The great Indian SEZ rush

Special Economic Zones are in the news for one reason or the other almost everyday.

Almost all the top business houses are trying to establish SEZs -- mostly captive SEZs -- where their new plants will come up. Quite a few sector-specific SEZs are being established, especially in the Engineering and IT sectors.

The proposals and approvals for multi-product SEZs are relatively few and those promoted by reputed builders are fewer. Yet, they have received more attention for the non-processing area that they will develop.

The proliferation of SEZs has worried the finance ministry and the Leftists. While the finance ministry is worried about possible revenue losses, the Leftists have raised the issue of displacement of farmers.

The commerce ministry has met these concerns by releasing its own estimates of revenue gain, the area that SEZs will actually take up, world class infrastructure that the SEZ developers will provide and economic activity that SEZs will generate.

The commerce ministry has also reacted by increasing the minimum processing area limit to 35 per cent, stipulated minimum net worth for promoters (Rs 50 crore -- Rs 500 million) for sector specific SEZ and Rs 250 crore (Rs 2.50 billion) for multi-product SEZ) and minimum investment limit (Rs 250 crore) for sector specific SEZ and Rs 1,000 crore (Rs 10 billion) for multi-product SEZ), and specifying maximum number of houses (7,500 for sector specific SEZ and 25,000 for multi-product SEZ), maximum number of hospital beds (25 for sector specific SEZ and 100 for multi-product SEZ) and maximum number of hotel rooms (100 for sector specific SEZ and 250 for multi-product SEZ).

The commerce ministry has also said that the new guidelines covering issues such as processing areas, infrastructure, norms for approval of the master plan as also the town planning will be issued very soon.

For IT sector SEZ, the commerce ministry is willing to let directors of software technology parks act as development commissioners, but has refused to let the control over such SEZs slip away to the IT and Communications ministry.

The Reserve Bank of India governor, meanwhile, has equated establishment of SEZs to real estate development activity and has asked banks not to treat SEZ development as infrastructure projects but as real estate projects and limit their exposures and make provisions accordingly.

Meanwhile, the rush for setting up SEZ continues. Strangely, the existing SEZs are busy inviting entrepreneurs to set up shop there. The rush for setting up SEZs is not yet quite matched by any hurry by entrepreneurs for setting up units there.

Undoubtedly, most of the captive SEZ set up by big business houses and IT SEZs are nothing but diversion of investment that would have taken place anyway in the Domestic Tariff Area (DTA), barring exceptions.

It is the income tax exemption, import/procurement of construction materials at lower cost and sales tax/CST exemption on inputs that have tilted the balance in favour of setting up new plants as SEZ units.

The others are waiting to see what kind of infrastructure the SEZ developers will provide and at what price they will make them available. Another interesting point for them is the road map for customs duty reductions and goods and services tax.

It is not likely that too many entrepreneurs will make a haste to move into SEZ till at least the next Budget.

• SEZs: A ready reckoner