Quality of the Business Environment: SEZs Versus DTA

  • Arpita Mukherjee
  • Parthapratim Pal
  • Saubhik Deb
  • Subhobrota Ray
  • Tanu M. Goyal
Chapter
Part of the India Studies in Business and Economics book series (ISBE)

Abstract

SEZs should be instrumental in creating a conducive and quality business environment. The success of SEZs would depend on their ability to attract units that are internationally competitive, which in turn would depend on the quality of infrastructure and the overall business environment that the SEZ provides. This chapter, based on a primary survey, assesses the quality of the business environment in SEZs and compares it with that in the DTA. The chapter makes broad recommendations to improve the quality of the business environment in SEZs for the long-term viability of SEZs in India.

5.1 Introduction

The SEZ policy envisaged SEZs as an instrument to promote exports that had otherwise been hampered due to the multiplicity of controls and clearances and the absence of world-class infrastructure. The SEZ policy aimed at reducing bureaucratic hassles and procedural complexities of doing business by simplifying and streaming procedures through the creation of a single-window clearance system through the office of the DC. It also offered a variety of incentives including direct tax benefits, duty-free import of goods, duty-free procurement from the DTA, exemption from export duties, central sales tax, service tax, state sales tax and other levies imposed by the respective state governments. To attract private investment in the development of SEZs, developers were offered income tax waivers on income derived from the business of developing SEZs for a 10 year block in 15 years along with customs and excise duty waivers for infrastructure development inside SEZs. It was expected that the single-window clearance system along with private participation in the creation of SEZ infrastructure would foster a conducive business environment that would attract domestic and foreign units to locate in these zones.

In India, there are a multitude of controls and barriers faced by private businesses and there is an overall lack of quality infrastructure. India was ranked at a dismal 142 out of 189 countries in 2015 in the World Bank’s ‘Ease of Doing Business’ rankings (Table 5.1). On various dimensions of ease of doing business such as starting a business, dealing with construction permits, getting electricity, registering property, trading across borders and enforcing contracts, India ranked unfavourably when compared to countries such as the Republic of Korea, Taiwan, Thailand, Vietnam, Brazil, Russia, China and South Africa. In fact, across all these dimensions of doing business, India ranked below 100 countries, and for dealing with construction permits and in enforcing contracts, India ranked among the bottom 10 countries. Similarly, for the infrastructure component1 of the Global Competitiveness Index ranking of the World Economic Forum for 2014–15, India ranked 87 out of 144 countries and worse than all its above-mentioned comparators. So the importance of creating an enabling environment for business in India cannot be overemphasised. This is especially true for SEZs where the exclusive focus is on boosting competitiveness and promoting exports. Since exports from SEZs to the DTA are subject to all the regular duties, SEZs in India would mostly attract businesses that are more export-oriented. Since the quality of the business environment is an important determinant of export competitiveness, the success of SEZs in India will crucially depend on the ability of the SEZs to provide a superior business environment.
Table 5.1

Doing business 2015: India versus comparator countries

Economy

Brazil

China

India

Korea, Rep

Russia

South Africa

Taiwan

Thailand

Vietnam

Ease of doing business rank

120

90

142

5

62

43

19

26

78

Starting a business

Rank

167

128

158

17

34

61

15

75

125

Procedures (number)

11.6

11

11.9

3

4.4

5

3

4

10

Time (days)

83.6

31.4

28.4

4

11.2

19

10

27.5

34

Dealing with construction permits

Rank

174

179

184

12

156

32

11

6

22

Procedures (number)

18.2

22

25.4

10

19.8

16

10

7

10

Time (days)

426.1

244.3

185.9

29

238.4

48

93

113

114

Getting electricity

Rank

19

124

137

1

143

158

2

12

135

Procedures (number)

4

5.5

7

3

5.6

5

3

4

6

Time (days)

53.3

143.2

105.7

18

179.1

226

24

35

115

Registering property

Rank

138

37

121

79

12

97

40

28

33

Procedures (number)

13.6

4

7

7

3

7

3

2

4

Time (days)

31.7

19.4

47

7

19

23

4

2

57

Trading across borders

Rank

123

98

126

3

155

100

32

36

75

Documents for export (number)

6

8

7

3

9

5

5

5

5

Time to export (days)

13.4

21

17.1

8

21.1

16

10

14

21

Documents for import (number)

8

5

10

3

10

6

6

5

8

Time to import (days)

