India’s Foreign Direct investment is mostly restricted to the field of services. This is evident from the fact that most of India’s FDI of USD 5.3 billion was in services. In contrast, China attracted FDI of around USD 27 billion in manufacturing alone. However, Indian exports of manufactured products were only 10% of that of China. This, in spite of India having lower labouring costs. What is holding the industry back then?
The Global Competitiveness Report 2005 identified poor infrastructural facility as the main reason for the bad performance. Where China stood at a healthy rank of 62 with respect to infrastructural facility, India was at the 76th position. Global competitiveness also received a setback as a result of the high cost of doing business according to World Bank reports.
Thus, to solve this problem the government has come up with the policy of Special Economic Zones and around 150 proposals of such zones have already been put into force. With respect to the same, The Special Economic Zone Act, 2005 has been passed; which promises to reduce red tapes and lower the cost of business.
SEZs provide for tax exemptions which cut down the manufacturing cost to a large extent. Self certification of exim cargo also reduces transportation delays thus resulting in a boost of investments in the fields of automobiles, engineering, etc. Since 2005, India has attracted Rs. 2000 crores as investment and generated around 1.25 lac jobs. The IT and ITES units have also provided an impetus to the real estate industry by giving them access to the non- processing areas. According to the laws, there have to be residential complexes, malls, recreation centres, etc. to cater to the needs of the workforce. The Special Economic Zones are expected to attract investment worth USD 30 billion and provide employment to around 2 million people.
However, the implementation of such a policy requires scrutiny. What happened in Nandigram bears testimony to the fact that this policy requires careful implementation. Consequent to this, they have become a battlefield all over the country, with farmers opposing the forcible acquisition of land.
Even the finance ministry is not pleased with the idea of tax exemptions which acts as a huge loss of revenue. It is believed that in ten years’ time an investment of Rs. 1,00,000 crores will result in a revenue loss of Rs. 1,50,000 crores.
Industrialists such as Rahul Bajaj have criticised this policy calling it a “sophisticated land grab”. There is a high likelihood that developers would take advantage of the subsided land rates and make it a real estate play.
This dream project of the government has indeed borne fruits. The export trend shows that since 2005 the exports have risen from Rs. 34787.5 crores to Rs. 67299.6 crores. Other figures have also shown that there has been a boost in investment and employment opportunities.
Thus, in light of the success of this policy, it is safe to conclude that SEZs provide industries with an effective means of development and growth. In order to ensure the smooth functioning of this policy, the government should formulate rehabilitation and resettlement schemes so that this process of industrialization is not hampered by social and political obstructions.