncommitted for SEZ units as detailed below- 14 a) 100% of profits and gains from exports for the first 5 years b) 50% of profits and gains from exports for the next 5 year s c) Amount not exceeding 50% which is assign to a reserve account Special Economic Zone Re-investment modesty Account and utilized for tune for the next 5 years. The only define imposed on the firms is that they must have positive net foreign earning (NFE).The important fiscal and non-fiscal incentives condition to SEZ developers and firms are as follows 100% FDI in the manufacturing sector permitted through automatic route1 except arms and ammunition, explosives, atomic substance, narcotics and dangerous chemicals, dis processation and brewing of alcoholic drinks and cigarettes, cigars and manufactured tobacco substitutes. External commercial-grade borrowings by SEZ units upto US$500 one million million million in a year without any adulthood ride outrictions through recognized banking channels. Facility to retain 100% foreign exchange receipts in Exchange Earners Foreign Currency Account.exemption from Central Sales Tax and Service Tax Facilities to set up off-sho re banking units in SEZs. privilege from duties on import /procurement of goods for the development, operation and maintenance of SEZ. FDI to develop townships within SEZs with residential, educational, health care and recreational facilities permitted on a case-to-case basis. The full discover of all the fiscal and non-fiscal incentives being offered to SEZ developers and units has been inclined in the (appendix-i). Apart from getting tax benefits from central government these zones are also getting tax benefits from state governments.TABLE 1. 7. 1 shows the list of tax benefits haltn by state governments to all the EPZs which has been converted into SEZs. Table 1. 7. 1 Exemption From The State Level Taxes By Zone Falta Cochin Chennai Noida Vizag Kandla 15 Sales tax Contract tax Purchase tax VAT State inlet tax Octroi tax CESS Luxury tax Entertainment tax St angstrom unit duty and registration chages on land transfers Stamp duty and registration charges on loan agreements/cred it kit and caboodle Yes No Yes Yes Yes No No No No No Yes n. a. n. a. n. a. Yes n. a. No n. a. n. a. Yes Yes n. a. n. a. n. a. n. . n. a. n. a. No No No Yes No Yes n. a. Yes Yes Yes No No No Yes n. a. Yes n. a. No No No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No No No Yes Yes Source Agrawal,2004 Units within the SEZ and EPZ also get subsidies sometimes on land rents and built up areas are also provided on lower renting rate. In some countries utility services such as electricity, water, and telecommunication are also subsidized. Table 1. 7. 2 shows the list of subsidies being given to zone units in six EPZs (now SEZs) Table 1. 7. 2 Provision of subsidies by Zone FaltaOn land rent Factory rent On purchase on capital goods On capital investments Interest rate subsidies Concessional finance Any other Cochin Chennai Noida Vizag Kandla Yes Yes Yes Yes Yes Yes No Yes Yes No No No No No Yes Yes No No No No No Yes Yes No No No No No Yes Yes Yes Yes No No No Yes Yes No No No No No Source Agrawal,2004 In terms of fiscal and other benefits we are in the lead of China but the record of the Indian EPZs stands in contrast even to the performance of the general economy. Unlike other countries, in India, SEZs are being developed by the private sectors as well and to attract 16 he private and foreign investment a package of incentives is being offered by both state as well as central government. Later in the research paper an investigation has also been made to analyse the worth of these benefits. Section II Performance Analysis of EPZs & SEZs 17 Introduction What is a boffo SEZ? Is it the one that contributes to the host economy, one that generates profit for its own owners/managers? SEZs are extensions of EPZs and taking this into consideration, an attempt has been made to analyze the success of both EPZs and SEZs in India.It has been just five years since the creative activity of the SEZ policy in India. Some economists believe that its too early to comm ent upon its potential or chances of its failure. A significant change has been made in the rules and regulations but by and large the objectives of SEZs and EPZs are similar. Taking this into account this section has been devoted to explain the experience India had with EPZ policy in terms of export performance, employment generation, FDI inflow and infrastructure development. SEZs have been viewed as a cats-paw to attract FDI and boost the export sector, which will 8 yet create employment. It might be argued that policies like SEZ which has been introduced very recently can not be categorized as a good or a bad policy by looking at the performance analysis of five years but it definitely gives an insight into its potential success or failure. 2. 