There is an emerging consensus that for India to revert to the trajectory of 8 per cent growth and above, which is both inclusive and sustainable, it is imperative that efforts be made to increase the pace of industrial activity in the country by giving a fillip to manufacturing and service sectors. A competitive and efficient industrial sector, which has the capability to compete effectively with the best in the world in terms of cost and quality, would not only aidin resource mobilization by boosting production, investment and exports, but would also help in employment generation and thereby help India carve a place at the high table of the industrialised economies.
It is in this context that the prevalence of an enabling and supportive business environment which would motivate investors to set up industrial units in the country assumes importance. This would entail removing glitches in policy, effecting procedural simplification and addressing problems of land acquisition as well as inadequacies in infrastructure and power so that India becomes competitive locally as well as globally by adopting resource-efficient modes of production. It is also important that industrialization is properly planned and effectively implemented so that risks to the environment are minimized. In order to address the concerns of business and ensure that companies are provided a facilitative climate for hassle-free operations, the government has demarcated special areas for industrial development within the country.Some such specialized areas or enclaves are mentioned here under:
Industrial Estates
Industrial Parksü Industrial Clustersü Special Economic Zonesü National Manufacturing and Investment ZonesThe following paragraphs provide the details of the status and performance of these specialized areas.
1. Industrial Estates
An Industrial estate refers to a specified area or a tract of land which is set aside or demarcated for a group of industries with the provision of common facilities which would help the units located in the estate to get the advantage of agglomeration by realizing better scale economies. The purpose of industrial estates is to promote industrialization by offering superior infrastructure facilities which would take the country to a higher orbit of growth.The industrial estate is usually located outside the city or populated areas and is meant to ensure provision of proper infrastructure facilities eg land (plots or built in sheds), roads, drainage facility, street lights, banks and ensuring continuous and reliable supply of power, water and other utilities within the estate which units would find it difficult to achieve at their own cost.Industrial estates are known to commence operation in India in 1952 with the following short and long term objectives:ü Rapid development of small scale industriesü Shifting the small scale industries from congested areas to industrial estates with a view to increase their productivityü Promoting decentralization and dispersal of industries i.e to facilitateindustrialisation of economically backward, semi-urban and rural areasü Promoting growth of ancilliary units within the estates.ü Generating employment opportunities to semi-skilled and skilled workers in the region.India’s Industrial estates programme has been among the biggest and most extensive among the developing countries and was aimed at fostering industrial development, particularly of the small scale sector, on a decentralized basis. The programme was to support the creation, expansion and modernization of small scale units through provision of factory accommodation at suitable sites with integrated infrastructure facilities such as water, electricity, transport, banks, canteen, watch and ward etc, most of which was to be provided by the respective state governments. The programme was much appreciated during the time and many units came forward to set up operations within the industrial estates. As a result, the number of industrial estates rose from 83 in 1961 to 799 in 1981 and 632 in 1992. Today there are more than 700 industrial estates in the country. The post liberalization period witnessed the setting up of a number of variations of industrial estates with the intervention of the state governments which made available land and requisite infrastructure for setting up a group of industries.The first industrial estate was set up at Hadapsar in Maharashtra and was followed by the establishment of an industrial estate Rajkot by the Saurashtra Government and Guindy & Ambattur Industrial Estates in Tamil Nadu. Presently, industrial estates in India are divided mainly into six broad categories:
Hooghly Industrial Estate- Jute is the important industry in the region while cotton, chemicals, machinery, matches, paper etc are the other segments within the estate.
Bombay-Pune Industrial Estate-Cotton is the important industry in the region while other industries include machinery and chemicals.
Ahmedabad Baroda Industrial Estate-Cotton is an important industry while other industries are machinery and chemicals.
Chhotanagpur Plain Industrial Estate-Metals (iron ore, coal, manganese, mica, limestone etc) is an important industry in this area.
Mandraz-Coimbatore-Bangalore Industrial Estate-Cotton, silk and wool weaving industries are important sectors. Other industries include chemicals, motor building machinery etc.
Mathura-Delhi-Sahranpur-Amble Industrial Estate-This includes two industrial belts-Faridabad and Ambala in Haryana and Mathura and Saharanpur in UP. Delhi is surrounded by these two industrial estates. Agricultural machinery and agro-products industries are important industries in this area. Other industries including cotton, chemicals, paper, glass, soap etc are situated here. There are presently 29 industrial areas and 16 industrial estates in Delhi. While the industrial estates were set up with the laudable objective of promoting industrialization across the country and facilitate scale economies in small scale sector through the provision of common facilities at all stages of establishment and operation, the outcomes have not been satisfactory. There are a number of issues which have constrained the growth in industrial estates. Some of the major constraints can be categorized in the areas of policy and procedures, production, marketing, finance and infrastructure which are elaborated as under:
| The policy problems relate to lack of single window clearance and multiplicity of agencies for seeking approvals. The production problems relate to raw material availability, capacity utilization, and storage problems. The marketing problems arises because of inadequate advertisement support, branding of products etc. The financial problems include investment risks, non-availability of bank credit at cost effective rates, meeting operating costs etc. The labour problems arise from inflexible labour laws, shortage of skilled workers etc. Poor state of common Infrastructure facilities such as roads, sewage, civic utilities,power supply etc. |
Problems faced by units in Industrial Estates –
Select examples in Specified Regions
North Maharashtra
1) No land available for industry expansion or new industry
2) High power tariff, erratic power supply
3) Inadequate meansof communication
4) Lack of water, streets and street lights in industrial estates
5) Entrepreneurs face problems of licences and permit raj
Western Maharashtra
1) Paucity of skilled labour
2) High power tariff
3) Delays in getting government approvals
4) Absence of airport
5) High fee for fire NOC
Marathwada
1) Absence of basic infrastructure
2) No planned development plan
3) No water management for industries
4) High cost and low availability of power supply . Cancellation of shifts due to load shedding
5) Absence of training institutes for creating skilled human resources
Chennai
1) High cost and low availability of quality power supply
2) Paucity of skilled work-force and labour shortage
3) High raw material costs
4) High cost of credit
Delhi
1) Poor civic infrastructure facilities including bad roads, poor streetlights, sub-standard drains, defunct sewerage and poor waste disposal facilities.
