Can replacement of SEZ Act with new law give wings to Make in India initiative?

When Finance Minister Nirmala Sitharaman in her budget speech said: "The Special Economic Zone (SEZ) Act will be replaced with a new legislation that will enable the states to become partners in 'Development of Enterprise and Service Hubs," I was taken back to the days when the SEZ Act, legislated in 2005, was expected to be the harbinger of an export-oriented manufacturing revolution in India.

Almost 17 years later, it appears that the dream has only gone bust. More so, given the rise in imports from China over the years, from $60.41 billion in 2014-15 to $78.88 billion during the period Jan-Nov 2021, shows how the promise of 'Make in India' has fallen short of expectations. At a time when geopolitical tensions run high, the surge in imports from China is only a reflection of the inability of domestic manufacturing to have risen to the challenge. In any case, the share of manufacturing in GDP has come down from 17 per cent in 2014 to 14 per cent in 2021, and consequently employment in the manufacturing sector has dropped from 5.1-crore in 2016 to 2.73-crore in 2021.

But let's first talk of the SEZs. After all, the swiftness with which SEZs were ushered in, and that too with so much of fanfare and hype, it becomes necessary to get an idea of what triggered a bad policy design. Public memory being short let me take you down the memory lane to the period when the SEZ Act was being formulated, and you will know of the kind of super-excitement that prevailed in the policy and industrial circles at that time. Such was the enthusiasm that farmers resistance to massive land acquisition that was taking place in many parts of the country were simply glossed over, considered to be no more than a pain that had to be endured to achieve exemplary economic growth.

Ten years after the SEZ Act had been passed, in one of my articles – Why easy land is no guarantee of industrial growth – published on India Together web portal (Feb 9, 2015), this is how I began: "I still remember vividly. Several years back, the former Prime Minister Manmohan Singh was presiding over an annual corporate awards function organized by a business newspaper. After Manmohan Singh's address, the floor was set open for some questions from the audience.

Industrialist Anand Mahindra got up and asked a question to the Prime Minister on what a young graduate from an Indian Institute of Management (IIM) could look up to, in the not-so-attractive business environment that prevailed then. To this, Singh gave an answer, the gist of which was: 'We are determined to set up exclusive export zones providing required incentive and support for the young entrepreneurs. The Special Economic Zone (SEZ) is an idea whose time has come'."

Obviously when the Prime Minister backs a project, policy makers will leave no stone upturned to deliver it. Astonishing it was to see the extent of freebies that were thrown in to attract investors. Economists normally quibble when social spending increases in a budget, but the kind of exemptions, and incentives including duty drawbacks and state levies that were provided to SEZs would even make the erstwhile princely estates squirm. As I then wrote, besides income tax holidays for 10 years, there was complete tax exemption from excise duty, custom duty, sales tax, octroi, mandi tax and turnover tax. In addition, these SEZs were exempt from tax on income from export profits for the first five years of operation.

A performance audit by the Comptroller and Auditor General (CAG) of the SEZs under operation between the period 2007 and 2013 was revealing to say the least. While no heads rolled, the harsh criticism that CAG spelled out should have led to some accountability being fixed. After all, with 45,635.63 hectares of land notified for SEZs, and with assurance of 24x7 supply of electricity and water, what happened to the 'idea for which the time had come' as the then Prime Minister had visualised? So much so that even the Economic Times had in an editorial admitted that SEZs had failed to take-off.

Subsequently, the World Trade Organisation (WTO) in a dispute settlement resolution in October 2019 ruled against the nature of prohibited subsidies that the SEZs were providing, violating the provisions of the Agreement on Subsidies and Countervailing Measures. It only shows how liberally subsidies were showered on the SEZs, which the policy makers at that time thought would incentivise the export-oriented manufacturing sector. This also tells us how the subsidy structure is designed. While the subsidies for the poor are considered to be doles, subsidies and giveaways for the corporate are called incentives for growth and act as a smokescreen to hide the huge support.

Although, estimates show that about 20 per cent of India's merchandise exports now come from SEZs, it is also known that about 20,000 hectares of land and a lot of built-up area lies unutilised. To make the SEZs WTO-compliant, and to ensure that the infrastructure is not wasted, a committee under Baba Kalyani had in 2019 suggested that these export zones be converted into employment and economic enclaves. The proposed makeover of SEZs therefore, as Finance Minister said the other day, is intended to 'cover all large existing and new industrial enclaves to optimally utilise available infrastructure and enhance competitiveness of exports'.

The problem with our economic thinking is that it is generally based on experiences abroad. Even when the SEZ policy was being formulated, I remember a lot of lobbying happened citing the example of a handful of exclusive export zones built by China. But once the SEZs came into existence, and failed to meet the expectations, I didn't hear about the Chinese experience again. Our policy makers are invariably influenced by what is happening abroad, and often lack the understanding of how to build on the inherent strengths that exist within the country. The three contentious farm laws, which were later rolled back, is another example. Market reforms in agriculture have failed to prop up farm incomes in the rich developed countries, and yet we somehow believe (and wrongly so) that the same free markets will work wonder for Indian farmers.

Similarly, since 49.8 per cent of India's exports come from the MSME sector, I think the better way forward would have been to instead provide incentives to the micro, small and medium enterprises. These MSMEs need appropriate policy attention, more than the Emergency Credit Line Guaranteeing Scheme, in short announcing Rs 2.73-lakh crore credit to them to offset the damage resulting from the pandemic. Strange, while MSMEs are offered credit, incentives and stimulus packages are given to big companies.

This has to change. We must realise that the MSMEs have the potential and the capability, and with appropriate support, incentives, and safeguards can be easily catapulted into an engine of growth.

(The author is a noted food policy analyst and an expert on issues related to the agriculture sector. He writes on food, agriculture and hunger)