1
The Problem and Prospects of IT & ITES, SEZs
.
Dr.M.Jeyabal, Reader in Eco
AA College, Madurai.
&
P.Vanitha, S.G.Lecturer in History
J.A.College for Women, periyakulam.
A Special Economic Zone (SEZ) is a geographical region that has economic laws
that are more liberal than a country's typical economic laws. Usually the goal is an
increase in foreign investment. Ones of the earliest and the most famous Special
Economic Zones were founded by the government of the People's Republic of China
under Deng Xiaoping in the early 1980s. The most successful Special Economic Zone
in China, Shenzhen, has developed from a small village into a city with a population
over 10 million within 20 years. The article Special Economic Zone of the People's
Republic of China provides more information about the Special Economic Zones in
China. Following the Chinese examples, Special Economic Zones have been
established in several countries, including India, Iran, Jordan, Poland, Kazakhstan, the
Philippines and Russia. North Korea has also attempted this to a degree, but failed.
Currently, Puno, Peru has been slated to become a "Zona Ecomomica" by its president
Alan Garcia. In the United States, SEZ are referred to as "Urban Enterprise Zones".
According to World Bank estimates, as of 2007 there are more than 3,000 projects
taking place in SEZs in 120 countries worldwide.
SIGNIFICANCE FOR INDIA
Considering the need to enhance foreign investment and promote exports from the
country and realising the need that a level playing field must be made available to the
domestic enterprises and manufacturers to be competitive globally, The Government
of India had in April 2000 announced the introduction of Special Economic Zones
policy in the country, deemed to be foreign territory for the purposes of trade
operations, duties and tariffs. As of 2007, more than 500 SEZs have been proposed,
220 of which have been created. This has raised the concern of the World Bank, which
questions the sustainability of such a large number of SEZs.
WHY IT-ITES IN INDIA ?
•
The IT industry as a whole in India comprises of:Hardware; includes computing
and networking hardware and peripherals (IT infrastructure). It does not include
consumer electronics.Software and IT Services; includes custom and packaged
software, IT services, and IT training services.IT Enabled Services (ITES); includes
all business and knowledge processes being outsourced or offshored by companies
facilitated by internet, telecom and similar means.
•
The global IT service market is in excess of USD 700bn. and growing. IT
services and software continue to be the mainstay of Indian IT-ITES, accounting for
1
2
nearly 60 percent of industry revenues. Exports account for a majority share of the
segment revenue with the US and Western Europe as the key markets. There has also
been a steady growth in domestic demand, which further contributes to this segment’s
standing in the Indian IT-ITES industry.
•
India’s supplies 53% of the global offshore market for IT and business services,
though the country has only about 27% of the pool of suitable talent (i.e. people with
the appropriate education and cultural orientation, as well as fluency in the necessary
languages, usually English). The total value of the services offshored to date is around
USD 45bn. Revenues from the Indian ITES sector are expected to double from the
current USD 8bn. to USD 17bn. by 2008. At that level, ITES output would account for
roughly 7% of the G.D.P. of the country.
•
Captive units continue to dominate the BPO segment, accounting for over 65
percent of the value of work offshored. While independent /third-party vendors
outnumber the captive units, the scale of work undertaken by each unit in the captive
segment is significantly higher.
•
As India grapples with the shortage of trained and ready talent, many regions
(such as Eastern Europe, Latin America, Southeast Asia and China) are emerging as
attractive offshore destinations. However, India has an early mover advantage and
there are over 400 companies operating in this segment.
•
In addition to the low-cost advantage, the other generic determinants are
availability of proper infrastructure and lower country risk. All these factors have
made Indian cities hot destinations for offshoring. In 2003, no more than 3 non-metros
were linked to foreign cities by direct flights – the number has now gone up to 15 and
the country is slated to be 35-market destination in the coming years.
•
The tasks being offshored in the BPO space include: call center work, data
entry, and back-office operations. The five priorities common across the range of tasks
include: speed & flexibility (5%&28%), innovation & productivity (5%&22%), risk
(20%&10%), quality (30%&20%), and cost (40%&20%) [numbers in brackets reflect
the change in the expectation of business customers from vendors in years 1 and in
years 3 to 5 about business priorities].
•
Companies are also rethinking the value proposition of offshoring: executives
who once regarded it only as a way to cut labour costs, essentially by replicating
current onshore activities, now see it as a chance to raise revenues or capital
productivity. In fact it’s almost no longer possible to talk about offshoring simply as a
lever for labour cost arbitage. Offshore costs have simply become the new baseline on
which to build scalability and continue to improve productivity and revenues year
after year.
•
With the income tax concessions for software companies coming to an end by
March 2009 for units registered with STPI (Software Technology Parks of India) the
demand for space in SEZs is likely to intensify further from such units seeking to
continue enjoying the extensive fiscal benefits.
•
Cumulative office space demand over the next three years is projected to be in
excess of 80mn sq. ft. IT software-BPO-KPO segments is expected to account for 70%
of net absorption.
•
To fund this huge expansion, capital flows into corporate real estate is estimated
at over USD 5bn. over the next 3 years.
2
3
•
Potentially high occupancy levels combined with extensive fiscal benefits
provided to developers make IT & ITES SEZs an attractive business proposition.
SIZING UP THE SEZ POTENTIAL
According to Piyush Tiwari,India’s recent experiments with the development of
special economic zones (SEZ) have been a mixed bag, of successes and failures. There
are more than 3,000 SEZs in 116 countries, not all have succeeded in their desired
objective of steering export-led growth. Chinese SEZs have, however, presented a
remarkable success story, generating around $12 billion of exports in 2004.
