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Can Modi Revive SEZs?

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When the 19-member Board of Approval (BoA) of the commerce ministry, an inter-ministerial body that clears Special Economic Zone (SEZ) proposals, meets next, there will probably be close to 100 applications seeking amendments to existing projects before them. Most of them, including mining major Vedanta, drug maker Dr Reddy’s and public sector entity Orissa Industrial Infrastructure Development Corporation (IDCO) will be seeking more time to complete the projects that have already been approved. Though, not a single one is likely to submit a fresh proposal to set up a new SEZ in the country.    
 
A decade after SEZs were launched, new projects are hardly coming up. Even several of the approved ones are not yet complete, with companies seeking multiple deadline extensions to complete their projects. In the case of Vedanta Aluminium Limited, this will be its fifth application for extension of the validity period of formal approval, granted for setting up of sector specific SEZ for manufacture and export of aluminium in Orissa.
 
It’s a fact that SEZs have lost their original charm, but the next Narendra Modi led BJP government could reverse the trend.
 
Here is why.
 
The major reason for the losing sheen was the frequent changes in the SEZ policy, allegedly caused by the turf war between two key economic ministries – the finance and the commerce. While the finance ministry wanted to explore every opportunity to generate more revenue, the commerce ministry wanted to offer tax sops to SEZs to encourage creation of more export-oriented manufacturing centres. The tug of war had seen the tax advantages enjoyed by the SEZs in the initial days eroding with each policy announcement, thereby making SEZs a less attractive option. While exports attracted no taxes in the beginning, from 2011-12 onwards, the finance ministry diluted the tax benefits offered to SEZs by overriding the SEZ Act. Later, the finance ministry introduced two other tax elements to the SEZ landscape — minimum alternate tax (MAT) and dividend distribution tax (DDT). 
 

That's not all. Several of the existing SEZs are finding connectivity a major problem to attract fresh investments. Despite having all the infrastructure needed within the SEZs, they find badly maintained roads, slow clearances in ports, and other supply chain bottlenecks, troubling them a lot.
 
Under the UPA government, both commerce and finance ministries had independent say, and the Prime Minister’s Office was not seen as supporting one view or the other. Contrary to this, Prime Minister designate Narendra Modi is expected to convert his office into the most powerful decision making authority, leaving little room for inter-ministry squabbles and resultant uncertainty. Further, BJP has prioritised establishment of world class investment and industrial regions as global hubs of manufacturing in its manifesto. The party has also promised expedition of freight corridors and attendant industrial corridors "for faster movement of goods and people". 
 
The next generation SEZs, envisaged by the commerce ministry as National Investment and Manufacturing Zones (NIMZ), is exactly what BJP has promised through its global hubs of manufacturing. The fact that NIMZs are coming along the Delhi-Mumbai Industrial Corridor (DMIC), an area already dotted with SEZs, makes it even more feasible. 
 
All that BJP needs to do is to build stakeholder / investor trust by showing that the government has transparent policies and is serious in maintaining its continuity to help long term investment decisions.
 
Given the fact that about one tenth of the validity extensions granted so far are to the SEZ promoters from Gujarat, the incumbent Prime Minister is, in all probability, already aware of the practical problems that are delaying multi-sector, multi-product, manufacturing SEZs.