SOCIAL HARMONY AND ECONOMIC DEVELOPMENT THROUGH SEZ Dr. T. Sivalingam, Ph.D., Reader in Commerce, Presidency College, Chennai-5 E. Bhaskaran. Research Scholar, Presidency College, Chennai-5 ABSTRACT The Government of India had announced a Special Economic Zone Scheme in April 2000 with a view to provide an internationally competitive environment for exports. The Special Economic Zones Act, 2005 is implemented to provide for the establishment, development and management of the SEZ for the promotion of exports and for matters connected therewith or incidental thereto. The objectives of The SEZ Rules, 2006 include making available goods and services free of taxes and duties supported by integrated infrastructure for export production, expeditious and single window approval mechanism and a package of incentives to attract foreign and domestic investments for promoting export-led growth. Like Mahindra Industrial Park (MIP), Chennai, which is an Auto Ancillary (AA) SEZ, there is an urgent need for Social Harmony and good governance in Ambattur Industrial Estate (AIE), Chennai manufacturing Auto Ancillary, to reduce unemployment and poverty. The objective is (1) to study on physical infrastructure facilities of MIP (2) to study on physical infrastructure facilities of AIE (3) To conduct comparative benchmark study on physical infrastructure of MIP & AIE. The methodology adopted is collecting primary data using random sampling technique from 25 Micro, Small, Medium and Large Enterprises in MIP & AIE using 5-point scale and secondary data from Associations like MIP & CAAIIUC. The null hypotheses tested are (1) the proportion of enterprises in MIP agreeing for better physical infrastructure facilities is not significant. (2) The proportion of enterprises in AIE agreeing for better physical infrastructure facilities is not significant. (3) There is no significance increase in physical infrastructure facilities of MIP & AIE. 1
To conclude, by weighted average method and test for proportion the physical infrastructure facilities of MIP is world class standard whereas in case of AIE there needs lot of improvement in roads & culverts, street lighting, storm water drainage, sewerage treatment, solid waste management, landscaping power, telecom, water and logistics. The Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 is implemented for promotion, development and enhancement of competitiveness of MSMEs for better infrastructure facilities and cluster development of such enterprises with a view to strengthening backward and forward linkages. According to The SEZ Act, 2005 & The MSMED Act, 2006 GOI may declare AIE as SEZ so that the enterprises will have social harmony & good governance which leads to economic development by way of FDI inflow & enterprises improvement thereby reducing the political forces, unemployment and poverty. 1. INTRODUCTION Policy of Govt. of Tamilnadu 1.1 Preamble The Government of India have announced the concept of Special Economic Zones (SEZs) in the year 2000 through a revision in the EXIM Policy 1997-2002 with a view to provide an internationally competitive and hassle free environment for export production. These SEZs are virtually deemed to be a foreign territory within the country free from all the rules and regulations governing the import and export. The SEZs are specifically treated as duty free enclaves for the purpose of industrial tariff, service and trade operations with exemption from customs duties and more a liberal regime on levies, foreign investment and other transactions. The domestic regulations, restrictions and infrastructure inadequacies are sought to be removed for creating an investor and industry friendly environment. As per the Government of India guidelines, SEZs can be developed in the public, private or joint sectors or by the State Governments or their agencies. They are expected to 2