17

24

21.1

7

19.4

21

10

13

21

Enforcing contracts

Rank

118

35

186

4

14

46

93

25

47

Time (days)

731

452.8

1,420.00

230

267

600

510

440

400

Cost (% of claim)

16.5

16.2

39.6

10.3

14.9

33.2

17.7

15

29

Source World Bank data, http://www.doingbusiness.org (accessed on 15 July 2015)

There is a large volume of literature dealing with India’s experience with SEZs that mainly focus on performance, factors determining success and failures and shortcomings with the existing policy framework. There is also enough discussion on controversial issues related to land grabbing and revenue forgone, among others. However, to the best of our knowledge, there is hardly any literature on issues related to the quality of the business environment in SEZs in India and a comparison with the business environment in DTA. This chapter attempts to bridge this gap by providing a critical assessment of the business environment in SEZs and their implications on SEZ policy. Since it is not always possible to measure objectively the quality of infrastructure or the efficacy of the policy regime and even when it is possible, no secondary data exists; hence, the discussion in this chapter is based on a survey of operational units in SEZs. In addition, operational units in the DTA were surveyed to act as a benchmark to assess the quality of the business environment in SEZs.

5.2 Sampling Framework

A primary survey of operational SEZ units was carried out in seven states, namely Andhra Pradesh,2 Gujarat, Haryana, Maharashtra, Tamil Nadu, Uttar Pradesh and West Bengal. These states together account for 141 of the 192 operational SEZs in the country. 145 operational units were surveyed from 32 SEZs, representing 23 % of all operational SEZs in these states. These 145 units represent nine industries, namely electronics hardware, energy, engineering, food processing, gems and jewellery, IT/ITeS, leather/footwear, pharmaceuticals/chemicals/biotechnology and textiles/apparel/wool.

The SEZs surveyed include 6 of the 7 central government SEZs, 10 of the 12 state government/private SEZs developed prior to the SEZ Act 2005 and 22 SEZs notified under the SEZ Act 2005. Of the 32 SEZs, 19 are single-sector and 13 are multi-sector SEZs (Table 5.2).
Table 5.2

Characteristics of SEZs in the surveyed units

State

Number of SEZs

Total operational SEZs in state

Percentage of operational SEZs

Single-sector

Multi-sector

Before SEZ act

After SEZ act

Central Govt. SEZ

Private SEZ

Andhra Pradesh

7

42

17

4

3

1

6

1

5

Gujarat

6

18

33

2

4

2

4

1

5

Haryana

1

6

17

1

0

0

1

0

1

Maharashtra

7

25

28

5

2

1

6

1

3

Tamil Nadu

6

34

18

4

2

3

3

1

4

Uttar Pradesh

3

10

30

2

1

1

2

1

2

West Bengal

2

6

33

1

1

2

0

1

0

Total

32

141

23

19

13

10

22

6

20

In addition, 159 DTA units were surveyed from the selected states and industries for relevant comparisons. The distribution of the surveyed units in both the SEZ and DTA by state and industry is shown in Figs. 5.1 and 5.2.
Fig. 5.1

Distribution of surveyed units by state. Source Based on primary survey

Fig. 5.2

Distribution of surveyed units by industry. Source Based on primary survey

Before moving forward, it is important to keep in mind the limitations of the survey framework. The 32 SEZs as well as the units within the SEZ were not chosen using stratified random sampling techniques. Due to a limited survey budget, very often a cluster of SEZs close to major cities was chosen to minimise costs. Therefore, there is a possible bias that the SEZs surveyed are likely to have access to better quality infrastructure compared to SEZs that are located far from cities. Developers of the SEZs were sometimes instrumental in facilitating the unit surveys and might have suggested the best performing units. Hence, the results of the survey cannot be generalised. However, the survey does provide some meaningful insights.

Moreover, the number of responses varies across questions. Responses are relatively lower for hard data questions related to the performance of units and SEZs, whereas for ratings-based performance assessment questions, the number of responses is high. So, for analysis purposes, an appropriate level of aggregation, i.e. whether the results would be reported at the state level or the industry level, has been chosen based on the number of responses.

