Tuesday, December 27, 2011

Companies pulling out of SEZ after incentives were scaled down in India

Looks like companies are pulling out of SEZs after the Indian government pruned benefits given to companies locating and operating inside SEZ. Below is a story published in The Economic Times.

But this February, finance minister Pranab Mukherjee pruned some of those benefits to SEZs, leaving entrepreneurs like Sonthalia fretting. "Having already made a significant investment of Rs 200 crore, we couldn't have pulled out," says Sonthalia, vice-chairman & managing director, Sonthalia Group of Companies. Sonthalia represents India Inc's growing disenchantment with SEZs -- the previous government's big idea to drive exports and, in turn, employment and growth.

China was reaping the benefits of such a policy crafted in the eighties and UPA-I felt SEZs could redefine India's status as an exporter. It rolled out a 15-year SEZ plan in 2006. Land on a platter. Speedy approvals. No income tax for five years and concessions for another 10 years. No tax on inputs.

Except after two years, the promises started coming unstuck, like the one on income tax. "We don't know what the government might do next," says Sonthalia. Faced with a harsher business climate and a government that is wavering on SEZ laws, companies are unsure whether they can plan for 15 years. About one-third of companies that held the rights to build an SEZ -- 202 of 583 -- have raised their hands and walked away.

The pace of withdrawals is increasing, with 60 leaving in the past two years alone. These include companies that were looking to set up SEZs for captive purposes (Bata, Dr Reddy's and Essar) or to lease it out (DLF, Omaxe and Unitech). It's no different for tenants. "Most units are evaluating their tax arbitrage before deciding whether to go to an SEZ," says Anshuman Magazine, managing director, CB Richard Ellis, a real estate consultancy.

About one-third of India's exports come from SEZs. Impressive as that headline number is, it is boosted by some migrating exporters -- for example, IT companies moved from software technology parks to SEZs. Further, it hides the skew of just five states and five sectors account for 90% of exports from SEZs. It hides the fact that SEZs are anything but nonurban and manufacturing conclaves, as they were conceived to be.

Of the 583 SEZs the Indian government had approved till October 2011, only 143 were operational. The running SEZs are operating under capacity as well. The government recently changed land acquisition, incentives and taxation provisions. In 2008, the Indian government transferred the responsibility of land acquisition from government to developer itself. In 2009, the government changed the basis of incentives from profits to investments in the draft of the direct tax code (DTC). In 2011, the budget removed income tax exemption for 15-year period and slapped 18.5% minimum alternate tax and 15% dividend distribution tax. Investors argue that once the DTC is enacted, SEZs won't be an attractive option. Why did this happen? It is because  of the tussle between two ministries for long-term plan (commerce) and short-term imperatives (finance).

The perils of having consumer groups in the absence of elected local bodies

A latest study by United Nations Capital Development Fund (UNCDF), reported in Nagarik Daily, states that budget leakage in Mountain and Terai regions is as high as 80 percent. The figure for Hilly region is 25 percent. On average, the leakage of allocated budget  by ministries and income of local authorities is close to 50 percent. Consumers committee in local authorities are misusing the money (by showing investment in local roads that are redone multiple times).

This raises doubt over the hypothesis that efficiency is enhanced if power is given to consumer committees to come up with priority projects and also allow discretionary power to them to spend budget allocated to local authorities. It raises question over the effectiveness of decentralization in the face of rampant corruption, vested interests of leaders, and illiterate committee members. The study states that without local elections and elected local representatives, real decentralization is unimaginable.

Here is an editorial on the same issue published in Republica:

The study has found that every year, over Rs 20 billion is being embezzled from state funds going into local development. According to the study, the money funneled down to the local level is misappropriated, right from the planning to the implementation stage of local projects. The problem is most acute in the Hill and Tarai regions with up to 80 percent of the allocated sums going missing.

[…]The latest revelations have also questioned a hallow principle among development experts in Nepal. Of late, a consensus has been building that local people are the best equipped to bring meaningful changes in the society. Thus, the local consumer groups have been given more and more say on how the money going into local bodies is spent. But the ground realities hint that things are not so straightforward. It was quite a stretch of imagination to assume that consumer groups that do not need license to operate, that do not pay taxes and most surprisingly, cannot be held accountable for their actions, would maintain self-discipline without any oversight. It is bizarre because no human being is immune to the base motives induced by a potentially endless source of money.