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SEZs: India has no Hong Kong, Mr Maran

S. Majumder

IF CHINA is a lesson for the Industry and Commerce Minister, Mr Murasoli Maran, and if he thinks that setting up SEZs (Special Economic Zones) would accelerate the future growth of export, he is wrong. May be China and India are economically similar on v arious issues, but China owes the success of SEZs to certain special characteristics. During his short visit to China before converting the Exim policy, Mr Maran was upbeat with the success of the SEZs and was convinced that they should be the plank for India's export growth. Consequently, the SEZ concept made a formal entry via the last Exim policy and climbed up in priority in the latest edition.

Conceptually, the cause for the success of SEZs in China was different from what Mr Maran had conceived. In 1979, China realised that foreign fund was the major source of capital assets and opened the economy to foreign investors. But, with its normal FD I policy and incentives, China could hardly attract foreign investment for the first four--five years. The SEZ concept was thought of to energise China's FDI flows and it worked. Therefore, the initial aim of the SEZs was to attract foreign investments, especially from the Chinese settled in Hong Kong.

Export was a secondary aim; thus, the SEZs became the area for attracting FDI. Hong Kong topped the list of foreign investors, with a share of over 60 per cent of the FDI in China. Another characteristic of the SEZs' success was that Hong Kong became the base for export of Chinese goods.

Over 20 per cent of China's annual exports goes to Hong Kong, from where they are re-exported; Hong Kong thus emerged a major gateway for China's export. Hong Kong's global strength in export was reinforced by more investments in China. Nearly 80 per cen t of the latter's exports is by re-export and much of these re-exports are products sourced from Chinese SEZs, in which Hong Kong Chinese are heavily invested in.

Therefore, the crucial factor for the SEZs' success was the inter-dependence between China and Hong Kong, where China acted as a manufacturing base and Hong Kong became the trading house. With global competition becoming fierce, Hong Kong traders found i t difficult to make large profits by trading in a free port area. At this point, the Chinese SEZs offered them a bonanza. They could not find any better place to invest than the SEZs, on account of cheap labour, and benefits of geographical proximity and cultural heritage. Had there been no Kong Hong, the SEZs would have flopped.

The growth in FDI-linked exports marked a dramatic shift in the Chinese approach. In 1979, China's main exports were primary products. By the 1990s, more than 80 per cent of the exports were accounted for by manufactured goods. In the early 1990s, most m anufactured exports were mostly such small item as toys, travel goods, shoes, and so on. In the late 1990s, there was a shift towards hi-tech automatic digital equipment, integrated circuits, electronics components, tape recorders and stereo systems, all dumped into India and its neighbours.

That Guangdong province is now China's main area for export, depends on the success of the SEZs located there. Of the five SEZs in China, three are in the Guangdong. Positioning Guangdong as the nerve-centre for SEZs was to attract FDI from Hong Kong, an d, in turn, export Guangdong-manufactured goods.

Guangdong accounts for over 35 per cent of China's total FDI inflows. Hong Kong is the main gateway connecting Guangdong enterprises with the international market. Without this strong connection with Hong Kong, Guangdong's SEZs may not have accelerated C hina's export.

Besides, the incentives offered by the SEZs are far more than what Indian SEZs give. Chinese workers are heavily subsidised in terms of food, clothing and housing, thus, the wages paid to them are much less than in India. Chinese labour laws are loose an d the foreign investors negotiate wages each time they receive a new export order. Further, foreign investors are free to hire or fire in the zone.

There is, virtually, no uniform law for the SEZs. Each has introduced its own legislation to govern investment and approval procedures relating to FDI. Often, before the national policy on foreign investment is passed, an SEZ promulgates its own legislat ion to test its effectiveness.

The interest rates are much lower in China than in India. The rates on bank loans are 4-6 per cent, compared to 11-13 per cent in India. Chinese firms do not even pay the principle. And in case of default, the debt is converted into equity.

What may dash Mr Maran's hopes of making the SEZs the engine of growth is the absence of a trading post such as Hong Kong, and our intricate labour laws. Though the Finance Minister, Mr Yashwant Sinha, has taken a bold step loosening the labour laws in t he 2001-02 Budget, the growing wage rates may curb the initiative of the foreign investors to invest in the SEZs.

Though Mr Maran and his Government think that the special incentives SEZs offer would be more of a stimulant than the incentives available in the existing EPZs, exporters and foreign investors may hardly be inclined to invest in them. For instance, expor ters in the Noida Export Processing Zone decried its transformation into an SEZ, protested that such transformation would hardly change the zone's productivity or impact the turnover.

Summing up, India is structurally different from China vis-a-vis export and FDI. Merely imitating the Chinese model of SEZs may not work for India. Further, the global FDI trend has changed tack -- from ``greenfield'' to M&As. Unless FDI becomes the be nchmark for capital assets in the SEZs, it would remain a rhetoric. The QRs removal and the likely gradual reduction in tariff would increasingly discourage exporters to invest in SEZs, unless they prove better than the domestic tariff area in te rms of infrastructure facilities.

(The author is a New Delhi-based freelance writer.)

Picture: The Industry and Commerce Minister, Mr Murasoli Maran... Merely imitating the Chinese model of SEZs may not work for India.

Picture by Kamal Narang