promote establishment of large, self-contained areas supported by world-class infrastructure oriented towards export production. Exploring the full potential of the concept of SEZs would bring large dividends to the State in terms of economic and industrial development and the generation of new employment opportunities. The State Agency viz., Tamil Nadu Industrial Development Corporation Limited has taken the lead to set up a SEZ at Nanguneri in Tirunveli district. In the context of Government of India guidelines for the establishment of SEZs, the Government of Tamil Nadu has decided to adopt the following policy that will be applicable to all the SEZs in the State of Tamil Nadu, subject to the framework of SEZs determined by the Government of India from time to time. 1.2 Legislation Support A central legislation is being brought out for (i) Delineation of area limits (ii) Constitution of a Board for Approval (iii) Establishment of a Zonal Development Board and (iv) a Zone Approval committee for the SEZ. 1.3 Environment The activities / projects, which fall within the ambit of Environment Impact Assessment Notification, 1994 will have to obtain environment clearance from the Ministry of Environment and Forests, Government of India. Applications of Individual Industrial units for issue of consent, No Objection Certificate etc., under Water Act and Air Act will be processed by the official of the Pollution Control Board at the appropriate level nominated for the purpose who will arrange to give these clearances for green and orange categories of industrial units within 15 days from the date of receipt of application and in the case of Red Category industries, TNPCB will arrange to clear the applications on a top priority basis. 3
1.4 Water Supply The SEZ Developer in conjunction with the Government agencies concerned will ensure the provision of adequate water supply within the SEZ, subject to water availability clearance from the authorities concerned. 1.5 Power 1.5.1 Tamil Nadu Electricity Board (TNEB) will ensure quality power supply to the SEZ units without any power cut etc. 1.5.2 Any Independent Power Plant (IPP) supplying power to the units in the Zone will be permitted. TNEB or any joint venture permitted by TNEB or the State Government would setup an exclusive power plant for the SEZ and in the alternative, if the State Government is not coming forward to set up an IPP, it would be permitted to be set up exclusively for the sale of power to the units in the SEZ only. 1.5.3 Not withstanding (1) and (2) above, individual units within SEZ will be permitted to put up their own captive power plants (CPP) not exceeding 25 MW for their own captive use exclusively or 110% of their captive use. 1.5.4 Whenever SEZ or SEZ units purchase power from TNEB or where stand-by charges is involved, the requisite charges will be paid by them to TNEB on mutually agreed basis. 1.5.5 SEZs are free to fix tariff for its customers for the power to be produced from their own CPP. 1.5.6 If TNEB s Transmission and Distribution lines are used for wheeling of power, standard charges as applicable will be paid. 1.5.7 The Collective Captive Power Plant capacity should be equal to the anticipated demand as far as possible. 4
1.6 Sales tax, duties, local taxes and levies 1.6.1 Developers of SEZs and industrial units and other establishments within the SEZs will be exempted from all local taxes and levies including Sales Tax, Turnover Tax, VAT, Purchase Tax, Mandi Tax, Octroi, Electricity Cess, or any other kind of Cess or any other levy of the State Government in respect of all transactions made between units / establishments within the SEZs, and in respect of the supply of goods and services from the Domestic Tariff Area to units / establishments in SEZs. However, applicable Sales Tax and VAT as and when introduced, shall be leviable on goods manufactured in SEZs but sold locally. 1.6.2 SEZ developer and units in SEZs would be exempt from taxes levied by the local bodies, as they would be self contained units and would be responsible for the maintenance of services within the Zone. 1.6.3 All Industrial units and their expansions to be located in the SEZs will be exempted from payment of Stamp Duty and Registration Charges towards land transactions. 1.7 Labour Regulations 1.7.1 labour laws / rules will be examined and steps taken to simplify the same. 1.7.2 The Reporting System will be simplified. The number of forms / registers, filing of returns and their periodicity shall be totally revamped. Inspection requirement shall be kept at minimum level. New concepts like Self Certification, Flexi Time, Working Time for Women etc., would be introduced. 1.7.3 All Industrial units in the SEZs will be declared as Public Utility Service under the provision of the Industrial Dispute Act, 1947. 5