2) Encroachments on roads and pavements and in many cases on the front gate of factories
3) High cost of power, high interest rates
4) Multiplicity of authorities, cumbersome process of getting approvals
5) Difficulties in expanding the business due to paucity of available land.
Suggestions for ameliorating the concerns of industrial estates
In view of the above, it has become imperative to address the myriad problems faced by industrial estates so that units are able to achieve functional efficiency, complement each other so that one unit’s output serves as an input for another unit in the estate and in this way achieve scale economies and aid in the economic development in the country. Some such suggestions include:
- A platform should be provided by the State Government to file Common Application Form (CAF) online where the applicants should be able to track the status of their application.
- Approvals should be granted in a time bound manner. There should be a provision of deemed approval, in case the application for approval is kept pending without assigning any reason and approval is not granted in specified period.
- With the government approving more industrial parks and investment zones, it is important that there is proper planning and development which takes cognizance of the environment, climate change, energy supply.
- The state government should assign the responsibility of developing and maintaining infrastructure in industrial estates to designated authorities in the state and monitor the outcome. A suitable mechanism for maintenance of industrial areas should be created whereby independent reputed companies in the private sector are identified and maintenance contracts are given to them.
- Also, the involvement of industrial area associations in maintenance should be encouraged through a mechanism of transferring a share of the revenue collected from the industrial areas through property tax and other levies.
- PPP should be pursued vigorously. There should be a dedicated promotional drive by the State Government to attract private investment in infrastructure in the identified sectors and Industrial Estates and parks.
- There is need for consistent power supply at cost effective rates. Availability of good roads, civic amenities and common infrastructure should be given priority.
- Bank credit should be made easily available at affordable rates.
- Units in industrial estate should be exempted from minimum alternate tax and dividend distribution tax within the estate.
- Consider providing interest subsidy to partially defray the high cost of creditto SMEs.
2. Industrial Parks:Industrial parks are yet another manifestation of industrial estates and integrated infrastructure facilities. An industrial park (also known as industrial estate, trading estate) is an area zoned and planned for the purpose of industrial development. Land is made available through state development corporations for setting up units within the zone/estate.Industrial parks are usually located on the edges of, or outside the main residential area of a city, and normally provided with good transportation access, including road and rail. The industrial parks could be product & region specific, theme based or country specific. It includes SEZs, NMIZs, industrial estates and the like. Some types of industrial parks are mentioned hereunder:
Types of Industrial Parks
Industrial Estates for SMEs:
» Industrial Parks, Industrial Estates, Industrial Development Areas etc.
Specialized/Theme based Parks:
» Science & Technology Parks, Biotechnology Parks, Leather Parks, hardware Parks etc.
Export Oriented Zones:
» Special Economic Zones, Export Processing Zones, Free Trade Zones,§ Free Zones (FZ)
Clustering & aggregation:
» National Investment and Manufacturing Zones (NIMZ), Growth Centers, Special Investment Regions (SIR), Petroleum, chemical & petrochemical investment regions (PCPIR), Industrial Corridors.