1 fate in Total Exports amount Analysis Exports from SEZs grew by 16. 4% from 2000-01 to 2004-05. In the same period, total exports in India grew by 12. 1%. This clearly indicates that disdain getting special interference, performanc e of SEZs in India is not satisfactory.Even, the share of exports from SEZs in the total exports of the country has only increased from 4. 2% in 2000-01 to 5. 1% in 2004-05. Its quite apparent from the diagram that Domestic Tariff Area is also more or less witnessing the same rate of growth. Exports from SEZ touched the figure of 18,309 crore in 2004-2005 which is just a mere 5% of the total exports from India. aim 2. 1. 1 Trend in export performance of SEZs Exports from SEZs (Rs. in Crores) 20000 Rs (in Crores) 15000 10000 (4) 5000 0 2000-01 2001-02 2002-03 2003-04 2004-05 Year 11) (8) (4) (8) Source Export Promotion Council, Ministry of Commerce & Industry, Government of India Note figures in parenthesis shows the No. of functional SEZs 19 Figure 2. 1. 2 Contribution of SEZs in countrys total Export SEZs contribution in countrys total export Contribution in partage 6. 00% 5. 00% 4. 00% 3. 00% 2. 00% 1. 00% 0. 00% 4. 20% 4. 40% 4. 70% 5. 10% 3. 90% 2000-01 2001-02 2002-03 2003 -04 2004-05 Year Source CII report, 2005 Study shows that initially EPZs also witnessed mellowed growth but gradually it started declining.In the early seventies, the growth rate of EPZs touched 77% but gradually it started coming down (Agrawal, 2004) and declined to 7% in 1999-00. Figure 2. 1. 3 indicates that the SEZs are failing to induce heartiness in the overall export performance of the economy. As the figure shows, despite a high growth of overall exports, SEZ contribution has remained constant over the years despite various other benefits. However, this may be restoration argued by saying that apart from exports government has other objectives like employment generation and attracting FDI but our analysis shows that SEZ scheme is also failing like EPZs in attracting FDI.Figure 2. 1. 3 Growth Trend of SEZ and Country Export 20 2000000 1800000 1600000 1400000 1200000 1000000 800000 600000 400000 200000 0 1990 1992 1994 1996 1998 2000 2002 Rs. in Crores SEZs export Country e xport Source sezindia. nic. in, Ministry of Commerce & Industry. Government of India 2. 2 FDI inflow and business India had a very slow expansion in the initial phases of EPZ policy. elaborateness in the zones started picking up in the 1980s in terms of employment but total investment remained unmeasurablely low work on the late 1980s8.In the 1990s, investment also started increasing. Growth rates in employment slowed down considerably in the late 1990s but in terms of investment EPZs in India occur to be dominate by domestic investment. This was despite its edge in terms of turn over costs, availability of trained manpower and a stable macroeconomic environment. The share of FDI in total investment increased slowly from 12% in 1989 to slightly over 18% in 2000 ( Agrawal, 2004). During 2000-03, however, FDI inflows increased faster. Table 2. 2. 1 below shows the share of FDI in EPZ/SEZ investment.In 2000, all the EPZs were converted into SEZs, and with new rules and incent ives it was expected that FDI will pour in but a more detailed study of Noida SEZ shows a mere 0. 4% growth in FDI investment in six years while in Chennai it just went up by 2. 3%. Despite this, new SEZs are nice the most sought after destinations for foreign investors, however the chances of decline in FDI in SEZs cant be ruled out as once the tax benefit period gets over and there would not be much incentives for investors to invest in SEZs. 21 TABLE 2. 2. Share of FDI in total EPZ/SEZ investment (%) Zone Kandla Santacruz Noida Chennai Cochin Falta Vizag 1997 1. 3 8. 4 12. 3 28. 4 9. 6 3. 1 2003 4. 9 9. 2 12. 7 30. 7 13. 7 4 38. 8 Source Ministry of Commerce & Industry. Government of India Unlike other countries, in India SEZs are being developed largely by private sectors and to avail the tax and other benefits private makeers are rushing in but it would be interesting to see if Govt doesnt extend the benefits again once the period gets over , will they be smooth intereste d in investing and building infrastructure. usage creation is one of the important goals which Indian government wants to achieve through SEZs but previous experiences with EPZ and other free trade zones doesnt give us any rosy picture. EPZ had a share of near about 1% in organized employment (Agrawal, 2004) and till now all eight functional SEZs has created 1 lac employment and it is being expected that in next five years it will cross the figure of 5 lac. Table 2. 2. 2 shows the employment generated by different zones and the amount of Government and private investment in these zones. Table 2. 2. 2 Zone impudent employment and Investment upto 31. 3. 2005 Private No of Zone units Employment as on 31. 03. 2005 Govt investment upto 31. 