5.3 Motivations for Locating in SEZs

SEZs are supposed to offer a wide variety of facilities and incentives to units located in the SEZ, as mentioned earlier. In order to assess the importance of various factors in a unit’s decision to locate in SEZs, the units were asked to rate each of these factors on a six-point scale from 1 to 6, with 1 indicating the least important and 6 indicating the most important. On average, all these factors were rated above 4, suggesting that they played important roles in the units’ decision to locate in the SEZs (Table 5.3). However, fiscal incentives, hassle-free business environment, single-window clearance and ease of export were rated very highly as motivating factors.
Table 5.3

Motivating factors for locating in SEZs

Industry

Electronics hardware

Energy

Engineering

Food processing

Gems and jewellery

IT/ITeS

Leather/footwear

Pharma/chem/biotech

Textiles apparel/wool

Overall

Ease of export

5.5

6.0

5.1

5.5

5.6

4.5

5.3

5.5

5.6

5.3

Port access

5.0

6.0

4.4

5.0

5.2

3.5

4.5

5.0

4.9

4.6

Hassle-free business

6.0

5.0

5.2

5.8

5.3

5.0

5.3

5.2

5.3

5.2

Single window

5.0

4.7

5.3

5.5

5.5

5.1

4.0

5.1

5.1

5.1

Income tax holiday

5.0

6.0

5.2

5.4

5.3

5.7

5.8

5.4

5.6

5.5

Duty-free import

5.3

5.7

5.4

5.7

5.7

4.8

5.4

5.2

5.7

5.4

Duty-free DTA procurement

5.0

6.0

5.2

5.2

5.2

4.8

5.3

5.4

5.5

5.2

VAT rebate

5.5

5.7

4.8

5.0

5.4

4.5

5.6

4.9

5.2

5.0

SEZ infrastructure

5.0

5.7

4.8

5.0

4.7

5.1

4.7

4.7

4.5

4.8

Infrastructure outside SEZ

4.5

6.0

4.3

4.7

4.2

4.3

3.4

4.2

4.0

4.2

Labour availability

5.0

6.0

4.6

5.0

5.1

4.1

4.5

4.8

4.2

4.6

Source Based on primary survey

Interestingly, for IT/ITeS industries, income tax holiday was the most important factor in their decision to locate in SEZs. Since the import intensity of IT/ITeS industries is generally low, other fiscal incentives such as duty-free import or DTA procurement were rated lower compared to the other industries. Moreover, since their export is not port-based, ease of export and port access are relatively less important for the IT/ITeS industries (Fig. 5.3).
Fig. 5.3

Motivating factors: IT/ITeS versus other industries. Source Based on primary survey

Based on the survey results, it may be concluded that all incentives given under the SEZ policy are important, but with variations across industries.

5.4 Quality of Business Environment

The quality of the business environment is one of the important determinants of export competitiveness. The success of SEZs in India will crucially depend on the ability of SEZs to provide a superior business environment. This section provides an assessment of the quality of the enabling environment, i.e. the extent to which SEZs have been successful in providing a hassle-free business environment and the regulatory and policy framework and its actual implementation that would help in materialising the benefits and attracting the right kind of investments in the zones.

5.4.1 Quality of Business Infrastructure

Both the SEZ and the DTA units were asked to rate the importance and quality of business infrastructure, such as electricity, water, telephone and Internet services, waste disposal system, sanitation system, street lighting, storage and warehousing facilities and security. The ratings are on a six-point scale, with 1 indicating least important/low quality and 6 indicating most important/high quality. All infrastructure has been rated as very important by both the SEZ and DTA units (Fig. 5.4). However, the importance of infrastructure has been consistently rated higher by SEZ units than by the DTA units.
Fig. 5.4

Importance of infrastructure: SEZs versus DTA. Source Based on primary survey

A t-test for equality of means3 was done to identify whether there was a significant difference in ratings between the SEZ and DTA units. The results indicate that the average importance assigned to the various infrastructure components is higher for SEZ units than for DTA units and the difference is significant at the 5 % level.

