The Impact of SPECIAL ECONOMIC ZONE’SOn Foreign Direct Investment

Dr.N.Moogana GoudProf and Director

SJC Institute of Technology

While announcing its new Export-Import Policy in 2000 the Government of India also announced the introduction of SEZs; deemed to be foreign territory for the purposes of trade operations, duties and tariffs.

Among all other incentives announced with the SEZ Act to woo the investment, the most lucrative are the100 percent tax exemption for industries on export profits for first five years and the provision of 100 percent foreign direct investment in industries under automatic route.

Special Economic Zones (SEZs)

Special Economic Zones (SEZs)

• SEZs have become a buzzword in recent years

• entirely a new concept and are basically modelled on the Export Processing Zones (EPZ) that came up nearly five decades ago.

• special Economic zone is a geographical region that

economic laws which are more liberal than the usual economic laws in the country. .

The basic motto behind this is to increase foreign investment.

deemed to be foreign

territory for the purposes of trade

operations, duties and tariffs

deemed to be foreign

territory for the purposes of trade

operations, duties and tariffs

Are specifically delineated

duty-free enclaves

Are specifically delineated

duty-free enclaves

SEZs

Countries which have Countries which have Experimented with Experimented with

This conceptThis concept

Countries which have Countries which have Experimented with Experimented with

This conceptThis concept

POLAND, POLAND, RUSSIA,RUSSIA,PHILIPPPHILIPP

INESINES

POLAND, POLAND, RUSSIA,RUSSIA,PHILIPPPHILIPP

INESINES

CHINACHINA(Great (Great

SuccessSuccess))

CHINACHINA(Great (Great

SuccessSuccess))UAE,UAE,

MALASIYAMALASIYAINDIA,INDIA,

JORDONJORDON

UAE,UAE,MALASIYAMALASIYA

INDIA,INDIA,JORDONJORDON

There are currently over 4000 special investment zones worldwide

China’s first SEZ at Shenzen ‘alone’ attracted over $ 30 billion in direct investment.

In countries like China, UAE & Malaysia, these zones have-

focal points for foreign investments

attracted over 20% of foreign direct investment

contributed to country exports

helped improve competitiveness of local industry, job creation, local skill up gradation & technology absorption from FDI.

In the year 2000government of India

formulated SEZ Policy and SEZ Act came into

force in 2005

Over 234 companies received formal approval, 162 companies received in-principle approval to set up SEZs. The Indian government is expecting an investment to the tune of Rs.53,561 crore (USD 13274 million) and anadditional job creation for 15,75,452 in SEZs by December 2009.

Special Economic Zones• Policy

– Duty free zones, deemed foreign territories

– Units to be net foreign exchange earner within 5 years. No export commitments

– No limits on DTA sales– FDI up to 100% permitted in

almost all manufacturing activities

– Transfer of goods from DTA to SEZ treated as exports,

– Can be set up in the public, private or joint sector

– Single Window Clearance

• Incentives– For developer: Income tax

exemption for a block of 10 years in 15 years

– For units: 100% Income Tax exemption for first 5 years, 50% for next 5 years and 50% of the ploughed back export profits for next 5 years

– Exemption from indirect taxes; excise, sales, services tax, etc.

– Freedom to raise ECB with out any maturity restrictions

New Law on SEZ enacted

Foreign Investment in IndiaFDI

India welcomes foreign direct investment in almost all sectors. Foreigners can directly invest in India either by themselves or as a joint venture.

Opportunities exist for investing in India in sectors as diverse as tourism and infrastructure, petrochemicals and mining technology and engineering, real estate, biotechnology, bio-informatics and nanotechnology. India is also being seen as the global destination for R&D, engineering design and prototype development and a manufacturing hub for high technology products.

FDI PolicyAccording to the current policy, FDI is not permitted in the following sectors – Certain sectors, namely:

• Atomic energy;• Lottery business/gambling and betting;• Agriculture (excluding floriculture, horticulture,

seed development, animal husbandry, pisciculture and cultivation of vegetables, mushrooms, etc.)