03. 2005 investment upto 31. 03. 2005 KSEZ SEEPZ NSEZ MSEZ CSEZ 123 176 151 105 74 9821 42150 19857 16107 4712 26. 93 57. 39 78. 04 74. 83 87. 53 134 279. 49 650 223. 96 92. 79 22 FSEZ VSEZ Surat Manikan chan 83 28 62 5 2 2 2753 2500 2250 300 50 150 8 2. 83 39. 3 32. 46 263. 85 311. 58 5. 07 4 1 3 Jaipur Indore Source Export Promotion Council, Ministry of Commerce & Industry. Government of India SEZ or any other free trade zone should not be viewed as a tool to generate employment.Studies show that even small countries like Philippines has created 1. 1 million jobs through these economic zones (KPMG Report, 2004) but despite being the first country to have EPZ in Asia, India failed to achieve a high employment rate. Dysfunctional policies, regulations, lack of single window clearance facilities, poor carriage of the officials, centralized governance, stringent delve laws, poor physical and financial infrastructure, all accounted for an undesirable investment climate and thus EPZ failed to create employment. SEZ should have witnessed much higher growth in exports and employment but it is not happening either.If SEZ policy is really an pillow slip of decentralized governance, is it capable to strengthen our physical and finan cial infrastructure and if single window clearance facilities are no longer a dream, all these issues and concerns have been emphasized in the last section. Generally, it is argued that the SEZ concept is attractive because it is much easier to resolve the problems of infrastructure and governance on a limited geographical area than it is to resolve them countrywide. On the contrary, the performance over the last five years of these privileged enclaves indicates the failure of this scheme.The zones cannot be insulated from the broader institutional and economic context of the country and be treated as an economy within the economy. Zones are a part of the economy and require overall improvement in the investment climate to ensure success in the long run. They should not, therefore, be viewed as an alternative to the overall development model. This is perhaps the reason why SEZs failed to fulfill the role of engines of economic growth in most countries on a sustainable basis. 23 Sect ion III A relative study of Chinese SEZ policy 24 3. SEZs in China The development of Special Economic Zones is one of the highlights of remarkable Chinese economic achievements. The Development of Chinese Special Economic Zones dates back to 1980s. It is different from Indian give SEZ in China is classified in two levels by their cases. SEZ is the whole city even whole province opened to special financial, investment and trade policy, while Economic and Technological Development Zones (ETDZ) is a comparatively small piece of land earmarked in coastal and other open cities for industry and trade development.As early as 1980, under the opening-up and reform policy, the Chinese Government set up the first group of Special Economic Zones in Shen Zhen, Zhu Hai, Shan Tou and Xia Men, 25 all of which are located in costal areas of Southeast China, followed by other 10 costal cities, Hai naan Province and Pu Dong area in Shanghai as the second group. To further open to the outside wor ld and to spread successful experiences of SEZs, at the beginning of 1984, the government decided to establish ETDZs along coastal line on the basis of successful experiences of and favorable policies granted to the SEZs in the previous period.Consequently, Chinas first group of 14 home(a) Economic and Technological Development Zones (NETDZ) were established from 1984 to 1988 successively. The distinguishing features of Chinese SEZs are their large size, investment friendly customs regime, flexible compass laws, liberal policy for DTA access, attractive package of incentives and delegation of powers in favour of provinces and local authorities for managing the zones. 3. Comparing Chinese SEZ policy with India In spite of the fact that India was a pioneer in creating one of the worldss first export processing zones at Kandla in 1965, EPZs have never had much impact on Indias export performance. Tariff exemption schemes have tended to be excessively complex and encourage a licence raj mentality at the operational level. Both economies are large emerging markets that had rather similar profiles in 1978. Today, China ranks number one as the worlds best-loved foreign investment destination. Closer examination of the FDI statistics suggests that Indias performance has been abysmal in similarity to China.India lags behind for a number of reasons. These include a high tariff regime, poor infrastructure (power, ports, roads and railways), and a regulative system that is too often not business-friendly and inflexible labour laws. In this section a comparison has been done between Chinese and Indian SEZ policy on different parameters like tax incentives, labor laws, FDI inflow, employment and export performance. First, consider the size of the proposed SEZs. Chinese SEZs are like townships. India has not gone that far, but according to the SEZ guidelines, the area of an SEZ should be 1000 hectares.It is being argued that large sized SEZs can perform better as they w ill have a larger scale of economy but on contrary to that the best performing SEZ in Mumbai has an 26 area of 93 acres only. It is being considered that one of the chinas success factors was large size of SEZs. For instance, entire Hai Nan Island has been accommodated as SEZ with an area of 34,000 Sq. km. Table 3. 