The quality of infrastructure within SEZs has been mostly rated as satisfactory (a rating of above 3). But at the same time, the quality of different infrastructure components within SEZs has been rated mostly below 5 across states and industries. When quality ratings are compared between SEZ and DTA units, in all states with the exception of Uttar Pradesh the DTA units have rated the quality of infrastructure higher than the SEZ units have (Table 5.4). This holds true for almost all the infrastructure components across the six states. In states such as Gujarat and Tamil Nadu where the overall infrastructure quality is generally good, the differences in infrastructure quality ratings between SEZ and DTA units are especially striking. For example, in Gujarat, the overall infrastructure quality, defined as the average of all infrastructure component quality ratings, has been rated as 5.3 by the DTA units and as 4.1 by the SEZ units.
Table 5.4

Quality of infrastructure in states: SEZs versus DTA

Infrastructure

Andhra Pradesh

Gujarat

Maharashtra

Tamil Nadu

Uttar Pradesh

West Bengal

DTA

SEZ

DTA

SEZ

DTA

SEZ

DTA

SEZ

DTA

SEZ

DTA

SEZ

Electricity

4.0

3.3

6.0

4.8

5.3

3.6

3.6

2.5

3.3

4.1

5.6

5.4

Water

5.0

4.9

6.0

4.2

5.0

3.9

3.7

3.4

3.3

4.2

4.6

4.1

Telephone

5.5

4.9

6.0

3.3

5.7

4.4

5.4

4.0

4.4

5.4

5.7

4.5

Internet

5.0

4.6

5.6

4.3

5.7

4.3

5.3

4.1

4.2

5.2

4.9

4.0

Waste disposal

4.5

4.0

5.3

4.1

4.1

3.8

4.7

4.3

3.5

4.5

3.6

2.3

Sanitation system

4.2

4.3

5.0

3.9

4.0

3.9

4.7

4.2

3.5

4.4

3.6

3.7

Street lighting

4.0

4.7

5.4

3.9

4.4

3.9

4.9

4.2

3.5

4.6

4.6

4.7

Storage/warehousing Facilities

4.5

4.2

4.0

3.9

4.3

4.1

5.1

3.9

3.6

4.8

3.6

2.9

Security

4.9

4.6

4.6

4.4

4.5

4.3

5.2

3.8

3.6

5.2

4.9

4.4

Overall

4.6

4.4

5.3

4.1

4.8

4.0

4.7

3.8

3.6

4.7

4.5

4.0

Source Based on primary survey

A similar picture emerges when the infrastructure quality ratings between SEZ and DTA units are compared across industries (Fig. 5.5). With the exception of the IT/ITeS and leather and footwear industries where the overall infrastructure quality ratings are very similar between SEZ and DTA units, in all other industries the SEZ units have rated the quality of infrastructure poorer than their DTA counterparts.
Fig. 5.5

Overall quality of infrastructure by industry. Source Based on primary survey

However, these differences in ratings between SEZ and DTA units do not necessarily imply that the quality of infrastructure is inferior within the SEZs. The demand for quality infrastructure is very high among the SEZ units, and the relatively low-quality ratings merely reflect the disconnect between industry expectations and the actual infrastructure provided within SEZs. It is possible that the ratings might be coloured by other factors such as the introduction of DDT and MAT in the recent past or general disappointment with the operation and administration of SEZs. But what can be safely concluded is that the quality of business infrastructure is not world-class or significantly different from what firms get in a DTA and there is significant scope for improvement.

When infrastructure quality is compared across different types of SEZs, some interesting results come out (Table 5.5). There is hardly any statistically significant difference in perceived quality of infrastructure between central government SEZs and other SEZs. Similarly, there is not much difference in infrastructure quality ratings between private and public or joint venture SEZs. However, single-sector SEZs get significantly higher infrastructure quality ratings than multi-sector SEZs. Single-sector SEZ developers can tailor the infrastructure based on industry requirements, which is not possible in multi-sector SEZs because of the diverse industries and their diverse requirements. This perhaps explains the higher ratings for single-sector SEZs. Moreover, a multi-product SEZ requires huge investment, and it may take time to develop infrastructure. Most of these SEZs are new.
Table 5.5

Quality of infrastructure in SEZs by type of SEZ

Infrastructure

Non-Central Govt. SEZ

Central Govt. SEZ

Public/JV SEZ

Private SEZ

Multi-sector SEZ

Single-sector SEZ

All SEZs

Electricity

3.9

3.8

3.8

3.9

3.7

4.3

3.8

Water

4.3

4.1

4.0

4.4

4.0

4.6

4.1

Telephone

4.2

4.7

4.6

4.3

4.3

4.9

4.5

Internet

4.5

4.5

4.4

4.6

4.3

5.0

4.5

Waste disposal

4.3

3.7

3.6

4.5

3.7

4.7

3.9

Roads within SEZ

4.6

4.6

4.5

4.7

4.4

5.1

4.6

Sanitation system

4.2

4.1

4.0

4.3

4.0

4.4

4.1

Street lighting

4.4

4.4

4.3

4.5

4.2

4.9

4.4

Storage/warehousing facilities

4.2

3.9

3.9

4.3

3.8

4.7

4.0

Security

4.4

4.5

4.5

4.4

4.3

4.8

4.5

Source Based on primary survey Note Numbers in bold indicate significant difference in ratings at the 5 % level