• Plantations (excluding tea plantation)• Retail Trading (other than single brand retail)

Rationalisation of FDI Policy

Allowed selectively up to 40%

Up to 51% under Automatic

Route for 35 Priority Sectors

up to 74/51/50% in 112 sectors under

Automatic Route100% in some sectors

Up to 100% Under Automatic Route in all sectors except

a small negative list

More sectors openedEquity caps raised

Procedures simplified

Pre 1991 1991 1997 2000 2000-05

Procedural further simplifiedNew sectors openedEquity caps raised

2006

India: FDI Outlook• 2nd most attractive investment destination

among the Transnational Corporations (TNCs) – UNCTAD’s World Investment Report, 2005

• 2nd most attractive investment destination – AT Kearney Business Confidence Index, 2005– Up from 3rd place in 2004, 6th place in 2003

and 15th place in 2002• Among the top 3 investment ‘hot spots’ for

2004-07– UNCTAD & Corporate Location – April 2004

• Most preferred destination for services - AT Kearney’s 2005 Global Services Location Index (previously Offshore Location Attractiveness Index)

Global Business Leaders on India

“India is a developed country as far as intellectual capital is concerned”

“India has evolved into one of the world’s leading technology centres. ”

“India can be the test bed for developing solutions for the poorest nations. ”

“India is handling the most sophisticated projects in the world. I am impressed with the quality of work”

JACK WELCH, GE

BILL GATES, MICROSOFT

GERARD KLEISTERLEE , PHILIPSGERARD KLEISTERLEE , PHILIPS

CRAIG BARRET, INTELCRAIG BARRET, INTEL

Worlds Largest

Democracy Stable Political

Environment

English SpeakingSkilled

Educated Human Resources

World Leader in Outsourcing

Young Population80% is below 45

years

Growing Consumer Class

Strong Economic Fundamentals

Reasons that make India an attractive investment destination

Reasons that make India an attractive investment destination

Investing in India – Entry Routes

Automatic RoutePrior Permission

(FIPB)

Investing in India

General RuleNo prior permission requiredInform Reserve Bank within 30 days ofinflow/issue of shares

By ExceptionPrior Government Approval needed.Decision generally within 4-6 weeks

FDI Policy contd….There are two routes for FDI in India –

Automatic Route

FDI is permitted under the automatic route for all items/activities except the following-

• Where the foreign collaborator has an existing venture/tie-up in India in the same field. There are certain exceptions –

investment by a Venture Capital Fund registered with SEBI;

existing joint venture has less than 3% investment by either party;

FDI Policy contd….

Existing joint venture is defunct or sick• Proposals falling outside notified sectoral policy/caps

or sectors in which FDI is not permitted FIPB Route (Approval Route)• In all other cases of foreign investment, where the

project does not qualify for automatic approval, as given above, prior approval is required from FIPB.

• Decision of the FIPB is normally conveyed within 30 days of submitting the application.

• The proposal for foreign investment is decided on a case-to-case basis depending upon the merits of the case and in accordance with the prescribed sectoral policy.

Foreign Direct Investment in India

Largest democracy –

political stability &

consensus on reforms

Liberal & transparen

t investment policies

Largest reservoir of skilled manpowe

r Long-term sustainableCompetitive advantage

- High growth rate economy

Fourth largest Economy

(PPP) - A safe place

to do business

FDI in SEZ

Government has allowed 100% foreign direct investment under the automatic route in manufacturing sector in SEZ. The manufacturing sector covers all units except

• Arms, ammunition and explosive. • Atomic substance • Narcotics and hazardous chemicals • Distillation and brewing of alcoholic drinks • Cigarettes, cigars and tobacco substitutes

Fact That Attracts Foreign Investment towards SEZ in India

The incentives and amenities offered to the units in SEZs for drawing foreign investment into the SEZs, includes:

Duty free domestic procurement of goods for operation, development and maintenance of SEZ units. Exemption from minimum alternate tax as per the Income Tax Act under 115JB. window clearance for state and central level approvals Freedom from state sales tax and other duties for development of SEZs

The major amenities and incentives available to SEZ constructors•

IMPACT OF SEZs ON FDI

Foreign direct investment continues to play an important

role. India has the opportunity to become a manufacturing hub for textiles, automobiles, steel, metals, petroleum products etc.

FDI was estimated at $ 4 billion, without counting reinvested earnings The ministry of commerce estimates an investment of Rs 1 trillion in these SEZs in the next few years

The country's special economic zones have attracted foreign direct investment of over Rs 10,900 crore in the last three years, Minister of State for Commerceand Industry Jyotiraditya Scindia said (2005-08)

The country's special economic zones have attracted foreign direct investment of over Rs 10,900 crore in the last three years, Minister of State for Commerceand Industry Jyotiraditya Scindia said (2005-08)

However, export from the SEZ during the financial year 2008-09 has been to the tune of Rs 99,689 crore registering 50 per cent growth over the year-ago period

However, export from the SEZ during the financial year 2008-09 has been to the tune of Rs 99,689 crore registering 50 per cent growth over the year-ago period

The aim is to enhance foreign investment, provide an internationally competitive & hassle-free environment for exports, boost industrial investment

persuading the private sector to build social infrastructure that the states cannot

afford E.g. 1. Reliance has announced to

develop 10,000 hectares of prime land adjacent to Gurgaon.