Status and Performance
The government of India introduced the Industrial Parks Scheme in 1997 which was revised in in 2002. The 2002 policy was wide in its scope and provided basic infrastructure and tax breaks to the parks. The scheme was valid till March 31, 2006. The Budget 2006-07 extended the tax holiday for park developers till 31 March 2009. The scheme attracted significant investment in the Parks, especially from the IT sector.An amended Industrial Parks Scheme was introduced in 2008, ahead of Budget 2008-09, which aimed at reducing the tax breaks provided to industrial parks. According to this scheme, the government announced that new IT units would not be permitted to be set up within industrial parks and imposed stringent norms for establishing manufacturing units in the parks. The scheme also raised basic infrastructure requirements which the developers would be required to provide within the parks. Under the previous scheme, developers had to build infrastructure and lease it to companies that would then complete the development to meet their specific needs. The new scheme mandated the developer to provide a minimum built-up area of 50,000 square meters. The administrative control of the industrial park was also transferred to the Finance Ministry as against the joint administration with Ministry of Commerce and Industry. This led to many units to reconsider and withdraw their investment in industrial parks. A comparison of Industrial Park Scheme 2002 and 2008 is as under:
Industrial Parks Scheme 2002 & 2008-A comparison
| Norms | Industrial Parks Scheme 2002 | Industrial Parks Scheme 2008 |
| Activities permitted | Wide scope, included infotech and manufacturing sector | Scope cut, excludes infotech, industrial model towns and growth centres |
| Minimum developed area | No such condition prescribed | Minimum constructed floor area to be 50,000 sq. mt. |
| Minimum units | 30 units | 30 units* |
| Minimum % of area for industrial use | 66% of allocable area | 90% of allocable area |
| Maximum occupancy by single unit in a park | 50% of allocable area | 25% of allocable area |
| Tax holiday | Available to original, and subsequent developer | Restricted to original developer |
| Ownership of industrial park | No such condition prescribed | Industrial park to be owned by only one undertaking |
Source: Business Standard, February 12, 2008As on 31st January 2011, the government has approved 217 industrial parks in the country. Of this, 192 parks are operational. A state-wise break-up shows that Rajasthan tops the number of industrial parks operating in the country. The other operating industrial parks are largely confined to developed states such as Maharashtra, Karnataka, Andhra Pradesh and Tamil Nadu. And in terms of investment in industrial parks, Maharashtra takes the lead followed by Karnataka, Andhra Pradesh, Haryana and UP. While Rajasthan has the highest number of industrial parks, the investment made by units is small by each unit unlike in the developed states. A significant number of industrial parks are operating in IT and software. Other sectors operating in industrial parks include biotech, pharmaceuticals, real estate, apparel, among others. The undermentioned table provided the details:
Approvals accorded under the Industrial Parks Scheme–Current status up to 31st January 2011.
| Sl. No. | Name of State | No of approvals as on 30 June 2009 | No. of approvals as on 31January 2011 | No. of functional parks as on 31January 2011 | Investment (Rupees in crore) as on 30 June 2009 | Investment (Rupees in crore) as on 31 January 2011 |
| 1 | Andhra Pradesh | 24 | 22 | 21 | 1990.56 | 1990.56 |
| 2 | Chandigarh | 1 | 1 | 1 | 138 | 138.00 |
| 3 | Gujarat | 5 | 5 | 3 | 586.25 | 586.25 |
| 4 | Haryana | 4 | 4 | 2 | 971.71 | 971.71 |
| 5 | Jammu and Kashmir | 1 | 1 | 1 | 29.79 | 29.79 |
| 6 | Karnataka | 39 | 36 | 32 | 4427.62 | 4427.62 |
| 7 | Kerala | 1 | 1 | 1 | 49.48 | 49.48 |
| 8 | Maharashtra | 50 | 41 | 34 | 5165.74 | 4916.44 |
| 9 | Pondichery | 1 | 1 | 1 | 5.13 | 5.13 |
| 10 | Tamil Nadu | 10 | 10 | 8 | 1036.94 | 1036.94 |
| 11 | Rajasthan | 77 | 74 | 74 | 792.26 | 792.26 |
| 12 | Uttar Pradesh | 9 | 9 | 7 | 908.46 | 908.46 |
| 13 | Uttaranchal | 6 | 6 | 2 | 493.50 | 493.50 |
| 14 | West Bengal | 7 | 6 | 5 | 816.51 | 816.51 |
| 15 | Total | 235 | 217 | 192 | 17273.40 | Rs.17,023.10 |
Source: Ministry of Commerce and IndustryAs is noticed in the table, the number of approvals for units in industrial parks has evidenced some decline as on 2011 as compared to 2009. The decline was witnessed in states like Andhra Pradesh, Karnataka, Maharashtra, Rajasthan and West Bengal. This also impacted investments in the Parks.Recently, countries like China and Japan have evinced interest in making investments in industrial parks in Western India.Some of the major problems faced by units in industrial parks pertain to multiplicity of approvals, inadequate infrastructural facilities including power, paucity of land for expansion and high interest rates. Some of the suggestions made for industrial estates are also applicable for industrial parks.
3. Clusters for SMEs
Introduction
According to Cluster Observatory, a cluster is defined as a concentration of enterprises producing same or similar products or strategic services and is situated within a contiguous geographical area spanning over a few villages, a town or a city and its surrounding areas in a district and face common opportunities and threats. Clusters may be broadly divided into the following broad categories:
Industrial cluster: Having at least 100 enterprises and/or a minimum turnover of Rs.100 million. Units in these clusters function from factory premises with hired workers. Such clusters have a mix of micro, small, medium, few large and at times all micro units. An industrial cluster essentially alludes to a sectoral and geographical concentration of competing, complementary or inter dependent firms, especially in the small and medium sector which face common opportunities and experience similar threats in their business environment.
Micro-enterprise clusters: Such clusters comprise micro units with production being carried out mostly by household based units by generally utilising home based workers. These include artisanal (handicrafts and handloom) and other micro enterprise clusters. A handloom cluster has a minimum of about 500 looms and that of handicrafts and other microenterprise clusters is estimated to have around 50 units. Under the cluster approach, firms gain by doing business with each other and / or by fulfilling their common needs for talent, technology and infrastructure. This is possible since the firms included in the cluster are free to compete directly with some members of the cluster, purchase inputs from other cluster members and rely on the services of firms within the cluster for the operation of their business.A cluster is envisaged to be somewhat different from the other industrial enclaves. For example an industrial estate or an industrial park having multiple products is not a cluster. A complete industry or a sector cannot be referred to as a cluster. Similarly, a small group of enterprises engaged in some collective business is also not a cluster. A cooperative, which promotes cooperation among a number of enterprises under some norm, rule or a public scheme of assistance is also not called a cluster. A cluster is generally identified by the product (or product range) and the place where it is located.The question that now arises is how does it help the SMEs to move up the value chain. The following paragraphs provide the details.