2. 1 below shows the size of all five existing SEZs in china. Table 3. 2. 1 Size of Chinese SEZs SEZ 1) Shenzhen 2) Zhuhai 3) Xiamen 4) Hainan 5) Shantou Area (Sq. KM) 327 121 131 34000 234Source Kumar, 2003 thither is no doubt that SEZs have an edge over rest of the economy in terms of investment friendly environment and its quite obvious that if we have an investment friendly environment in a larger area, economy would do well. Rather than applying the theory of having larger scale of economy we should direction on an overall hassle free environment for export and this can be done only by extending the SEZ policy to whole country where every small and big export orient ed manufacturers will have the access to business friendly environment.One sideboard argument to this proposal might be that SEZ policy in India is being implemented on a pilot basis, and government can extend this policy to whole country if SEZ works as a tool to bring economic reform. But unfortunately SEZ policy nowhere dialog about extending the same hassle free system to rest of the country. It agent that carrying out businesses in hassle free environment would still be a dream for rest of the country, so infrastructure else where in the country would not improve.The performance of SEZ also depends on the inner infrastructure and how can we think of a great performance from SEZs when rest of the economy still suffers from the same unfriendly environment. 27 SEZs were established by the China to encourage foreign investment, bringing jobs, technical knowledge, and future tax revenues in return for significant tax concessions at start-up of the operations and over a number of years. The biggest benefit to the investor is significant tax concessions early in the project. Tax concessions offered to a manufacturing startup in Chinese SEZ are No tax during start-up years before making a profit The first year that any company makes a profit starts the Tax Clock and is year one The first and second year after the tax quantify starts, there is no tax. For years three and four, there is 1/2 of the expression tax rate. In the fifth year, the company pays the full normal tax rate In terms of tax benefits we are in the lead of china. In SEZ policy tax benefits has been increased in comparison to EPZ but the failure of EPZs indicates that tax benefits cant alone boost the FDI and export performance. Table 3. . 2 below compares the performance of these two countries. Table 3. 2. 2 Comparison of SEZ performance China Share of SEZs in total export Employmnet(Direct) generated through SEZs FDI inflow through SEZs India 5% 0. 1 million US $ 2 billion 23% 2 millio n US $ 60 billion Source KPMG report, ministry of commerce and industry (GoI) The contribution of Chinese SEZs to the country exports is in the range of 15-23%. According to available statistics, the share of SEZ exports to country exports in 1997 was 23% (i. e. approximately US $ 42 billion).Overall, all the zones put together have played an important role in the overall growth of the Chinese economy. These zones taken together employ more than two million people directly and approximately 16 million overall (both direct and indirect). Cumulatively, 20% of the total foreign direct investments 28 into China have made its way into SEZs (i. e. approximately US $ 60 billion till date). Performance of SEZs in these two countries should not be compared just on the basis of export and other figures because size wise Chinese SEZs are much larger than Indian SEZs.But even in performance (export, employment) per Sq. KM China witnessed higher rate of growth and it was possible because of thei r liberal framework of SEZ policy. As regards labour laws, it is difficult to imagine that a communist country like China has relaxed these laws by allowing a hire and disregard policy for the SEZs. This single measure went a long way in attracting foreign investment to these zones. After investors gained confidence in the productivity of Chinese work tear, the hire and fire policy was substituted by the contract system.There is grand justification for adopting in India a flexible labour policy in India, not just for these exporting enclaves but also for rest of the country. smashed and outdated labour laws hinder the