2. Reliance’s ambitious 14,000 hectares twin SEZs project near Mumbai is in fact going to be the second largest SEZ project in the world.

The government hopes that the SEZs will bring in billions of dollars in investment and create over a

million new

India already has 11 functioning SEZs- 7 set up by the central government and 4 by private/joint/state sector.

These 11 SEZs are functioning in- Kandla, Surat, Cochin, Santa Cruz, Falta, Chennai, Vishakhapatanam, Noida, Indore, Salt Lake (Kolkata) and Jaipur. Two others at Jodhpur & Moradabad are ready for operation.

The SEZ Act has brought in foreign direct investment. Nokia, Flextronics, Ascendas, Foxconn Tech, Apache Software and Brandix (a Sri Lankan textile company) have already invested in India because of SEZs.

In the first year of SEZs, investment to the tune of $3-5 billion has been committed

SPECIAL ECONOMIC ZONES- Fuelling India’s Economic Growth

FDI- 100% permittedunder automatic route

Simplified Procedure- Single window clearance

SEZ can be established either by the Central Government, State Government or any other entity

Exemption from customs/excise

dutiesExemption from Service Tax

Duty-free imports of capital goods and inputs for production for Export

Liberal access to foreign exchange Encouragement to FDI Simplified, “one-stop” approvals Generous tax concessions esp. in early years Flexible Labour Laws Limitations on sales within the country Better Infrastructure (Power, Transport & Communications)

We will note the differences between China and India later.

SPECIAL ECONOMIC ZONES- Fuelling India’s Economic Growth-

Cont

EXPERIENCE IN OTHER COUNTRIES

Unfortunately, the impact of zones on FDI is hard to gauge given the lack of data. Many zones do not track foreign investment flows separately, and data is uneven.

Available data suggests that SEZs are an important destination of FDI in some countries.In the Philippines FDI flows increased from 30 percent

1997 to over 81 percent in 2000 (UNCTAD, 2003).

In Bangladesh, $103 million of the $328 million of FDI inflows were registered in EPZs

In Mexico FDI increased from 6% in 1994 to 26% in 2000In Mexico FDI increased from 6% in 1994 to 26% in 2000

in China, SEZs account for over 80 percent of cumulative FDI

Challenges Before Emerging Market Economies

India and China, the two emerging market economies for their respective GDP growth.

Let us compare how both India and China, the two emerging market economies are behaving in economic spheres.

As in the year 2005 the GDP in China was at $2.2 trillions compared to India at $700 billions

In Foreign Trade 2005, China owned $1.4 trillions compared to $230 billions for India.

In Foreign Exchanges Services 2005,  China had $820 billions and India at $147  billions.

With regards to Foreign Direct Investments     as in 2005, China had $60 billions     compared to India at $5 billions.

SEZ stir have no impact on FDI

SEZ FDI is a 'double- edge sword' that could be a mode of development at some places but not everywhere says “Courtney Fingar, editor of Financial Times' global investments magazine “

JVDheldden, the Indian arm of FDI, also released a study

called 'India as FDI Destination' .He says

The country is not realising its full potential because of the business environment and policy- related impediments.

The promise of $500 million-plus investment opportunities in diverse sectors in India was marred by the obstacles at various levels.Multiplicity of agencies are also undermining the investment efforts in the country.

Many agencies are engaged in doing similar activities relating to FDI -- such as FIPB, DIPP, FIIA, IC, SIA, and so on," the study said

Bureaucratic delays, discretionary interpretation, vested interests, bias and subjective practices are retarding the pace of FDI in India, it said.Specific sectors include private banking where RBI approval is required for FDI beyond 5 per cent.

The study said despite these impediments, India remains an attractive destination for its high returns in foreign investment at 20 per cent, compared to China (13 per cent) and Thailand (12 per cent).

Comparing India and China, Fingar said though both countries are most sought after FDI targets of multinationals, "their success story is quite opposite".

"While others (including China) seek to move from attracting FDI in manufacturing and assembly-line operations to the service sector, India is doing just the opposite, from success in the service sector to the manufacturing, such asSEZs," she said.

SEZs would be complementing India's success in the service sector, she said, adding the boom in retail and service sector of IT and IT-enabled services and BPOs had a 'knock on' effect on the real estate