Indian Clusters: Current Status
According to Cluster Observatory, there are presently 1157 industrial clusters for SSIs in India in various sectors ranging from textiles to chemicals and pharmaceuticals to food processing. It is estimated that around 77% of all industrial MSMEs accounting for 61% investment and about 72% of employment exist in clusters. The industrial cluster produce 136 types of products which can be classified in 14 sectors. Food product sector tops the list by producing 23% of clusters followed by textiles (14%), metal products (13%) and non-metallic mineral products (10%), which makes these four sectors account for 60% of total production in clusters. Apart from industrial clusters, there are around 6000 handlooms/artisanal/micro-enterprise clusters, 50 service clusters pertaining to tourism, 38 healthcare clusters and 59 IT clusters. Such clusters are at different stages of development with some conglomerations enjoying robust health while others are waiting to be ‘induced’ to acquire a competitive edge.Some of the clusters are so big that they account for a significant proportion of India’s total production in specified sectors. For example:
➔ Ludhiana: Accounting for 90% of the production of woolen knitwear in the country
.➔ Panipat&Karur: Accounting for 60% of total home furnishings produced in the country.
➔ Tirupur: Responsible for 60% of production and 80% of cotton hosiery exports in the country.
➔ Agra, Ambur, Kanpur: Produces 80% of leather and leather products in the country.
➔ Alleppy: Responsible for 80% of coir products
➔ Surat: Produces 80% of synthetic textiles in the country
➔ Bangalore: The software capital of the country.
Some of the other prominent clusters include Badohi& Jaipur for carpets, Surat for gems &jewellery, Cochin &Veraval for seafood processing, Firozabad for glassware, Aligarh for locks and Muradabad for brassware, among others.
Cluster Development in India: The Advantages Revisited :
There is a general consensus that industries essentially seek to organize themselves into clusters in order to derive the advantages accruing from proximity to suppliers. The interdependent network, which accrues from cluster formation, facilitates timely production. Furthermore, infrastructure facilities provided in the cluster are tailor – made for production / distribution requirements of units and there is scope for continuous improvement based on demand. Benefit can also accrue from efficiency, effectiveness and flexibility in a cluster. Some of the other advantages of cluster based development model are as under:
➢ It is a focused approach to produce highly specialized goods and services, with emphasis on the highest possible value addition.
➢ It brings together the managerial and productive skills of individual units and works collectively, to improve the Cluster’s bargaining capacity vis-a-vis the others.
➢ It holds great promise for employment generation and export promotion.
➢ It results in geographical dispersal of economic units across the length and breadth of the country. It facilitates balanced growth across all regions of our country and holds potential for regeneration of rural and urban areas.
➢ It can make a positive impact on poverty alleviation and gender equity by supporting activities of Self Help Groups (SHG) in the traditional sectors such as weaving & spinning, handicrafts, animal husbandry, agro processing and the like.
➢ For Micro and Small Enterprises, the cluster approach offers a comprehensive solution to the typical impediments faced by these units. Collective action on their part leads to establishment of common facility centers, common brand-building for the export market, common purchase obligations and optimum resource utilization which, in effect would enhance their bargaining power among players in identified market segments.
➢ Confers collective benefits, for example through the spontaneous inflow of suppliers of raw materials, components and machinery or the availability of workers with sector specific skills.
➢ Facilitates the creation of providers of specialized technical,administrative and financial services.
➢ Creates a conducive environment for the development of inter-firm co-operation as well as of co-operation among public and private institutions to promote local production, innovation and collective learning.
Enhancing the Competitive Advantage of Clusters
It goes without saying that the cluster approach to development has helped SMEs to overcome the inherent disadvantages accruing from factors such as technological obsolescence, finance and marketing support. However, it is also equally true that the approach, by itself, is proving to be unequal to help SMEs to overcome the constraints arising out of poor product quality, information deficiencies, poor market linkages and inadequate management systems. In such a situation, there is need for fresh thinking and for developing strategies and avenues for enhancing the efficiency of clusters. In fact, it is important to sensitize policy makers and planners to evolve an enabling environment and policy framework under which SMEs can thrive in the competitive environment through the cluster approach.Some such measures are mentioned hereunder:
➔ Improved access to credit is important to improve the financial efficacy of the cluster. Cluster based financing should therefore, be treated as a thrust area. Here it needs to be mentioned that one of the main reasons for the success of knitwear cluster in Tirupur has been state intervention in the supply of short term credit to facilitate networked production.
➔ Encourage development of specific financial products suited for clusters. Different sectors and clusters have specific credit needs that are not fulfilled by the limited number of financial products that the various banks currently have in their domain. One of the positive measures that can help augment credit flow to the micro and small enterprises is to develop specialized financial products that cater to the specific needs of sectors and clusters. MSMEs in India operate mostly from clusters. Due to common risks and opportunities, cluster centric interventions produce maximum benefits to MSMEs.
➔ The government should accord top priority to addressing the modernization, productivity and technological needs of the cluster. Venture capital financing should be encouraged to promote access to new technologies.