1.8 Single Window Clearance Single Window Clearance would be provided to the SEZ units. Tamil Nadu Guidance and Export Promotion Bureau viz., GUIDANCE, may provide necessary assistance in this regard only for such clearances, which will be outside the ambit of the Single Window Clearance. 1.9 Provision of other services Facilities such as Police Station, Fire Services, Post Offices etc., may be provided in the SEZ, but cost to be borne by the SEZ Developer / Promoter. 1.10 Law and Order. The State Government shall make appropriate and exclusive arrangements within the SEZ for the maintenance of law and order, and the control of crime. The Indian laws will be applicable to all members of the SEZ in all matters of adjudication or disputes. 1.11 Committee for review and development of SEZs. The State Government shall constitute a Committee of Secretaries and other concerned officials including representatives of SEZ Developers / Industrial Township Area Authorities / Promoters under the Chairmanship of Chief Secretary to resolve issues pertaining to the promotion, development and functioning of SEZs in the State. The Industries Department will be the nodal department for convening the meeting and all other matters of policy relating to SEZ. 2. LITERATURE SURVEY The Government of India had in April 2000 announced the introduction of SEZ policy in the country, deemed to be foreign territory for the purpose of trade operations and tariffs. The SEZs in India closely follow the PRC model. They are not entirely a new concept and are basically modeled on the Export Processing Zones (EPZ) that came up nearly five decades ago. In India, the first zone was set up in kandla as early as 1965. It was followed by the Sanctacruz export-processing zone, which came into operation in 1973. The 6
government set up five more zones during the late 1980s. These were at Noida (Uttarpradesh), Falta (West Bengal), Cochin (Kerala), Chennai (Tamil Nadu) and Visakhapatnam (Andhra Pradesh). The EPZ in Surat became operational in 1998. The latest figure, as of Oct 11 th, puts the total number of formal approvals at 236, while the number of in principle approvals stands at 169 (total of 405 approved SEZs). Among the SEZs formally approved, the ranking sector-wise are IT / ITES followed by pharmaceuticals, biotechnology, multi-product, textiles/ apparel, electronic hardware and telecommunication equipment. There has been some overlapping of sectoral categories in the case of some zones like IT Hardware and Software / ITES, Electronics, Pharmaceuticals and bio-technology. EPZ exports have risen from less than Rs.10 lakh in 1966 to over $1 billion. Over the same period, total employment increased from 70 to around 89,000, net foreign exchange earnings increased from Rs.0.16 million to Rs.43195 million and value addition increased from 21% to 44%. First of all the average annual growth rate of value addition in the EPZs was as low as 2.9% which means that the companies operating in these zones were basically exporting out almost as much as they imported without significant addition to the value of goods produced. Again despite the overall growth of exports from EPZs in absolute terms their actual share in total national exports and manufactured exports increased from 0.07% and 0.14% respectively in 1973 to just 4.3% and 5.6% respectively in 2001. This is in contrast to countries like Bangladesh and SriLanka, where EPZs contributed to over 20 per cent of overall exports by the year 2000 or to Mexico where they make up 40 percent of national export figures. The Indian EPZs clearly failed to induce dynamism in the overall export performance of the national economy. On the employment front too after an initial spurt in number of people getting jobs in the EPZs there has been a general decline and even stagnation. For example while 7
