By Somesh Arora, Commissioner of Customs (Rtd)
THE party time for Special Economic Zones may well be over before it has actually begun. With that will be over the worry lines for Revenue Department, which was spending sleepless nights over purported loss of revenue because of more than 500 approved zones and more than 250 already notified. However, not all this may augur well for Ministry of Commerce, which will have to consider bail out packages and compromises on its disciplinary powers.
The changed outlook has been so sudden and abrupt that it has taken even the staunchest supporters of the concept by surprise. Till last December (talking of YOY basis) or even until September this year, there were prospective Developers seen in the corridors of Udyog Bhavan making a beeline with their requests for approval/notificati on of SEZs. Now, given a choice even some of the biggest and leading players would like to wriggle out of the projects, provided they are allowed to exit honourably with chunks of land allowed to be denotified. The dilemma before the MOC will be to reverse its stand in the wake of denotification debate in the context of Goa, where it took a stand in the courts that under SEZ Act, there is no power to denotify. If it sticks to its guns, the MOC may well soon have a mini cadre of Central Government Administrators rather than Development Commissioners, which it was contemplating. This is because delays/defaults in implementing the already notified projects will be so rampant in the days to come that resort to Section 10 of SEZ Act, 2005 ( which allows administrator to be appointed may become the only option), if Board of Approvals decides not to live with delays at least till the next property boom. Grim situation, indeed. It actually is. Not to be carried away with the figures of rising exports, more approvals, more employment generation in SEZ arena. Reality is the that leading developers today are laying off employees by hundreds, have abandoned their land acquisition plans (even if not abandoning the projects altogether) and are only interested in salvaging their land banks because of the pressure from state governments/ industrial authorities who helped acquisitions on the condition of reversion of land in case of projects failing to come up. There are hardly any takers for the projects as units are finding the prices of land and fixed assets quoted by the developers astronomically high. With every passing day, developers are incurring interest costs on the capital employed by them in acquiring land banks, which for them will be hard to recover. In addition, further deployment of capital in developing projects is not found feasible even by cash rich developers in the face of lack of demand.
The crown of becoming laughing stock, of course, should go to the local level politicians in the rural areas some of whom were so shrewd that having sold their own land holdings at good prices to prospective developers were resisting attempts by other farmers to do so. Their promises of getting even better prices to the farmers and staring agitations for the same have all gone flat. Now they are scared to face their own constituency. In Haryana, where more than 30 SEZs were supposed to come in and around Gurgoan only, the situation at social levels has become interesting. We have there one class of farmers who made the killing by selling lands in areas like Jhajjar, bought fertile land elsewhere and were still left with enough to afford Ford Endeavors, Toyatas and a likes, as also good wine and quality Tobacco for their HUKKAS. We also have in the same rural areas their next-door neighbors who did not sell their land expecting better prices to come their way and are managing to do with their bullock-carts, desi-daru and shared hukka. Of course, their generation next telling sarcastically to their Bapus as to what can happen to them if they do not listen to them but to the local level politicians.
The runner up crown, undoubtedly, should go to some of the so called leading developers who announced projects as big as developing two Chandigarhs by engaging foreign consultants for their world class projects which would have dwarfed even if not put to shame the likes of Le Corbusier. But are today considering alternates of developing low cost housing for weaker sections to salvage their land banks. Who should be the second runner-up, it is left for everyone to guess.
However, objectively speaking, can authorities approving projects falling with in the defined parameters be blamed for indiscriminately going in for numbers. The answer is clear NO, because Constitution has provided everyone a right to do business and profession. In addition, no applicant can be refused on the ground that there stand too many applications already approved. It is for the people in the business to contemplate as to how much competition from others is going to be there and whether the same will remain viable in the long run. Nevertheless, ape mentality is hard to overcome. Even after years of end of License Raj, there are many with the mindset to think that every permission/ approval from Ministry of Commerce is a goldmine. A privilege, which they are going to have at the cost of others. On its part, MOC clearly works under defined guidelines and for it to refuse permission to anyone who falls in the parameters is legally not possible. It is, therefore, for the business people to make an informed choice rather than go with the herd mentality. MOC surely, now has a role in doing effective monitoring.
There are many reasons, which can now be thought of, since the hindsight wisdom is available, for the SEZ concept to develop snags even at the take off stage.
For once, too many seekers were jumping the bandwagon without going into the fine print of the policy and experience. With the earlier seven Government SEZ’s, taking 15 to 20 years ( with the sole exception of SEEPZ) to register sizeable occupancies despite the best location advantage, low cost of land acquisition, full state support available in terms of power, electricity etc., for developers to think that they had a magic stick to turn their projects in to goldmines overnight was rather far fetched.
Secondly, without the support of the State Governments in acquisition of land, the fixed cost of acquisition and development for some of the developers was turning out to be so high in the face of competition, interse, that the price demanded by them from prospective units was affordable only for those units who wanted floor space area advantage on the land. This meant targeting sectors like Information Technology, Pharma or BPOs. While I.T. everyone was heavily betting on, it was owing to prospect of substitution demand emanating from shifting of units from IT parks in the face of likelihood of sunset clause under Income Tax Act being enforced. However, that has not happened due to extension of sunset clause. New demand is hard to come by in the face of recession. Even otherwise, the demand would have been garnered by IT SEZs run by IT giants like Infosys rather than an upstart developer getting substantial share of it.
For FDI in manufacturing sector to come in is also difficult. As given a choice, a well informed foreign manufacturer would rather set up shop in an SEZ in China where advantages in terms of low cost of land , higher productivity, better technical know how are available. In fact, in some of the areas the cost of land acquisition has gone so high for developers that the rates at which it will be sold to manufacturing units will form 13% to 15% of their total cost of project as against 4%to 5%, which is the norm. This high cost of fixed assets is likely to eat into whatever tax benefits may come in the way of these units in terms of direct and indirect tax incentives. Therefore, Revenue Department should not unduly worry.
Lastly, on comparison with EOU scheme, one finds that because of the flexibility it offers, it has turned out to be a better option than the SEZ unit is. Both are more or less equitable in terms of fiscal and other incentives. But, purely from the business prospective, it is advantage EOU. One can set up unit wherever land is found in economical parcels, it can be located close to point of labour or raw material availability, and it offers environment to work in a much more private space away from the probing eyes of your competitors in an SEZ. (DRI may not be too happy with the last observation) . Further, In Indian context socially speaking, barring the Big Industrial Enterprise, there is a tendency to have Industrial growth close to own native place of promoters. This is because of the strong familial ties, which require presence in and around their own area. Therefore, even when such entrepreneurs venture into exports, they prefer EOU scheme.
However, not all this means that SEZ story is going to be a sob story only. There is hope for smaller SEZs located on the periphery of big towns, where eventually IT and BPO sector is going to flourish, once the recession is over. Even for the bigger SEZs, which have managed to keep their cost of acquisition of land on the lower end, the hope holds on. Besides, in the time of crisis some out of the hat thinking on the part of Central and State Governments may be required especially in service sectors. For instance medical tourism, spiritual tourism, education are sunrise sectors. Investments in these can be encouraged. Permission to open casinos in SEZs to allow people to do gaming against foreign exchange can be permitted by states like Haryana, Maharashtra etc. which have got approved some of the highest number of SEZs and are now riddled with the prospect of , the leading developers shutting shop. As far as developers are concerned, from now on, it is going to be the survival of the fittest and only those will eventually profit who have courage, conviction and cash pots –all in abundance.