➔ The government should create a corpus fund to support R & D activity in SME cluster. Besides, dialogue between university and industry should be encouraged to facilitate knowledge infrastructure in industrial clusters.
➔ Skill up gradation and skill development should be encouraged to cater to the demand for specific skills in the unit. Professional management expertise should be made available for the guidance of the small entrepreneurs in respect of financial and marketing management.
➔ Draw up initiatives that help select clusters to undertake innovation by linking them with international value chains and international benchmark clusters. Most of the currently established technology development institutions tend to focus their initiatives for the upper end of the clients in SME sector, thus benefiting only a handful few. Ministry of Science & Technology through its several affiliated organisations and National Manufacturing Competitiveness Council (NMCC) with support from Ministry of MSME may take lead to evolve the level of technology and innovation across select sectors and clusters. This can be enabled by:
Provision of financial support and knowledge linkages to early innovators to help them develop new products, services and processes§ Sponsoring independent testing, producer certification and rating services for cluster products/ services
Linking up with high-end buyers of cluster’s products and services
Drawing up specific multi-stakeholder initiatives for research into commercialization of new ideas translated into beneficial products, processes and practices.
➔ The states should undertake training and orientation of all the relevant department officials (e.g. fisheries, handlooms, handicrafts, industries, food processing, labour & employment, vocational training etc.) on cluster development approach, methodology and how to integrate their departmental activity in line with specific cluster based requirements.
➔ There is also a need for better facilities within the clusters by creating common facilities at low cost.
➔ Establish cluster-oriented free trade zones, industrial parks and other common facilities that can help clusters realise their growth potential and upgrade facilities that individual enterprises may find difficult to achieve. Such initiatives need to be taken by respective Ministries such as Ministry of MSME, Ministry of Textiles, Ministry of Industry & Commerce, Ministry of Food Processing and relevant departments in the respective state governments.
➔ At the same time the scope for implementing public – private partnership for cluster development as also the possibility for seeking expertise of the private sector in skill development and infrastructure should be actively explored so that public investment can be leveraged with private support in a concentrated manner for efficient development and operation of clusters.
➔ Lastly, providing basic infrastructure to SSI clusters has been the traditional strategy of most governments for promoting small scale and micro industries. Hence specialized facilities can be jointly funded by government and user industries and thereafter handed over to specialist private agencies for maintenance. This would help to partly defray the maintenance costs of small units.
4. Special Economic Zones (SEZs)The concept of SEZ, which is classified as a specifically delineated duty free enclave deemed to be foreign territory for the purpose of trade operations and duties and tariffs, was first introduced in India in April 2000 as part of Exim Policy of the country. A comprehensive SEZ legislation, the Special Economic Zone Act, 2005 (SEZ Act) was passed in 2005 which gave a fillip to the country’s SEZ policy.The concept of such designated industrial zones to promote exports is not new to this country, which earlier were called Free Trade Zones or Export Processing Zones. However, the performance of Export Processing Zones was much below potential. The reasons are numerous. The Zones were not really free trade zones, as envisaged, primarily due to a host of restrictions, infrastructure bottlenecks (with regard to water, power, waste disposal, warehousing, port connectivity etc) and insufficient space for growth. To address such anomalies and provide a conducive policy environment for exporting units in an otherwise restricted economy,the SEZ Act was passed in 2005.SEZs are specifically demarcated areas within the country where raw materials and capital goods can be imported duty free from abroad or the domestic market and a special package of tax holiday and incentives are given for boosting exports from the country. The SEZs are to be supported by integrated infrastructure for export promotion and single window clearance mechanism.Both manufacturing and services are allowed to set up operations in a SEZ.The express purpose of constituting an SEZ has been to attract fresh investments in green-field projects in specially designated enclaves to give the units a zone of comfort from the high transaction cost and other structural impediments faced by the domestic industry in their area of operation. The provision of such an internationally competitive environment for exports, was made to augment the competitiveness of firms in the global arena and in turn bring incremental foreign exchange earnings to the country.The category ‘SEZ’ covers a broad range of more specific zone types, including Free Trade Zones (FTZ), Export Processing Zones (EPZ), Free Zones (FZ), Free Ports, Urban Enterprise Zones and others.
Status and Performance of SEZs
(i) Functional SEZsAs on July 2014, there are 185 functional SEZs of which 19 are multiproduct SEZs while the remaining are single product SEZs operating in areas such as IT/ITES, engineering, electronic hardware, textiles, biotechnology, gems &jewellery and other sector specific SEZs. Total employment in SEZscomprises 12.8 lakh persons as of March 31, 2014. SEZs notified under the SEZ Act in the post 2006 period, provide 76 per cent of the total employment.
(ii) State-wise Break-Up of SEZsA state-wise break up of SEZs across the country shows that industry hasinvested largely in developed states such as Andhra Pradesh, Maharashtra,Tamil Nadu, Karnatakaand Gujarat. The maximum number of notified SEZs are in Andhra Pradesh(78) followed by Maharashtra (65), Tamil Nadu (53), Karnataka (40), Gujarat(29) and Haryana(29). This is shown in the chart below.
As indicated in the above Chart, Rajasthan is the only state where all the approved SEZs have been notified. In all other cases, the notified SEZs are well below the number of approved SEZs.