employment in the EPZs grew at the rate of over 50.2 percent between 1966 and 1970 it declined to a mere 5.2 percent between 2000 and 2002. The idea of the so-called SEZs was first mooted by the Ministry of Commerce s Export-Import Policy, 2000, in an obvious attempt to copy the model evolved in China. In 2005 the SEZ Act was passed by the Indian parliament and came into force from February 10,2006. According to an internal assessment of the Union Finance Ministry in 2005, the government had to forgo about Rs.90, 000 crore in direct and indirect taxes over a period of four years on account of the SEZs. If one takes into account the money spent by the Government on actual construction and maintenance of these EPZ / SEZs the situation is even worse. Commerce Ministry hopes they will attract more than $5 billion in FDI by the end of 2007. The Finance Ministry calculated a resulting tax loss at INR 1000bn over the next 4-5 years. Taking stock of the SEZ experience around the world, the survey found India was the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model but EPZs were not able to emerge as effective instruments for export promotion due to multiplicity of controls and clearances, absence of world-class infrastructure and unstable fiscal regime. 2.1 DEVELOPMENT OF SEZs IN TAMILNADU- AN OVERVIEW 6 SEZs currently functioning. MEPZ Special Economic Zone at Chennai Mahindra World City- 3 Sector Specific SEZs near Chennai Nokia SEZ, Sriperumpudur near Chennai Flextronics SEZ, Sriperumpudur near Chennai. 6 SEZs being set up by TIDCO Multi products SEZs 8
Ennore SEZ, near Chennai Nanguneri SEZ in Tirunelveli Dist. Hosur SEZ in Krishnagiri Dist. Perambalur SEZ in Perambalur Dist. Sector Specific SEZs Rubber Industries SEZ in Kanyakumari Dist. Bipure SEZ in Krishnagiri Dist. 5 SEZ- new initiatives by TIDCO SEZ for Automobile and Auto Component Sector, near Chennai Reliance ADAG SEZ (Multi products SEZ), near Chennai Indo Singapore SEZ, near Chennai 2 IT / ITES SEZs in Taramani, Chennai. Several sector specific SEZs (for IT & ITES, Foot Wear and Accessories, etc.) approved by GOI and are under development. 2.2 INCENTIVES Exemption from industrial licensing for manufacture of items reserved for Small Scale Industries (SSI) 100 percent FDI investment through automatic route to manufacturing SEZ units. Facility to realize and repatriate export proceeds within 12 months. No cap on foreign investment for SSI reserved items. Write-off of unrealized exports bills unto 5%. Profits allowed to be repatriated freely without any dividend-balancing requirement. Full Freedom for subcontracting, including subcontracting abroad. 100% income tax exemption for a block of five years, 50% tax exemptions for the first two years and up to 50% of the Profits ploughed back for next 3 years. 9
Supplies from Domestic Trade Area to SEZ to be treated as exports. Carrying forward of losses. 100% IT exemption for 3 years & 50% for 2 years for offshore banking units. Exemption from Central Excise duty on procurement of capital goods, raw materials, consumables spares etc. from the domestic market. Reimbursement of Central Sales Tax paid on domestic purchases. According to the Ministry of Commerce, state governments supporting private sector proposals or making one on their own for setting up a SEZ need to give the following commitments. That the area incorporated in the proposed SEZ is free from environment restrictions. That water, electricity and other services would be provided as required; That the units would be given full exemption in electricity duty and tax on sale of electricity for self generated and purchased power; To allow generation, transmission and distribution of power within the SEZ. To exempt from State Sales tax, octroi, manditax, turnover tax and any other duty / cess or levies on the supply of goods from Domestic Tariff Area to SEZ units; That for units inside the zone the powers under the Industrial Disputes Act and other related labour Acts would be delegated to the Development Commissioner and that the units will be declared as a Public Utility Service under Industrial Disputes Act. That single point clearances system and minimum inspections requirement under State Laws/ Rules would be provided. 10