5.4.2 Ease of Access to Social Infrastructure

Ease of access to social infrastructure in SEZs is important for attracting and retaining skilled workers and, hence, can be crucial for the long-term viability of special economic zones. SEZs may be located in areas that may not have access to social infrastructure. Since SEZs have non-processing areas, they can create the social infrastructure, such as housing, health care and schools, or they can be located in a place that has access to social infrastructure. SEZ and DTA units were asked to rate the ease of access to social infrastructure for their employees in selected areas—housing facilities, healthcare facilities, access to schools and colleges, recreation facilities, commuting to the workplace, availability of banks/ATMs and availability of grocery stores/supermarkets. The survey results indicate that the ease of access to social infrastructure is better in DTA than in SEZs (Table 5.6). Across all social infrastructure dimensions, DTA units rated their access to social infrastructure higher than their SEZ counterparts. Except for Uttar Pradesh, a similar difference is visible in all states. However, though inferior to DTA units, ease of access to social infrastructure was rated satisfactorily by the SEZ units in all states except West Bengal and Gujarat. The poor ratings for SEZ units in West Bengal are mostly driven by the units in Falta SEZ (the central government SEZ), which is around 55 km from the heart of the city, and the units complained about poor connectivity, long commute times and overall lack of social infrastructure. The difference in ratings between SEZ and DTA units is especially striking in Gujarat. Based on the ratings, Gujarat has the best social infrastructure in the DTA region compared to the other states. Hence, the expectations of industries located in Gujarat are higher, which might explain the lower ratings.
Table 5.6

Ease of access to social infrastructure by state: DTA versus SEZs

Social Infrastructure

Andhra Pradesh

Gujarat

Maharashtra

Tamil Nadu

Uttar Pradesh

West Bengal

Overall

DTA

SEZ

DTA

SEZ

DTA

SEZ

DTA

SEZ

DTA

SEZ

DTA

SEZ

DTA

SEZ

Housing

3.9

4.2

6.0

3.5

4.2

3.7

4.3

4.0

3.5

3.7

4.6

2.7

4.4

3.7

Healthcare

4.2

3.4

6.0

3.0

4.7

3.7

4.9

3.8

3.9

3.7

4.5

2.7

4.7

3.4

Schools/colleges

4.7

3.7

6.0

2.6

4.6

4.1

4.6

3.7

3.7

3.5

4.6

2.5

4.7

3.4

Recreation

4.7

3.6

6.0

1.9

4.3

4.0

3.6

3.7

3.4

3.1

4.3

1.8

4.4

3.1

Groceries/supermarket

4.8

3.7

6.0

2.8

4.4

3.8

4.5

4.0

3.7

3.8

4.8

2.4

4.7

3.5

Bank/ATM

5.0

4.8

6.0

3.8

5.0

4.2

4.7

4.3

3.8

4.7

5.1

3.7

5.0

4.3

Commuting

4.2

3.8

6.0

2.6

4.1

4.0

4.2

4.2

3.2

3.8

4.4

2.4

4.4

3.6

Overall

4.5

3.9

6.0

2.9

4.5

3.9

4.4

3.9

3.6

3.7

4.6

2.6

4.6

3.6

Source Based on primary survey

When ease of access ratings are compared across industries, a similar picture emerges (Fig. 5.6). With the exception of IT/ITeS industries, access to social infrastructure has been rated more favourably by DTA units than by SEZ units for all industries. For IT/ITeS industries, both DTA and SEZ units have similar ratings for access to social infrastructure. Like their DTA counterparts, most of the IT/ITeS SEZs are located inside cities. Moreover, most IT/ITeS units that are exporting may either be in an SEZ or be in a Software Technology Park. This might be an explanation for the similarity of ratings.
Fig. 5.6

Ease of access to social infrastructure by industry. Source Based on primary survey