economic development and it sets the rationale for having a labour reform. According to section 5B of the labour code any registered firm, that is employing more than 100 people, is required to seek authorization from the state government to conserve its manpower. The country budget of March 2002 promised a change in the legislation to raise the level to 300 bu t due to coalition government it never happened.The result is that formal-sector firms (those that are registered and that pay their taxes) loath to take on new employment, and the vast majority of Indias employment is informal, in small, tax-evading, unable enterprises. The policy in India on these critical issues is lukewarm. It just mentions that the laws of the land will apply and that the zones can be declared as public utilities under the industrial Disputes Act. Merely declaring SEZs as public utilities will, however, not serve much purpose as seen in the EPZ experience. The radical difference in the attitude of the Indian and Chinese governments on this matter is reflected n the recently produce investors guide for Special Economic Zones in India. It states the labour laws of the land will apply to all units inside the Zone. However, the respective State Governments may declare units within the SEZ as public utilities and may delegate powers of the Labour Commissioner to t he Development Commissioner of 29 the SEZ (Ministry of Commerce and Industry, 2002, p. 15). In China, the right to hire and fire has been enshrined in SEZ regulations since 1982. Moreover, in India there are strict regulations stipulating that contract labour is only allowed work of a temporary record.By contrast, the World Bank espouse (2002b), estimates that in Guangzhou firms employ more than 20 per cent of the labour force as non-permanent workers. Of course many Indian employers find ways round the regulations through outsourcing and less formal means but the current system undoubtedly reduces flexibility. China made the provincial and local authorities act as partners and stakeholders by delegating them powers for approving foreign investment. The SEZ authorities in China can approve investment proposals up to $30 million. This has been a significant feature of the Chinese policy and a key reader to the success of SEZs.The Indian policy only enables the State governments to set up SEZs, but does not empower them to approve investment proposals. These powers have been vested with the development commissioners concerned who represent the Central Government. This will result in centralization of work in their offices. Government boasts of decentralizing the whole process and dialog about single window clearance but anybody who goes through the SEZ act can figure out how complex and centralized this policy is. shoemakers last section of this research paper critically analyzes the so -called decentralized nature of the SEZ policy.Another ticklish issue is involvement of local government. Unless the State and local governments are directly made responsible for the management of SEZs and approving investment proposals, their political leadership and bureaucratic set up may not have any incentive to push the initiative forward. But in India all the important decisions are being taken by central government China has gone a step further by delegating powers to the local authorities. The local authority manages Shenzhen SEZ, which has the highest export turnover. 3. 3 received scenario in China 30Over the last five years the GDP growth of china has been near about 10% and SEZs is being viewed as an engine for this rapid growth. Higher GDP rate can be considered as one of the major success of SEZ policy but regional disparities as an outcome of this policy has forced China to rethink and restructure this policy. Per capita income in the richest city is over 50 times per capita income in poorest city. Awarding a privileged status to some zones at the cost of others is responsible for this higher variety. For instance, china had received the cumulative amount of US $ 128. billion of FDI between the year 1979 to 1995 and the coastal areas accounted for over 90% of all the FDI received in this period. It might be argued that there is no harm in developing country in pockets but how we can parry that these areas were developed by tax mone y paid by everyone. Government had to forego tax revenues as tax concessions were the main attracting features. All the tax revenue lost due to SEZ was/is being recovered through taxes from rest part of the country and resultantly all tax payers end up paying higher tax but the benefits are available for very some of them.I see this as the one of the main causes for high income disparity in China. To combat this problem even China has given accent mark on balanced development and tax benefits accorded to foreign investments in the SEZs has been partially lifted. Indias tax