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Contents
The Rationale Benefits and costs: Theoretical approaches Net Benefits: A quantitative assessment Benefits and costs : Qualitative analysis Conclusion
Why SEZs?
Two approaches
SEZs offer relaxed tax and custom regime and offset anti-export bias in import substituting regime
Offer good I climate in export oriented regime tax incentives : Modern Infrastructure Good Governance Location-specific advantages
Promotion of EOI
Domestic producers:
1. 2. Independent producers Insertion into GVCs (Small firms) Seller driven Buyer driven
Clustering
Direct
1. 2. 3. 4. 5. 6. Foreign exchange Employment generation Employment for Females Skill Upgradation FDI Tech. transfers and creation 1. 2. 3. 4.
Indirect
Indirect employment Investment Skill spillovers Technology spillovers
1. Ind. growth 2. Productive Diversification 3. Human development 4. Revenue generation for govt.
Quantifiable : static :Foreign Ex earnings, Net value addition, I, employ, Dynamic : Income generation
Costs
Quantifiable: 1. SEZ development cost : Not incurred by the government 2. Revenue loss (Tax and other investment incentives) 3. Operational costs
Other welfare costs : Non quantifiable Resource transfer from the domestic sector to SEZs with no net addition to economic activities ( relocation and substitution effect) Land Acquisition without adequate compensation Impoverishment of farmers Loss of agricultural land Misuse of land for real estate Regional disparities Unequal treatment
Net benefits
NNB = (EXP+DTA+TAXGAIN)-IMP-RM-ELEC-ADMIN-TAX LOSS Where NNB: Net benefits from SEZs EXP : foreign exchange earnings and DTA : Domestic Tariff area Sales TAXGAIN: Taxes collected on DTA sales EXP+DTA+TAXGAIN: Total benefits IMP : imports ELEC : the cost of public utilities (electricity, power and fuel) RM : the cost of locally purchased inputs TAX Direct and indirect ( only for SEZ developers) tax foregone ADMIN: Administrative costs IMP+ELEC+RM+TAX+ADMIN : total cost
Fundamental assumptions:
The proposed SEZ investment in each of the three years will be Rs. 100,000 cr. The actual investment in each year will follow a three years time frame. In other words, realized investment in the first year will be 50% of the proposed investment in that year say, t. In the second (t+1) year, 30% and in the third (t+2) year , 20% of the investment proposed in the year t will be realized. Of the total investment, 7% is projected to occur in the FTWZ /power SEZs in each year. The remaining will be invested in other zones. The infrastructure development expenditure in new SEZs will be 60% of the total investment in the first year. In the second and the third year it will be 30% and 10%. The remaining investment termed productive investment is divided between the IT sector and other sectors in the proportion of 44% in the first year, 42% in the second year and 40% in the third year. We required several other conduct and performance related ratios which are based on the CMIE database of the export oriented sector. Data was extracted for the relevant industries.
Total infra
2007
2008 2009 Total
Cumulative exports
30222.68
98535.43 174526.5 303284.6
Net benefits
In direct employment
28479.8
40452.2 43536.0 112468
2178.7
3094.6 3330.5 8603.8
7601.623
34009.09 64547.84 106158.6
290026.7
578771.7 828331.5 1697130
8.58 11.81
15.20325 42.51136
14.24 12.16
64.54784 46.16
2007 64385.58 1287.712 4225.652 7532.868 5150.847 16902.61 30131.47 443.5265 1435.528 2520.337 6882.085 22563.79 40184.68 321927 1056413 1883217
2008
211282.6 2009 376643.4
Regional development Contribution to employment, Income generation Ancilliary industrial activities Most notable : SEEPZ, CSEZ, Kandla, Noida At the sector level significant contribution to technology transfer, spill overs and development of Local entrepreneureship : Gems and Jewellery, Electronics, SW, rubber gloves
Technology Transfers, creation. And Spillovers limited Skill formation : Industrial Training, improvement in skill, Better prospects outside. Remunerative employment for people with low Education level: : comparable wages and Better working conditions, satisfaction levels are higher Living conditions improved after joining the EPZs
Current status
SEZ Nokia, Tamil Nadu: Status commenced commercial production Inaugurated by the PM Commences operation in November 2006 Units being set up Investment US$ 100 Million Employment (No.) Direct : 2800 Indirect : 10000 35000* by May 2007 3000* (2500 training) under
Motorola and Foxconn, Tamilnadu Apache SEZ (Adidas Group), Andhra Pradesh Divvys Labs, Andhra Pradesh Rajiv Gandhi Technology Park, Chandigarh Brandix Apparel SEZ, Andhra Pradesh
*Expected
$200 million*
Construction started
$50 million*
25,000*
Commenced operations
NA
Construction started
NA
of
$100 million*
Recent patterns
1. Formal approvals : 234 as on May 1, 2007 2. AP : 45, Maharashtra : 47, Tamilnadu : 25, Karnataka : 29, Haryana and Gujrat : 19 each, Kerala 10, UP 8. WB: 7,MP : 4 3. IT : 133, Electronic HW and SW : 16; 10 multi products; 12 Pharmaceuticals, 9 bio tech, over 11 textile
High tech industries that have come up due to SEZs: Electronics Manufacturing Services, Semiconductor, Aerospace,
Other industries benefited : Biotech, Pharmaceutical, automobile, textile.
Conclusion
SEZs can act as catalyst to industrial growth provided they are implemented effectively. Effective implementation of a policy that aims at giving shock to the economy requires mobilization of public opinion. People often approach such an issue initially with strong, emotionally laden feelings and opinions. It must be shaped and formed so that important decisions are taken without creating instability in the society. Four things are important : The government must slow down the process of giving approvals. This is important not only for social or political reasons but also due to economic realities. Legal institutions related to land acquisition ( including land acquisition modalities, compensation package and rehabilitation package) must be addressed. Introduce a performance based exit policy for SEZ developers Restore STPI and EOUs benefits Finally, the policy should be treated as transitory.