Further, we did not find any significant difference in ratings between private SEZs and other SEZs. The overall access to social infrastructure ratings is slightly higher for public and joint venture SEZs compared to private SEZs—3.7 and 3.5, respectively. These ratings corroborate the fact that very little infrastructure development has taken place in the non-processing areas. Since most of the private SEZs are relatively small, they do not have the necessary scale to invest in social infrastructure development in the non-processing areas. Also, they think that if they invest in the social infrastructure, it may not be fully utilised unless the SEZ is able to attract a large number of units. The SEZ Rules 2006 state that infrastructure facilities in the non-processing areas are to be utilised only as support services to the SEZs. If the developer invests in facilities such as hospitals, housing and hotels, it may be commercially non-viable unless they have enough clientele. The survey participants pointed out that developers should have the option to allow the use of social/non-processing facilities in the SEZs by non-SEZ clients on payment of duty.

5.4.3 Ease of Doing Business

One important factor for the success of SEZs is the creation of a hassle-free business environment for starting and doing business in SEZs. Instead of dealing with multiple government departments and ministries that can be time-consuming and transaction-heavy, the single-window clearance system is supposed to streamline all procedures by creating a single window, i.e. the DC’s office that would act as a nodal agency to facilitate all registration and licences required for starting and doing business in SEZs.

Our survey results indicate that the single-window system is working quite satisfactorily. Table 5.7 shows the average number of days it takes to obtain various licences and clearances as reported by the surveyed SEZ units and their quartile distribution. The average time taken for employee state insurance and employee provident fund registration, factory registration, import and export licences, permanent account number (PAN) and tax deduction account number (TAN) registration, service tax registration and value added tax (VAT) and central sales tax registration has been reported to be less than 30 days. Among all the procedures, obtaining environment clearances takes the longest—an average of 77 days. However, the higher average number of days for environment clearance is mainly due to the fact that some industries are in the ‘red’ category, i.e. the most polluting industries have to go through a thorough environmental impact assessment. For ‘green’ and ‘orange’ category industries, the average time to obtain environment clearances is 19 days and the median time is 13 days.
Table 5.7

Ease of starting business in SEZs: days needed for procedures

Procedures

Mean

Quartile 1

Median

Quartile 3

Approval from the DC

52

30

35

45

Employee state insurance and employee provident fund registration

22

15

21

30

Environment clearance

77

13

25

135

Excise registration

34

20

21

31

Factory registration

28

13

18

30

Import and export licence

17

11

16

20

PAN and TAN registration

12

10

12

15

Service tax registration

15

7

13

25

VAT and central sales tax registration

17

12

15

22

Source Based on primary survey

The relative efficiency of the single-window system is evident when we compare the time taken for approvals, licences and registration between the SEZ and the DTA units. Compared to DTA units, SEZ units reported less time for different procedures (Fig. 5.7). The average time taken to obtain import and export licences and service tax registration is substantially lower for SEZ units compared to DTA units. However, the time taken for VAT and central sales tax registration is very similar for both SEZ and DTA units.
Fig. 5.7

Days needed for licence/registration/clearance: SEZs versus DTA. Source Based on primary survey

SEZ units were asked to rate on a six-point scale the efficiency of the single-window system as well as the quality of assistance received from the DC’s office and developers. SEZ units have rated assistance from the DC’s office and the developer highly (Table 5.8). Half the respondents have rated them at 5 and above, and 25 % of the respondents have given them the highest rating of 6. On average, the single-window clearance system has been rated satisfactorily. However, 25 % of the respondents have rated them as unsatisfactory. This might sound puzzling since the DC’s office is an integral part of the single-window system and their respective ratings are supposed to be highly correlated. However, as noted by many of the surveyed units, one of the main problems with the single-window system is that even though the system is single window, many of the procedures come under the purview of the state governments. So, there are bureaucratic delays even after the best efforts of the DC’s office. Some of the units, especially the small-scale ones, found it difficult to keep up with all the notifications from the Department of Commerce. They felt that simple and clear guidelines need to be provided to the units regarding various procedures, and some of these units would prefer a booklet. Many units reported problems/delays in getting service tax and VAT refunds. Some units suggested that customs procedures need to be further streamlined by integrating Customs IceGate (which is the e-commerce portal of the Central Board of Excise and Customs) with SEZ online, which would reduce delays in getting the necessary customs clearances.
Table 5.8

