Saturday, 2 May 2015

Sliding SEZ exports

Special Economic Zones (SEZs), that have over the years seen an investment of Rs 3.22 lakh crore and provide employment to 14 lakh people, are going through tough times. During the first nine months of FY15, SEZs—set up as enclaves that provide a duty-free environment for exports—have seen exports tumble 7.61% to Rs 3.48 lakh crore. The slide is a fall-out of two unilateral decisions taken during the FY12 Union Budget—imposing an 18.5% minimum alternate tax (MAT) and levying a dividend distribution tax (DDT) of 10%. As if the lack of fiscal incentives was not enough, free trade agreements led to eliminating or reducing duties, eroding the benefits of SEZs further.

But, SEZs seem to have found a saviour in parliamentarian Chandan Mitra. A parliamentary standing committee headed by Mitra has asked the department of commerce to raise the issue with the finance ministry. It has sought restoration of tax benefits to SEZs. That needs to be fixed quickly for exports to rise. It could be one of the key elements to drive the Foreign Trade Policy  (2015-20) that is looking to raise exports (both merchandise and service) by $100 billion annually till they touch $900 billion by FY20. Removing both MAT and DDT would provide an added impetus to exports in this season. But, SEZs still have a long way to go as far as exports are concerned. Despite all the fanfare, SEZs still account for just 24% of merchandise exports. It is time for SEZs to raise their performance and contribute a larger chunk to the country’s merchandise exports.

While there are 352 notified SEZs, as of December 2014, only 168 were operational. The fear is that, like in many other areas, the non-operational SEZs are turning into real estate players. That should be stopped by all means, since their primary aim was to create a manufacturing and service ecosystem. One way suggested by the committee is to do an annual audit of land with SEZs as well as a performance audit. That should ensure that SEZs stick to the knitting. A better performance by the SEZs in general will be critical to meeting the stiff export targets set out by the trade policy in the future.

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