(iii) Product-Wise Break up of SEZsWhile the aim is to encourage large multi-product SEZs which would augment cost effective production and exports of manufacturing units by reaping the benefits of scale economies, it is the product specific sectors which are getting maximum approvals across states. A product –wise break-up of SEZs shows that the maximum number of SEZs approved are in the IT/ ITES zones with a share of 61.4% in the formal approvals and 61.3% in notified SEZs. Other sectors such as Bio-tech, Multi-Products, Engineering, Pharmaceuticals/chemicals, Textiles/Apparel/ Wool and Multi-Services fall far below the approvals provided to IT/ITES sector
. The number of formal approvals and notifications for multi-product SEZs are very low due to large scale land requirements of over 1000 hectare for this category
. This is indicated in the table below.
Select Industry-Wise Share of Approvals and Notified SEZs (as on April 30, 2014)
| Sector | Formal Approvals | Notified SEZs |
| IT/ITES/electronic hardware etc | 61.4 | 61.3 |
| Bio-tech | 5.3 | 4.9 |
| Multi-Product | 4.2 | 4.1 |
| Engineering | 3.0 | 3.4 |
| Pharma/Chemicals | 3.9 | 5.2 |
| Textiles/apparel/wool | 2.4 | 2.8 |
| Multi-services | 1.9 | 2.1 |
| Gems&Jewellery | 2.3 | 1.5 |
| Metal/Stain. Steel/Alum/Foundry | 1.4 | 1.3 |
| Footwear/Leather | 1.1 | 1.3 |
| FTWZ | 2.3 | 1.8 |
| Port based multiproduct | 1.2 | 0.5 |
| Agro | 1.1 | 1.3 |
| Petrochemicals | 0.7 | 0.5 |
| Power/alternate energy | 0.5 | 0.8 |
| Food Processing | 0.8 | 1.0 |
| Non-conventional energy | 1.1 | 1.0 |
| handicrafts | 0.8 | 0.8 |
| Electronic Products | 0.5 | 0.8 |
| Auto and related | 0.4 | 0.3 |
Source: Compiled from Ministry of Commerce
(iv)Investments in SEZsAs on March 31, 2014,total investment in SEZs stood at Rs. 2.97 lakh crore which has gone up sharply from Rs. 4,035 crore in 2006 indicating that SEZs have enormous potential. And most of the investment, around 92 percent, has come in the post 2006 period from SEZs notified under the Act
(v) Exports from SEZsSEZs have contributed significantly to export growth in the past few years.This has been encapsulated in the graph below.
The data for the last nine years shows that exports from SEZs registered an impressive performance subsequent to the SEZ Act. Exports have gone up from a paltry US$ 5.08 billion in 2005-06 to a massive US$ 82.35 billion in 2013-14. In fact, the watershed moment arrived in 2009-10 when exports from SEZ increased to US$49.05 billion from US$22.15 billion in the previous year, marking a stupendous rise of 121%. In fact, this was the time when exports from SEZs outperformed exports from the domestic tariff area. However, the performance of SEZs could not be sustained in the subsequent years due to economic downturn accruing from financial meltdown in the US and restrictive policies and cumbersome process of doing business in India.It is hoped that the rebound in the world economy, particularly the US and a rethink in SEZ policy would boost demand and provide a fillip to exports.
SEZ Policy: Problems
On the face of it, the SEZs have all the trappings of a mega industrial project supported by the specific policy thrust given by the government to ramp up private investment and exports. However, despite this, the situation on the ground is far from satisfactory. SEZs have to contend with a wide range of policy glitches which prevent the units from optimizing their production. Some such problems include:ü Frequent amendment in policy and tax structure, some of them retrospective, and withdrawal of incentives provided earlier. This diminished investor confidence and was partly responsible for the slowdown in investments in SEZs.ü Imposition of Minimum Alternate Tax (MAT). At the inception of SEZ Act, SEZ units and developers were provided a tax holiday for first five years of production and tax at a discounted rate for the next five years. However, MAT was imposed in the Union Budget 2011-12 at 18.5% of book profits for the units and developers inside SEZs. An alternative minimum tax was also introduced in limited liability partnership firms for setting up SEZ units. The sudden withdrawal of the tax holiday incentive, which was originally promised, dented the confidence of the investor and made led to a slowdown in investment in the SEZs.ü Imposition of dividend distribution tax. Similar to MAT exemption, at the time of introduction of SEZ Act, developers were exempt from levy of dividend distribution tax on the dividends declared from the profits earned from development, operation and maintenance of SEZs. This exemption was withdrawn in FY12ü Delays in land acquisition – difficulty in getting minimum contiguous land requirementin large SEZ for setting up industry.ü Inadequate infrastructure and power raises the cost of production and makes the product unviable in the international market.ü Rigid labour laws in SEZs impacts the competitiveness of labour intensive exports and does not provide a distinct advantage of operating in SEZs.ü Social infrastructure within the SEZs are meant to be used only for those employed in the zones which makes it an unviable proposition.Not surprisingly,the performance of SEZs continues to be below potential.This is borne out from the following statistics: Out of 565 SEZs that have been approved, only 387 have been notified and of these only 185 are operational. This is shown in the following table.Status of SEZs in India As on August 2014
| Item | Number |
| Functional SEZs( Prior to SEZ Act) | 2 |
| Formal Approval Granted | 565 |
| Of which notified SEZs | 387 |
| In Principle Approval Granted | 39 |
| Operational SEZs | 185 |
Source: Ministry of Commerce
Similarly, as indicated earlier, the rate of growth in exports have dropped from the high of 115% in 2009-10 to 4% in 2013-14. During the same period, the rate of growth of incremental investment in these zones have dropped from 23% to 13.4% and it is reported that 21,000 hectares of land is vacant where units are to be set up in SEZs.Much of the problems presently faced by SEZs arise from the perception that SEZs are a drain in revenue. As a result, many of the tax concessions available to SEZs were withdrawn in 2011 which created uncertainty in the minds of the investors and led investors to exit from the zones. Against this backdrop, it is heartening to note that the new government is seized of the problems impacting SEZs and is preparing a blueprint to revive SEZs and exports. There is a strong case for addressing the anomalies in the policies governing the SEZs and creating a framework which would help in fulfilling our overall objective of harnessing export led growth.