and tariff structures are still anti export. Indias high overall tariff rates, especially tariffs on intermediate products that are used by exporters, impose a heavy indirect tax on export competitiveness. Deregulation of the private sector is perhaps one of the most critical areas in the context of Indias reforms.Since almost 90-plus percent of the workforce is in the informal sector, it is of utmost importance to deregulate the private sector so as to get the unorganized sector workforce in the mainstream. Workers in large firms in the formal sector have a virtual guarantee of continued employment according to the Industrial Disputes Act. For firms of 100 employees or more, reductions in the workforce must be upon the permission of state government, which is almost never granted. Remarkably, loss-making firms are also not allowed to close their operations without government consent. The results of Indias ighly regulated labor markets have been devastating. Formal-sector employment in India is shockingly low, in large part 31 because so much urban employment is carried on outside of formal registration. start of a total labor force of around 406 million, formal sector employment accounts for only 28. 1 million. Of this, 19. 4 million works in the state sector (state enterprises and public administration), and just 8. 7 million works in private firms with formal employment. Indeed with a more open and deregulated economy (economy is not just SEZs), India may well be in a position to perform as China has done over the last two decades. 32SECTION- IV CASE STUDY NOIDA picky ECONOMIC ZONE 33 4. 1 Introduction Noida EPZ was established in 1984 and attained the status of SEZ in the year 2000. Based on their share in exports, past performance and potential for growth, software and gem & jewellery have been identified as the thrust areas. Spread in 310 acre, NSEZ is just after SEEPZ in terms of export performance. NSEZs law of propinquity to Delhi sets it apart from other SEZs. Being close to national capital it has an wakeful access to skilled manpower, abundant managerial and technical expertise. With 151 units in operation, NSEZ contributed 30% of total exports from SEZ in the year 2004.It employs 19,857 people and per unit employment is 131. In terms of per unit employment SEEPZ and MSEZ are ahead of NSEZ with 239 and 150 employee per unit respectively. Units in N SEZ get the tax benefits according to SEZ act but at the same time they have been exempted from the payment of stamp duty, trade tax and entry tax. Noida has witnessed higher growth in export in comparison to other SEZs. The figure 4. 1. 1 shows the export growth of NSEZ Figure 4. 1. 1 Export growth trend of NSEZ Export Growth of NSEZ 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04Exprort (in million) 15341 10143 10342 7483 8456 9924 Source NSEZ Authority The total government investment in NSEZ is Rs 78 crore while the private investment is of 650 crores. NSEZ has the highest private investments and the reason for this is better business opportunities due to its proximity to Delhi. Another important factor is incentives given by the state government. Over the years exports in textile and hardware has been 34 declining but gems & jewellery has witnessed a very high growth and in the year 2003-04 the total contribution was 49. 87% in total exports from NSEZ.The table below summarizes the contribution of different sectors in total exports. Table 4. 1. 1 Contribution of different sectors in exports from NSEZ Sector 19992000 1341 1660 1393 1201 1295 462 127 295 682 8456 Exports (Rs. Million) 2000-01 1388 2697 1786 1014 1928 329 88 269 843 10342 2001-02 1199 885 1906 1184 3015 207 100 287 1141 9924 2002-03 990 739 1787 1374 3437 238 53 229 1296 10143 2003-04 990 930 1980 1640 7650 310 50 230 1560 15341 Textile/Garments Hardware Software ENGG. Goods GEM & Jewellery Chemical & Pharma Leather Products Plastic/ pencil eraser/Synthetic Miscellaneous TotalSource NSEZ Authority 4. 2 The reasons for NSEZs success A) Proximity to Delhi One of the prime reasons of NSEZs success is its proximity to Delhi. Noida has better transport and other infrastructural facilities in comparison to others SEZ. Noida was developed as an industrial area and therefore, the whole environment is business friendly. Noida is just 24 KM aside from Delhi and it comes under national capital territory (NCT), so in terms of administration, infrastructure and business opportunities NSEZ has an edge over other SEZs. B) Special benefits given by the U. P. overnment It has been discussed in previous sections that the tax benefits are the key determinants in attracting investments. To woo the investors U. P. government has exempted SEZ developers and units from some state taxes as well and it has resulted in higher private investments in NSEZ Exemptions from the payment of entry tax, trade tax and stamp duty makes NSEZ the 35 most sought after destination for setting up the units. Due to these exemption units in NSEZ export more to reap the benefits given by the state government at the fullest. 