Satisfaction with single-window system, DC assistance and developer assistance

Statistics

Single-window rating

DC assistance rating

Developer assistance rating

Mean

4.1

4.6

4.6

Quartile 1

3.0

4.0

4.0

Median

4.0

5.0

5.0

Quartile 3

5.0

6.0

6.0

Number of observations

140

141

118

Source Based on primary survey

5.5 Conclusion and the Way Forward

The primary survey of units shows that while units rate ease of doing business as an important criterion to locate in an SEZ, units in SEZs may not have the best business environment or the social infrastructure. The survey also shows that the single-window clearance system as envisaged in the SEZ policy is not working. There are several policy implications of these findings. First, measures should be taken by the Department of Commerce so that SEZs can provide a single-window clearance system. Some of these measures include linking the SEZ online with Customs IceGate and working closely with state government to have a state government representative in the DC’s office to facilitate clearances, among others. Second, private investors do not invest in state-of-the-art infrastructure until they have a viable business model. Therefore, what is the right model for promoting SEZs in the country? While China developed a small number of large SEZs (in terms of land area covered), India has promoted a large number of small SEZs. Small SEZs do not have economies of scale. It might not be financially viable for a small SEZ to have its own effluent treatment plant or captive power generation plant. Similarly, the costs of import, export and domestic procurement might be higher due to lower volumes. These might reduce the international competitiveness of exports from these SEZs.

Moreover, having too many small SEZs increases the investment requirement for providing external infrastructure to these SEZs. In a developing country that lacks resources to provide quality infrastructure across the country, one rationale for promoting SEZs is to create enclaves where best quality infrastructure can be provided. The current pattern of SEZ development undermines this logic, affecting the quality of infrastructure available to these SEZs. A better option would be to take a cluster development approach where several single-sector SEZs could be promoted in a cluster. Such an approach would enable these SEZs to reap the benefits of economies of agglomeration and also would lead to the development of local production networks. This is also the thought behind the creation of the National Manufacturing Investment Zones. These zones can then become nodes around economic corridors, which can offer good quality logistics infrastructure.

In our survey, the quality of infrastructure inside single-sector SEZs was rated favourably compared with multi-sector SEZs. This is because the developer could tailor the infrastructure based on the requirements of the industry. Moreover, a cluster approach would make it possible to develop common infrastructure, such as effluent treatment plants, non-processing areas with business centres and training facilities that otherwise would not be feasible in a small SEZ because of lack of scale. Another advantage of having single-sector SEZs in clusters is the development of ancillary industries around these clusters. Having local production networks not only lowers the costs of procurement of inputs for the SEZs, but also creates the necessary backward linkage for the economy to reap the dynamic benefits of SEZs. Moreover, when SEZs create additional economic activity in the state and generate employment outside the SEZs, it can generate buy-in from the states.

Location is an important factor from the perspective of the units operational in SEZs. Not only do they need good infrastructure inside SEZs, but they also need good infrastructure outside SEZs, access and good connectivity to ports (except IT/ITeS and some other services SEZs), logistics facilities and the availability of skilled manpower. For the workforce, access to social infrastructure is critical. Since SEZ developers cannot invest in social infrastructure (because of lack of scale) or infrastructure outside SEZs, they need to develop SEZs in strategic locations keeping in mind these demand-side factors.

This raises the question of whether SEZs be developed in backward areas? Department of Revenue (2014) highlighted that SEZs have not developed in backward areas, and therefore, they have not promoted balanced regional development. Globally, SEZs tend to locate in proximity to ports and other supporting infrastructure. Ease of doing business is a key factor determining the location of an SEZ. Our study found that units give a high rating to both good outside zone connectivity and world-class infrastructure inside the zone. Moreover, it is difficult to get high-skilled workforce in backward areas, and therefore, industries are not interested in locating in such areas. Backward areas are ‘backward’ because of lack of infrastructure. Unless the government invests in developing the infrastructure, including social infrastructure (as in the case of China), it is unlikely that the industries will be interested in locating SEZs in these areas.

Many of the SEZs are failing to take off because they are unable to attract units. Since there might be significant social and private costs involved in developing these SEZs, a less risky option would be to promote hybrid SEZs that have both an SEZ and a DTA. Two of the most successful hybrid SEZs in India—Mahindra World City and Sri City Private Limited—have been successful in attracting units both in their SEZs and in their DTA. These SEZs are extending their world-class SEZ infrastructure facilities to their DTA zones, making them attractive destinations for domestic and foreign industries. The existence of a DTA also provides developers with the necessary scale to invest in social infrastructure.