SEZ Policy: Some Suggestions
There is no doubt that we need world class SEZs which can compete with those in China to produce quality products at cost effective rates. It is important that SEZs should be endowed with superior quality infrastructure, liberal labour laws and other amenities that would attract projects from well-known business houses and enhance export linked growth. The SEZ policy should hence be simple, transparent and encourage industry to operate in a hassle free environment.There has not been any major problem with the broad precepts underlying the SEZ policy. It is the implementation and frequent change in policy that causes concern. It is understood that the issues thrown up by the SEZ scheme are complex and hence need a coordinated policy approach. Hence a good beginning for the government would be to refrain from frequent changes in norms. Some of the other suggestions are as under:
- Reinstate the original benefits offered to SEZs. The policy framework should be simple and transparent and there should be minimum government intervention in the operation of the zone. A single window clearance mechanism is needed for facilitating ease of doing business.
- Invoke section51 of SEZ Act which allows the provisions of the Act to override the provisions of other acts.
- There is need for rationalization of duty for sale from SEZs to the domestic market and extend focus product and focus market benefits to SEZ units.
- The Income Tax Act mentions that SEZs should not be formed by splitting of existing business. And if more than 20 per cent of manpower are split to form an SEZ, it is construed as splitting of business. There is need to raise the upper limit on employees redeployed from older businesses from 20% at present to half of the total technical strength of the new IT SEZ. It should be also be clarified whether technical employees mean revenue earning general employees in the case of BPOs operating in SEZs.
· Provide complete exemption from payment of MAT under section 115-JB to all “developers” of SEZ. Complete exemption from payment of MAT under section 115-JB to all units established in SEZ; Complete exemption from payment of DDT under section 115-O to the developers of SEZ.
· Tax exemption under section 10AA of the Income tax Act,1961 should be continued to the units established in SEZ on or after April 01 2014.Alternatively, a transition period of at least 4years be provided and the units established on or after April 01 2020,should only be governed by the tax regime as laid down in the DTC.
- Profit-linked incentive to the Developers of SEZ should be continued or, alternatively, a weighted deduction of 150% to 200% of the capital expenditure be provided. Alternatively, a transition period of at least 4 years be provided to the developers who are in the middle of formation of SEZ and the provisions relating to Tax regime in DTC be made applicable to those SEZ established on or after say April 01 2020.
- Allow non-residents of the zones to access facilities such as schools, hospitals and malls, which are built by duty free import material.
- There is need to continue with the reforms agenda which would bring freedom in decision-making to units while operating a business. The recent reform in labour laws is hence welcome. So is the decision to let states independently promote exports through State Councils
- The location of SEZs must be such as to promote manufacturing exports. Linkage to ports and airports should be taken into consideration while setting up the SEZs. Well-developed transport infrastructure may improve the performance of the SEZs even if they are located little far off from these points and then it may not necessary to locate the SEZs very near to the ports/airports.
- Encouragement for modern version of SEZs like free ports, free coastal zones, setting up of growth poles and clusters should be encouraged. The experience of countries like Korea, Japan, Malaysia, Hong Kong, Taiwan and Singapore confirms this.
- Offering greater flexibility to firms in terms of plant location in the zone would encourage the investors’ participation.
- The size of each SEZ should be such as to promote the efficient provision of infrastructure services, particularly the provision of power, water and other services.
- Efficient investor friendly administration is crucial to the success of SEZs. This may be difficult to achieve if there is a proliferation of zones. Therefore, limiting the number of zones, particularly for specific product zones, would be easy to administrate.
- While providing approval, prioritisation of the zones is needed according to the strategic importance of the product and development needs of the region.
- On investment front, encouragement for more green-field FDI in the zone to supplement domestic investment would attract more private investors. China is the glaring example where about 20 per cent of the FDI has flown into SEZs. Allowing the private sector to be responsible for investment in the zones would sustain the development. Domestic investment in the zone should have long-term orientation.
- Enforcement of good governance in the SEZs with flexible labour laws would be an important component for success of SEZ. At the same time, establishment of well-balanced compensation and rehabilitation policy should be designed for displaced people.
- Remove impediments faced by SEZ developers due to the new Land Acquisition Act in establishing contiguity of land in large SEZ.
