New law, old problems

Industrial hubs won't alter SEZ weaknesses

Despite the sustained underwhelming performance of special economic zones (SEZs) over the past half century, the government has chosen to double down on the concept by expanding the ambit of these zones under a new law to be presented in the upcoming monsoon session of Parliament. The Development Enterprise and Services Hub (DESH) Bill, 2022, which replaces the existing SEZ law of 2005, is an ambitious piece of legislation that aims to create mega-manufacturing and investment hubs that will facilitate both export-oriented and domestic investment, playing the dual role of domestic tariff area and SEZ. The development hubs will come up under regional boards in states and Union Territories and, according to available information, could be set up by the Centre, the states, jointly by the two, or by a manufacturer of goods and services.

The decentralised, single-window system is designed to address the practical problems of myriad approvals that entrepreneurs typically face when setting up an establishment in India, including exit options, and making SEZs more compliant with World Trade Organization rules. It is a distillation of proposals by an expert committee headed by Bharat Forge Chairman Baba Kalyani. The impending legislation may be a well-meaning attempt to address some of the critical constraints that have held back SEZs in India from realising their full potential. But the real test of its success will lie in addressing the key issues that have been the bane of any large industrial project, let alone SEZs, in the past. Stringent land acquisition laws, which add significantly to project cost and red tape, have been one reason that the size of the SEZs that came up under the 2005 Act was too small to create the kind of massive economies of scale that yielded the famous “China Price”, which has made that country a global force within a quarter century.

The Narendra Modi government attempted to dilute this land law via an Ordinance in its first term but it was allowed to lapse in the face of considerable political and popular opposition. It is unclear how the DESH Bill will address this contentious issue. Beyond that, policy uncertainty remains the other weakness that is outside the scope of the new law. The withdrawal of tax concessions is one issue that causes industry to retreat precipitously from such zones, just as it has done from “backward area” zones where state governments offered time-bound incentives. Beyond taxation, the larger issue of a predictable and stable policy and regulatory environment from both the Centre and states would play a far bigger role in ensuring investment than any special hubs.

Practices such as pandering to powerful domestic lobbies by raising tariffs or ignoring the results of international arbitration or chopping and changing economic policy are not conducive to creating the kind of environment in which entrepreneurs would be ready to sink significant capital and take risks. Most of all, the provisions of such basics as secure infrastructure, from logistics links and uninterrupted power, remain perennial question marks. All these issues demand national-level solutions that would improve the overall business environment. Focusing on these aspects would prove more constructive and conducive to investment than concentrating on the hub/SEZ concept, which patently has not worked for India.