SEZs left high and dry, need succor

Story Courtesy Business Standard

NEW DELHI: Scores of SEZ developers are seeking to get themselves ‘de-notified’ or cut to size for want of investor confidence. A senior Union Commerce official who asked not to be named confirmed to ET last week the trend and attributed the same to the economic slowdown the provenance of which is failed US financial markets. 
DLF has already got the ‘final approval’ for their IT SEZ near Delhi repealed and many others who have obtained such approvals are anxious to toe the line. While at least few developers want their SEZ tags (and attendant tax benefits) to go in order to be able to make their businesses doable through utilisation of the real estate they had acquired, most others are seeking to cut themselves to rational size without flouting the minimum processing area norm. 
Obviously, near standstill in the credit market and the pervasive demand crunch (the latter causes the former to persist even as partly resulting from it), has forced the developers to plead inability to get enough firms to buy SEZ slots. The viability of many , which are being developed/about to be developed is in doubt. But that should not convince one to mindlessly buy the argument that these are in trouble purely due to the economic slowdown, which the developers claim they did not anticipate to be one of such gravity. 
The fact is the (inter-ministerial) board of approval for SEZs has, right from the start, adopted a very liberal policy towards grant of SEZ approvals. The logic was that if you give quite a lot of approvals, even if some projects eventually fail to materialise, you would end up with a decent number of SEZs and even if some of these tend to see real estate as the principal revenue stream, a good many of them would still be sufficiently doing other economic activities like manufacturing to boost GDP and produce lakhs of new jobs. 
The policymakers professedly believed that the 1:1 ratio for earmarking processing and non-processing areas, other cautionary norms and the oversight by the development commissioners would minimise the possibility of malpractice. The current rush for cancellation of SEZ status shows that the board of approval for SEZs could have been more circumspect in granting approvals. 
The SEZ Act, as of now, does not allow de-notification. But one can get the approval cancelled even after the ‘final approval’ is obtained, which is usually after acquisition of land. So the flurry of applications for shedding the SEZ tag that is now being witnessed is actually about cancellation of final approvals or cutting the processing area without violating the notified norm in this regard. That nevertheless clearly demonstrates the growing diffidence within the (potential) developer- community with regard to the viability/business sense of these tax-free zones.

Some would argue that none of Indian SEZs would have the size of those in China which are large, multi-product industrial townships with huge cost benefits, including those on input taxes. In fact, of 530-odd formal approvals (which include about 265 SEZs notified) given so far, only a few are for multi-product zones. Majority of the approved SEZs are IT SEZs, with minimum area of just 10 hectares. 
There are also questions about the economic and moral tenability of the SEZ model. The states are now disallowed to acquire land on behalf of the SEZ developers. However, the fact is many states did involve themselves in land acquisition for SEZs at the initial stage that makes the demand for permission to sell such land—which is what the so-called applications for ‘de-notification’ are all about—dubious. 
The schism at the policy-making level continues to be visible even though the row over ‘compulsory land acquisition’ has been more or less resolved. For example, the Kerala government has recently come out with certain additional ‘state-specific safeguards’ including an increase in processing area to 70% of total SEZ area. 
Leaving aside the dispute over whether to have SEZs or not, the reality is now that hundreds of SEZs, although most of tiny sizes, are being developed in the country. One estimate is that a sum of Rs 1,00,000 crore has already been invested in this sector. At this juncture, the government policies would need to coherent enough to make best use of these investments for the benefit of the economy. 
Unfortunately, various policies are at odds with even the legitimate plans of SEZ developers. Since the RBI refuses to classify SEZs as infrastructure ventures (the central bank believes SEZs are real estate projects), SEZ projects have the high-risk tag. This has made raising funds nearly impossible for them, especially in the current situation of a general credit squeeze. 
Since SEZs are not allowed to sell lands (unless they get part of the acquired land de-notified), the potential lenders remain doubly sceptical about the creditworthiness of the many SEZ developers. This because in case of default, few options are available to the lender to recover the funds. 
Also, the ECB policy, despite the recent liberalisation, continues to militate against SEZs as `real estate projects’ (which is what SEZs are, according to RBI) are not among the prescribed end uses for ECB funds. 
So, scores of SEZ developers are left high and dry. They are sitting on land banks without the funds needed to develop them and attract investors. At a time the government is trying to revive the slowing economy through fiscal stimuli, this doubtless represents a policy dichotomy.

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