To conclude, the SEZ policy used a multi-pronged approach to attract business in SEZs. It provided incentives to SEZ developers in the form of tax holidays on income from SEZ development, and duty-free import and procurement from the DTA to stimulate private investment for the development of SEZs. It was expected that SEZ developers would create world-class infrastructure inside these SEZs. The SEZ policy introduced the single-window system that would simplify and streamline the procedures for doing business in SEZs. These, along with tax holidays and duty-free import and procurement of domestic goods for the units, were supposed to create an enabling environment that would attract domestic and foreign business to locate in SEZs.

One of the major findings from the surveys is that the infrastructure inside SEZs though satisfactory is not world-class. It is worth contemplating whether the SEZ policy did enough to ensure that world-class infrastructure gets created. The SEZ Rules provided an elaborate definition of ‘infrastructure’ but did not specify the kind of minimum critical infrastructure that needs to be developed inside SEZs and also did not put in place the necessary monitoring mechanism to ensure that quality infrastructure is provided inside SEZs. Instead, it was left to the developers.

From the developers’ perspective, their income is derived from the units through payments for lease/rentals and services. Since lease/rental payments are a major part of the developers’ income, the most rational option for a developer when developing an SEZ would be to get land in or near cities that would generate high future income for them. That is one of the reasons why many SEZs were developed near cities. For example, according to a newspaper report, Unitech Limited signed a deal with the multinational human resource firm, Aon Hewitt Associates India Private Limited, to lease space at one of its IT SEZs in Gurugram that could potentially earn revenue of Rs. 800 crore over a 15-year period.4 Therefore, developing land got more priority than developing infrastructure and for good reason. According to some of the developers interviewed, commercial banks consider SEZ development a risky investment and, hence, either charge a high interest rate or deny the loan. So, in many cases, the developers had to invest their own money. With uncertainty regarding the number of units that would eventually locate in their SEZs and their own money at stake, many of the private developers did not have any economic rationale to make huge investments upfront on infrastructure development. This is probably one reason why we found so little development in the non-processing areas in many of the private SEZs that we visited.

Developing world-class infrastructure inside SEZs should be a priority. The government needs to take a proactive role to ensure that SEZs are developed to attract the best enterprises from India and foreign countries. Badly developed SEZs will only attract substandard enterprises.

One of the selling points of our SEZs, i.e. MAT exemption, has already been withdrawn. Further, incentives given to the SEZs can be actionable under the WTO in the near future (see Chapter 8). Then, the selling points of SEZs have to be a hassle-free business environment and world-class infrastructure. So, improving the business environment is essential to maintain the attractiveness of SEZs. There is an urgent need to streamline the single-window systems, which would require broader consensus with the state governments and various line ministries.

Footnotes

  1. 1.

    This includes quality of roads, railways, ports, electricity supply and telephone connectivity. It covers both inside zone infrastructure and outside zone infrastructure.

  2. 2.

    The survey was conducted during January 2014 to July 2014. Andhra Pradesh was divided into Telangana and Andhra Pradesh in June 2014. All reference made to Andhra Pradesh in this book refers to undivided Andhra Pradesh.

  3. 3.

    The t-test is used for testing differences between two means. A t-test for independent groups is useful when the same variable has been measured in two independent groups and the researcher wants to know whether the difference between group means is statistically significant.

  4. 4.

    ‘Unitech inks Rs. 800 crore leasing deal with Aon Hewitt’ by Bindu D. Menon and Thomas K. Thomas, The Hindu Business Line, 23 September 2013, New Delhi. http://www.thehindubusinessline.com/companies/unitech-inks-rs-800crore-leasing-deal-with-aon-hewitt/article5160968.ece (accessed on 19 October 2015).

Copyright information

© Indian Council for Research on International Economic Relations (ICRIER) 2016

Authors and Affiliations

  • Arpita Mukherjee
    • 1
  • Parthapratim Pal
    • 2
  • Saubhik Deb
    • 3
  • Subhobrota Ray
    • 4
  • Tanu M. Goyal
    • 1
  1. 1.Indian Council for Research on International Economic RelationsNew DelhiIndia
  2. 2.Indian Institute of ManagementKolkataIndia
  3. 3.Economist and Independent ConsultantKolkataIndia
  4. 4.Economist and Independent ConsultantGurugramIndia

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