While the prolonged argument on attractiveness of manufacturing SEZs continues, the skewed nature of functional SEZs would help in making an unprejudiced judgement on their potential. Merely 30% of the operational SEZs under the
SEZ Act of 2005 are manufacturing (including multi-product) in nature. Nevertheless, manufacturing SEZ exports contributed to more than 75% of SEZ exports in 2009, exhibiting sectoral performance and latent demand. Increasing cost competitiveness of Indian companies and access to diversified labour pools coupled with onus on foreign trade indicate long-term potential in manufacturing SEZs.
So far, India has been reckoned as the world’s back office and its growth has been attributed to the services boom. The second stage of development will be investment-led, for which manufacturing SEZs are expected to be vital. Exports from such SEZs have posted 22% growth over the last two years, in line with growth in overall merchandise exports. Plausible explanations are high-quality infrastructure, competitive costing mechanisms and incentives awarded.
However, current figures are still less than the manifold growth that manufacturing SEZs can help achieve.
India’s total FDI inflows into such SEZs (approximately Rs 5,000 crore) accounts for only 1% of total FDI inflows, vis-à-vis 20% in China. That being said, it would be unfair to dismiss their potential on the account that they are minuscule as compared to their Chinese counterparts.
Evolution of SEZs in India indicates that sector emphasis showed a marked deviation from manufacturing to services during the IT boom, which coincided with the SEZ Act formulation. In lieu of the new stipulations and minimal 10 hectare (ha) land requirement for IT SEZs, there was a land rush, evident from the fact that more than 60% of the notified SEZs belong to IT/ITeS. Only a handful of operational manufacturing SEZs under the Act, posted exports, given their long gestation periods. Therefore, this will help to address the roadblocks and identify success factors resulting in boosting investors’ confidence and stakeholders’ participation in such set-ups.
If we look at the challenges faced by this sector, a major concern is the requirement of large contiguous land parcels measuring more than 100 ha, vis-à-vis 10 ha required for IT SEZs. Aggregation of large contiguous tracts of land has been the foremost reason for the failure of a majority of the manufacturing SEZs. State industrial corporations can play a kaward it to companies through a bidding process. Even from a regulatory standpoint, various stakeholders regard laws draconian and vague, hence treading cautiously.
Another recent concern is the uncertainty on treatment of SEZs under the DTC. Tax treatment is the main differentiating factor between SEZs and industrial parks, and it is imperative that SEZs remain out of the ambit of DTC. Resolving DTC implication on SEZs would directly impact the demand from current and potential unit holders.
Investors are also wary of the long investment cycles associated with a manufacturing SEZ. It is here that the configuration assumes significance: location and product. So far, only 38% of proposed investments are actually deployed (ex-FDI) in notified SEZs. Unlike for IT SEZs, land often is not the biggest cost component for manufacturing SEZs, which is mandatory because of large set-ups with massive capital costs required for plant and machinery. Considering their scale, central and state governments need to provide support for critical infrastructure like power and water. Location suitability is also often understated with a common misunderstanding that availability of desired extent of land would suffice for these zones. Conversely, setting them up invariably behoves a rigorous feasibility study on project viability based on multiple success drivers.
Industries such as food processing, pharma, automotives, engineering, biotech and textiles have achieved at least 15-20% growth over past few years. There are many non-IT developments demanding large-scale economic enclaves addressing international demand for various products.
Land related subsidies alone would not suffice in sustaining the SEZ momentum. Since manufacturing goods are tangible unlike services, connectivity and accessibility to sourcing hubs and transport nodes have direct impact on operating margins and returns. Supply chain linkages and proximity to effective labour pools play an important role in the unit holders’ decision-making. In addition, state-specific SEZ policies should further be delineated to provide impetus to industrial investments. Many private players are eliciting their interest in manufacturing SEZs and expediting the setting up process by having tie-ups with state governments for external support or equity participation.
It is felt that in case of manufacturing SEZs, government-driven incentives would benefit the regions in attracting long-term investment percolation and employment generation. In addition to this, strategic location assessment with product fit will help in allaying the investors’ fears associated with gestation period and margins. Even in a downturn year like 2009, manufacturing and trading have contributed close to 50% of SEZ exports demonstrating the viability of manufacturing SEZs as long-term economic instruments.
Source : Financial Express