- A natural fall-out of successful operations of SEZs is the creation of effective forward and backward linkages. It should be noted that just establishing SEZ does not guarantee investment interest, higher industrial activities and exports as experienced in African countries.
- Self-certification should be allowed for non-polluting industries as part of environmental policy in SEZs.
Once the policy is streamlined and the SEZs begin to show results, it will have a demonstrative effect in terms of transforming the image of our country just as China has showcased to the world through its massive SEZ in its provinces.
5. National Investment and Manufacturing Zones (NIMZs)
The National Investment and Manufacturing Zones (NIMZs) have been conceived as a specifically delineated area for the establishment of manufacturing facilities for domestic and export led production, along with the associated services and infrastructure. Conceptualised as a large integrated township, the zones are envisaged to ensure the provision of world class infrastructure and incentive structure which would help bring in manufacturing investment and in turn would push the manufacturing share in GDP to 25 per cent by 2022 from around 16 per cent at present. The proposed NMIZs would house one or more SEZs, industrial parks and warehousing zones, export oriented units, along with domestic tariff area units.The NMIZ is envisaged to be established on the similar lines as the Special Economic Zones (SEZ) — with provision of tax breaks and fiscal benefits to developers and units within these zones, provision of world-class infrastructure, simpler business procedures and other clearances and less rigid labour laws. Nevertheless, there would be differences with SEZs in terms of size, infrastructure planning, regulatory procedures, exit policies, nature of fiscal incentives, among others. NMIZs are also to have ‘processing’ and ‘non-processing’ areas, for production and residential/commercial uses, respectively.NMIZ is envisioned to create islands of excellence, which will promote manufacturing activity, by reducing the constraints imposed by inadequate infrastructure, rigid labour laws and procedural bottlenecks. The Contract Labour Act, which prohibits companies from hiring temporary workers will be relaxed in these zones.Strong infrastructure, a progressive exit policy, structures to support clean and green technologies, appropriate investment incentives, and business friendly approval mechanisms will be the cornerstones of the NIMZ policy.Some of the advantages of setting up units in NIMZs are as under:
Provision of world class infrastructure
Rationalization and simplification of business regulations at Central and State levels
Simple and expeditious exit mechanism for manufacturing units
Incentives to SMEs including easy access to bank finance
Industrial training and skill up-gradation measures
Financial and institutional mechanism for technology development, including green technologies
Government procurement
Special focus sectors.Apart from the above, the policy allows any acquisition of land only by the state government, which would then hand it over to a special purpose vehicle created for this purpose.The proposed zones will be cleared in a time-bound manner by DIPP which will be the central authority in this case. An empowered project clearance authority will be formed to liaise with different state and central departments to get clearances in a time-bound manner.While the units within such zones will enjoy the tax benefits already available elsewhere, the discussion paper proposes to further incentive such units. It says 50% of the expenditure incurred in filing international patents by units within such zones will be shared by the government. Subvention of interest on working capital by 4% will also be available to them to create parity with international counterparts.At present eight investment zones along the Delhi-Mumbai Corridor have been designated as NIMZs. These are as under
Ahmedabad-Dholera Investment Region, Gujarat
Shendra-Bidkin Industrial park city near Aurangabad, Maharashtra
Manesar-Bawal Investment Region, Haryana
Khushkhera-Bhiwadi-Neemrana Investment Region, Rajasthan
Pithampur-Dhar-Mhow Investment Region, Madhya Pradesh
Dadri-Noida-Ghaziabad Investment Region, Uttar Pradesh
Dighi Port Industrial Area, Maharashtra
Jodhpur-Pail-Marwar Region in Rajasthan
Apart from the above, there are eight NIMZs outside the DMIC region which have been given in principal approval
Nagpur in Maharashtra
Tumkur in Karnataka
Chittoor in Andhra Pradesh
Medak in Andhra Pradesh
Prakasham in Andhra Pradesh
Bidar in Karnataka
Gulbarga in Karnataka
Kolar in Karnataka
While the above areas have been demarcated for the creation of NIMZ, the project by itself has yet to be implemented and the NIMZ is not has not become operational so far.
Suggestions for Boosting Manufacturing Activity through NIMZ
- Implement the National Manufacturing Policy and expedite creation of National Investment and Manufacturing Zones across different locations on priority basis.
Relax labour laws in NMIZs to provide flexibility to employers to boost manufacturing activity. The issues which need to be reviewed include temporary status of employees, flexibility to downsize, non- applicability of Contract Labour Abolition Act to units in the NMIZ, amongst others. A social security system to be in place to protect the interest of the workers by ensuring that appropriate compensation is given to them through an insurance instrument and dues settled at the time of closure of unit located in the zones.
Ensure simplification of laws and faster approvals for obtaining business permits and reducing paperwork while maintaining clarity and transparency in process.
There is need for entry and exit policies which are favourable to business. The multiplicity of procedures are a major deterrent and enough for investors to seek alternative destinations. The accent should be to favour time-bound approvals by introducing ‘deemed approvals’ in case of delays beyond prescribed limit.
Provision of world class infrastructure including power should be among the top considerations within NIMZs. Today, our infrastructure deficiency is dissuading investment. Bad roads, high turnaround time at ports, high operating costs of railways, among others are adversely impacting business decisions. The power sector has a problem of fuel shortage; ensuring fuel supplies to the power sector is crucial to get business moving and should be assured in the zone.