3. OBJECTIVE OF THE STUDY (1) To study on physical infrastructure facilities of Mahindra Industrial Park (MIP) (2) To study on physical infrastructure facilities of Ambattur Industrial Estate (AIE) (3) To conduct comparative benchmark study on physical infrastructure of MIP & AIE. 4. METHODOLOGY The methodology adopted is collecting primary data using random sampling technique from 25 Micro, Small, Medium and Large Enterprises in MIP & AIE using 2-point scale and secondary data from Associations like MIP & CAAIIUC. Null Hypothesis (1) The proportion of enterprises in MIP agreeing for better physical infrastructure facilities is not significant. (2) The proportion of enterprises in AIE agreeing for better physical infrastructure facilities is not significant. (3) There is no significance increase in physical infrastructure facilities of MIP & AIE. 5. Interpretation of Data Null Hypothesis-1: (1) the proportion of enterprises in MIP agreeing for better physical infrastructure facilities is not significant. 11
Table-1: Mahindra Industrial Park (MIP) S.No. Problems Wt. Yes No Wt- Yes Wt- No T Mean Wt - Mean 1 Roads & culverts 0.10 2 23 10-115 -105-4.20-0.42 3 2 Street lighting 0.05 1 24 5-120 -115-4.60-0.23 4 3 Storm water drainage 0.05 1 24 5-120 -115-4.60-0.23 4 4 Sewerage treatment 0.05 3 22 15-110 -95-3.80-0.19 2 5 Solid waste management 0.05 2 23 10-115 -105-4.20-0.21 3 6 Landscaping 0.05 1 24 5-120 -115-4.60-0.23 4 7 Power 0.10 5 20 25-100 -75-3.00-0.30 1 8 Telecom 0.05 2 23 10-115 -105-4.20-0.21 3 9 Service Providers 0.05 1 24 5-120 -115-4.60-0.23 4 10 Logistics 0.10 2 23 10-115 -105-4.20-0.42 3 11 Free of Taxes and Duties 0.05 0 25 0-125 -125-5.00-0.25 5 12 Single Window Mechanism 0.10 0 25 0-125 -125-5.00-0.50 5 13 Package of incentives 0.05 0 25 0-125 -125-5.00-0.25 5 14 Exports 0.05 0 25 0-125 -125-5.00-0.25 5 15 Foreign Direct Investment 0.10 2 23 10-115 -105-4.20-0.42 3 Weighted Average 1.00 22-2.92 Source: Primary Data Level of Problems Range of scores Very Low 1.0-1.5 Low 1.6-2.4 Moderate 2.5-3.0 High 3.1-4.0 Very High 4.1-5.0 Rank Test for proportion Z observed (Zo) = p-p ------- = [0.06 0] / [0.06* 0.94] / 25 = 1.26 [pq / n], P = 0= not known. Z expected (Z e) = 1.96 at = 0.05 Since Zo < Ze, it is inferred from the table-1, that the proportion of enterprises agreeing for better physical infrastructure facilities is not significant. 12
Null Hypothesis-2: The proportion of enterprises in AIE agreeing for better physical infrastructure facilities is not significant. Table-2: Ambattur Industrial Estate (AIE) S.No. Problems Wt. Yes No Wt- Yes Wt- No T Mean Wt - Mean 1 Roads & culverts 0.10 20 5 100-25 75 3.00 0.30 5 2 Street lighting 0.05 23 2 115-10 105 4.20 0.21 2 3 Storm water drainage 0.05 17 8 85-40 45 1.80 0.09 8 4 Sewerage treatment 0.05 19 6 95-30 65 2.60 0.13 6 5 Solid waste management 0.05 24 1 120-5 115 4.60 0.23 1 6 Landscaping 0.05 21 4 105-20 85 3.40 0.17 4 7 Power 0.10 22 3 110-15 95 3.80 0.38 3 8 Telecom 0.05 20 5 100-25 75 3.00 0.15 5 9 Service Providers 0.05 24 1 120-5 115 4.60 0.23 1 10 Logistics 0.10 20 5 100-25 75 3.00 0.30 5 11 Free of Taxes and Duties 0.05 18 7 90-35 55 2.20 0.11 7 12 Single Window Mechanism 0.10 19 6 95-30 65 2.60 0.26 6 13 Package of incentives 0.05 23 2 115-10 105 4.20 0.21 2 14 Exports 0.05 24 1 120-5 115 4.60 0.23 1 15 Foreign Direct Investment 0.10 24 1 120-5 115 4.60 0.46 1 Weighted Average 1.00 318 3.46 Source: Primary Data Level of Problems Range of scores Very Low 1.0-1.5 Low 1.6-2.4 Moderate 2.5-3.0 High 3.1-4.0 Very High 4.1-5.0 Rank Test for proportion Z observed (Zo) = p-p ------- = [0.85 0] / [0.85*0.15] / 25 = 11.90 [pq / n], P = 0= not known. Z expected (Z e) = 1.96 at = 0.05 13