36 Section V Policy Analysis A Critical Approach 37Without doing the cost benefit analysis when a government establishes any economic policy which affects all the people in a direct or indirect way, it becomes important to raise som e basic questions like whether the benefits of that policy would outweigh their costs, is it good for the country in the long run? SEZ policy has been enacted by parliament but ironically no cost benefit analysis was done before announcing it. As discussed earlier the prime objective of this scheme is to boost the export sector and a package of fiscal and non fiscal incentives are being offered to developers and units to achieve the objectives.One way to assess the rationale for having SEZ policy is to investigate what would have been the performance of the economy in the absence of this policy. Anticipating this would not be an tripping task. Export performance of our country has been abysmal and there was a need to take some measures but according to me, preferential treatment should be the last measure and firstly any government should root out all those evils which are hindering the growth of export or for that matter whole economy.Rigid tariff regime highly regulated labour ma rket, centralized governance are some major problems which obstruct the growth of the export sector and this also makes the investment climate unfriendly. Deregulating the labour market and decentralizing the whole process should have been the first anteriority of the government and making the whole country hassle free for investments and business opportunities would automatically boost the export sector. Establishing SEZs is a very complex task encompassing a wide range of policy, legal and regulatory issues.SEZ policy was praised initially as a well drafted policy but inter ministerial conflicts, heavy economic costs and recent cases of migration from DTA to SEZs actually highlights the finesse spots of its designers. 5. 1 Heavy Economic Costs According to SEZ Act 2005, the firms are eligible for getting an extended Income Tax holiday for 15 years. Firms and developers have also been exempted from excise duty and custom duty. A loss of Rs. 39,704 crore of duty under export promo tion schemes during 2003-04 (CAG Report, 2004) which accounts for 82% of customs duty collected that year gives an idea of how costly this whole affair is.According to an internal assessment by the 38 Finance Ministry, the Government may have to forego about Rs 90,000 crore in direct and indirect taxes over the next four years on account of SEZs. 5. 2 embodied Welfare Very recently an article written by M. Bhardwaj appeared in Business Standard which alleges that Haryana government acquired over 1700 acres of land from farmers at Rs. 300 crore and offered this land to Reliance for 360 crore in the take a leak of SEZ while it was estimated that land was worth 5,000 crore. This is a perfect example of corporate welfare.Its unbowed that the value of land goes up drastically when market anticipates the introduction of any such scheme into that particular area but taking away the land from farmers at a much lower rate cant be justified. According to the SEZ Act any state government can set up SEZ jointly with private sector. This can be called public private participation. Theoretically everything sounds good, so where is the problem. Now if any company has link with top politicians of a state, the possibility of favoured treatment cant be ruled out. Even in terms of incentives state can also offer a package of tax benefits.Imagine a situation where two firms which produces the same good, are operating from two different states and one of them gets an edge over another just because of preferential treatment by the state. Would you call it a fair competition? SEZ act enables the state government to offer land at a much lower rate and to provide extra incentives and what do we expect that the state governments would not misuse these powers? 5. 3 Migration from DTA to SEZ To avail all the facilities and incentives offered by SEZs, small firms and even big companies are shifting to these privileged enclaves.SEZs have encouraged internal migration. One of the prime o bjectives of this policy was to attract FDI but the share of FDI in investments in SEZs is very low and due to inward migration very fewer new manufacturing units have been set up in the SEZs. 5. 