Inspired with China’s success, India enacted its own SEZ Act 2005, ‘to build excellent
infrastructure in designated enclaves and provide incentives to lure investors in exportoriented industries.’
In a country where inadequate infrastructure is the biggest development
bottleneck, such a policy is expected to fast track the development of world-class
industrial infrastructure. Thanks to the policy, 362 SEZs have been formally approved
and 176 projects have received in-principle.
Key concerns
The ride to SEZs has not been smooth in India. There have also been failures and
Nandigram (WB) is a dark reminder. Reliance’s SEZ in Jhajjar (Haryana) is also
facing strong opposition from locals. One major difference in the Indian and Chinese
SEZ policy is the role of private sector. In China, SEZ are purely public sector
projects. In India, SEZs could be public, private, or public-private partnerships.
Conceptually, it is a novel idea to channel private sector investment into policies
which lead to economic development. Then why the opposition?
Why the opposition
The dissents against SEZs, as it appears, is not due to policy but implementation.
Of the total 362 approved SEZs, 225 are for IT/ITeS, which in India has grown 2.4
times since 2004 and export constitutes around 80 per of its revenue. Why offer
incentives to a sector that is already export, oriented and is poised to grow on its own
strengths? Besides, employment generation potential of services sector is limited.
An SEZs is supposed to provide economies of scale through agglomeration
economies. Internationally, SEZs vary from 2 to 800 sq km. In China, Hainan SEZ is
34,000 sq km (entire province is an SEZ).
SEZ policy in India provides for a minimum size of 10 sq km and maximum of 50
sq km. However, only 4 percent of the approved SEZs are more than 10 sq km and
only 13 per cent are above 2 sq km.
Next, 171 SEZs are near large cities and 138 are in Ahmedabad, Mangalore,
Chennai, Delhi, Gurgaon, Hyderabad, Kolkata, Mumbai, and Pune. Such a strategy
stretches the infrastructure in these cities. SEZ-led job creation would cause further
migration and put pressure on the overstressed land markets. SEZs here cannot absorb
surplus agriculture labour, due to the mammoth costs households face in migrating to
large cities.
3
4
Rising land prices in large cities make it attractive for developers to propose SEZs
here, as these allow an easy route to acquiring land for commercial uses.
Another criticism of the policy is that it leads to loss of agriculture land. This
perception seems to be overstated as the Board of Approval and state governments
agree that mainly barren (if necessary, single-crop) land should be acquired.
The main opposition against such large projects, as in Nandigram and Jhajjar, is the
fear of land acquisition without adequate compensation and that the land so acquired
would be misused for real estate development. Under the SEZ regulation, up to 65 per
cent of and SEZ can be used for housing or commercial development. This raises the
danger of SEZs becoming real estate projects.
Factors for success
Based on experience and economics, there are at least three critical factors that
need attention while implementing SEZ policy.
Size and location: The upper ceiling of 50 sq km needs to be critically assessed, as it is
could be insufficient for the development of manufacturing clusters. If large size SEZs
prove prohibitive for a single private developer, there is a strong case for publicprivate partnership. If mainly barren land is acquired and compensation package is
well designed, acquisition of large land would not pose constraint.
Acquisition of land:
This produces substantial redistribution effects between farmers whose land has
been compulsorily acquired and those who still possess their lands. Presumption here
is that the farmers can sell their land when urbanisation reaches their land if their land
is not compulsorily acquired. Such an indirect income redistribution effect causes
tension between governments and farmers.
There are some broad lessons to be learnt from Chinese experience. Wherever
plans in China required land development, municipal governments increased the land
supply through land acquisition, a conversion of land ownership from rural communes
to the state. Farmers were compensated for their land with a package that included: job
offers in enterprises established on the acquired land, housing compensation,
compensation for the loss of crops, and urban residency.
In China rural residents can’t migrate to urban cities without a permit from
government: without permits the migrants can’t access public services like education,
medical, pension, and subsidised goods. Compensation in terms of non-farm job
(responsibility of the government agency acquiring land) and city residency are very
lucrative and for the farmers these intangibles far exceed the direct compensation
package.
To reduce resistance to SEZs, a well-designed package is required that combines
monetary (equivalent to the market value of land) and non-monetary (jobs and social
benefits) compensations. There is provision for compensation by SEZ developers, but
a clear government policy is needed. MIDC, in Maharashtra, has an R & R package
which includes non-monetary compensation in terms of assured employment for
displaced families and land at concessional rates in the developed area. These
individual efforts need to be complemented by a national policy on R & R, with scope
for adjustment at local level.
4
5
Infrastructure
SEZs near large cities find justification in the lack of infrastructure (road, rail, power)
at the other locations. Development of transportation infrastructure throughout the
country is important to stimulate dispersed development of SEZs.
To conclude, I would however like to stress that for the sustained growth of economy
it is necessary to improve the overall investment climate, which would require the
development of infrastructure nationwide. In the long run, SEZs cannot be insulated
from institutional and economic environment of the country and the short-term
competitiveness created on the basis of incentives cannot be sustained over long
periods.
Reference
1. wikipedia.org
2. http://www.parsvnathsez.com/IT.asp
3.Yahoo Answers India
4. Government of Tamil Nadu,Industries Department
Secretariat, Chennai - 600 009
5. Senior Lecturer, (property) at University of Aberdeen Business School, Scotland.
5