Since Zo > Ze, it is inferred from the table-2, that the proportion of enterprises agreeing for better physical & common infrastructure facilities is significant. Null Hypothesis-3: There is no significance increase in physical infrastructure facilities of MIP & AIE. Table-3: Comparison of MIP & AIE S.No Problems Wt. Mean WM Rank Mean WM Rank MIP AIE 1 Roads & culverts 0.10-4.20-0.42 3 3.00 0.30 5 2 Street lighting 0.05-4.60-0.23 4 4.20 0.21 2 3 Storm water drainage 0.05-4.60-0.23 4 1.80 0.09 8 4 Sewerage treatment 0.05-3.80-0.19 2 2.60 0.13 6 5 Solid waste management 0.05-4.20-0.21 3 4.60 0.23 1 6 Landscaping 0.05-4.60-0.23 4 3.40 0.17 4 7 Power 0.10-3.00-0.30 1 3.80 0.38 3 8 Telecom 0.05-4.20-0.21 3 3.00 0.15 5 9 Service Providers 0.05-4.60-0.23 4 4.60 0.23 1 10 Logistics 0.10-4.20-0.42 3 3.00 0.30 5 11 Free of Taxes and Duties 0.05-5.00-0.25 5 2.20 0.11 7 12 Single Window Mechanism 0.10-5.00-0.50 5 2.60 0.26 6 13 Package of incentives 0.05-5.00-0.25 5 4.20 0.21 2 14 Exports 0.05-5.00-0.25 5 4.60 0.23 1 15 Foreign Direct Investment 0.10-4.20-0.42 3 4.60 0.46 1 Weighted Average 1.00-2.92 3.46 Source: Primary Data Level of Problems Range of scores Very Low 1.0-1.5 Low 1.6-2.4 Moderate 2.5-3.0 High 3.1-4.0 Very High 4.1-5.0 There is significance increase in performance of MIP when compared to AIE. 6. CONCLUSION To conclude, by weighted average method and test for proportion the physical infrastructure facilities of MIP is world class standard whereas in case of AIE there 14
needs lot of improvement in roads & culverts, street lighting, storm water drainage, sewerage treatment, solid waste management, landscaping power, telecom, water and logistics. The Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 is implemented for promotion, development and enhancement of competitiveness of MSMEs for better infrastructure facilities and cluster development of such enterprises with a view to strengthening backward and forward linkages. According to The SEZ Act, 2005 & The MSMED Act, 2006 GOI may declare AIE as SEZ so that the enterprises will have social harmony & good governance which leads to economic development by way of FDI inflow & enterprises improvement thereby reducing the political forces, unemployment and poverty. The Economic Survey debate over Special Economic Zones (SEZs) have to be taken into account in the formulation of policies. Many of the apprehensions could be addressed through appropriate policies and safeguards. Describing SEZs as testing grounds for implementation of liberal market economy principles, the survey noted some of the apprehensions against them: generation of little new activity because industries might relocate, large scale land acquisition which may lead to displacement of farmers with meagre compensation, misuse of land for real estate, acquisition of farmers with meager compensation, misuse of land for real estate, acquisition of prime agricultural land having serious implications for food security and uneven growth aggravating regional inequalities. It defended the setting up of SEZs as they promoted value-addition to exports, generated employment and mobilized foreign exchange. The challenge ahead lies in appropriately sequencing to sustain the popular support for reforms and reconciling the conflicting interests of the various forms of constituencies. 15
The Commerce Ministry, which is spearheading the movement for more SEZs, in turn claims that there will be an additional investment of INR 1000bn, mainly through the FDI route, and that the SEZs will create 500,000 additional jobs. What the government needs to priorities its objectives by offsetting its costs and benefits and then deciding the path it wants to pursue in the long run. 7. REFERENCES 1. T0he Special Economic Zones Act, 2005, Universal law Publishing Co. Pvt. Ltd., Delhi, India 2. The Micro, Small and Medium Enterprises Development Act, 2006 by Commercial Law Publishers (India) Pvt. Ltd., Delhi, India 3. The Hindu, different dates. 4. www.tidco.com, www.sipcot.com, www.indcom.tn.nic.in, www.smallindustryindia.com, www.laghu-udyog.com & www.unido.org 5. Tamil Nadu- An Economic Appraisal, 1999-2000, 2001-02, 2002-03, 2003-04 & 2004-05, Department of Evaluation and Applied Research (DEAR), Chennai-108, India. ****** 16