4 substantial Estate Play 39 State governments are offering land to SEZ developers at concessional rates. For real estate developers SEZ policy has come as an opportunity to grab the scarce land near cities. Ideally SEZs should be established in remote areas but due to lack of infrastructure the submerging of SEZs are near by cities.According to SEZ Act at to the lowest degree 25% of the total acquired area would be processing area and in the remaining area developers can build commercial complexes, malls, hospitals, hotels, educational institutions etcetera Minimum area requirement for setting up SEZ is 1000 hectares and according to SEZ guidelines developers get a tax break even on all the buildings on the 750 hectares. On going real estate boom has shifted the think from export to building residential complexes and commercial malls. Developers can always make huge profit from selling or leasing the buildings and this is where real estate play comes in.Land deals and compensation payments are known to be hot-beds of corruption so no wonder if farmers are being displaced from their place in the name of SEZ without giving adequate compensation. Conclusion Considering the need to boost export sector and attract FDI, government announced this policy but ironically the performance of SEZs in exports highlights the failure. When government should liberalize overall policy, government has decided to focus on one or two areas. The real attraction of SEZs is the tax holiday promised and to grow the business in hassle free environment firms are just shifting to these privileged enclaves.To compete with China a package of fiscal and non fiscal incentives are being given but this has been overlooked that tax benefits in chinas SEZ were available only to foreign investmen ts, not exports. All exemptions and fiscal incentives should go in the process of overall tax and labour reform. Giving preferential treatment to any particular area in the name of exports cant be justified in the democratic set up. Even if government wants to continue with this policy, only developers should be given the tax benefits if they are developing any SEZ in the remote area.The whole process is still centralized and government should minimize their role. 40 References 1. Official Website of SEZ. http// sezindia. nic. in. 2006, accessed on 23 whitethorn 2006 2. Ministry of Commerce. 2005. yearbook Report2004-05. 3. CII report. 2005. Special Economic Zone Engines for Growth. Available at http//www. ciionline. org/Northern/regionalfocus/836/images/sez. pdf. Accessed on 23 June 2006. 4. Bhardwaj, M. 2006. No review, RIL mega SEZ signing next week, says Haryana CM. June 13. Business Standard 5. Aggarwal, A. 2004. Export Processing Zones in india Analysis of the ExportPerforma nce. ICRIER Working paper No. 148. 6. Jain, S. 2006. Killing SEZs, making a killing. 22 May. Business Standard 7. Tondon Committee (1982) The Committee on Free trade Zones and 100% Export oriented Units, Apponited by the Ministry of Commerce, Government of India, September 1981. 8. IIPM Editorial. 2006. The Great Indian obsession. 9. The Hindu. 2005. Lok Sabha passes SEZ Bill. 11 May 10. Suchitra, M. 2006. The high cost of easy foreign exchange. 9 March. India Together 41 Annexure-1 (List of all the fiscal and non-fiscal benefits given to SEZ developers and units) i. 00% income tax exemption for a auction head off of five years and an additional 50% tax exemption for two years thereafter ii. 100% FDI in the manufacturing sector permitted through automatic route, barring a few sectors. iii. External commercial borrowings by SEZ units upto US$500 million in a year without any maturity restrictions through recognized banking channels. iv. Facility to retain 100% foreign exchange rece ipts in Exchange Earners Foreign Currency Account. v. 100% FDI permitted to SEZ franchisee in providing basic telephone services in SEZs. vi. vii. No cap on foreign investment for small scale sector reserved items.Exemption from industrial licensing requirements for items reserved for the SSI sector. viii. No import licence requirements 42 ix. Exemption from customs duties on import of capital goods, raw materials, consumables, spares etc x. Exemption from Central Excise duties on procurement of capital goods, raw materials, consumable spares etc. , from the domestic market. xi. xii. xiii. No routine examinations by Customs for export and import cargo. Facility to realize and repatriate export proceeds within 12 months. Profits allowed to be repatriated without any dividend-balancing requirement. xiv. xv.Job work on behalf of domestic exporters for direct export allowed. Subcontracting both domestic and international is permitted this facility is available to jewellery units as well . xvi. Exemption from Central Sales Tax and Service Tax Facilities to set up off-shore banking units in SEZs. Exemption from duties on import /procurement of goods for the development, operation and maintenance of SEZ. Income tax exemption for a block of 10 years in 15 years. Exemption from Service Tax 43 FDI to develop townships within SEZs with residential, educational, health care and recreational facilities permitted on a case-to-case basis.