With April-February FY13 exports falling 4% over the same period in FY12 despite a 4% rise in February exports, next month’s foreign trade policy review is looking at Special Economic Zones (SEZs) as a big thrust area. There has been a sharp reduction in the number of developers who want to set up SEZs—37 of the 46 SEZs that have been denotified between 2010 and 2012, and this is in addition to the withdrawing of applications for getting approvals for SEZs. This, the argument goes, are largely the result of not being able to get land for SEZs as well as the finance ministry deciding to raise MAT levies to 18.5% on developers and on units in the SEZ apart from a 15% dividend distribution tax on developers. Despite this, however, supporters of SEZs point out, exports from SEZs still rose 35% in the April-December FY13 period to R3.53 lakh crore.
The move to encourage manufacturing SEZs gets even more important given the fact that the collapse of India’s exports growth has largely been driven by the fall in India’s manufacturing competitiveness. Manufactured goods comprised 78.8% of India’s FY01 export basket but this fell to 64.5% in April-November FY13. Within this, the share of textiles has come down from 23.6% in FY01 to a mere 8.7% in April-November FY13. Indeed, of the top 50 global imports, India has just 6 items. It has just 5 items in global imports with a share of more than 5% and 3 of these—oil, diamonds and jewellery—are based on imports and have low value-addition.
The problem, however, is when you look at a breakdown of SEZ exports, there is little to show manufacturing exports are getting a leg up due to the creation of SEZs—though the original rationale for SEZs was that the superior infrastructure that these zones would provide would help make India’s manufacturing world class. Of the R3.53 lakh crore of exports from SEZs, around R81,000 crore comes from IT SEZs and another R21,000 crore from SEZs of other services, leaving R2,62,000 from manufacturing SEZs in FY12. While that is a significant export number, the bulk of this comes from one unit, the Reliance refinery—including deemed exports, total exports from the refinery added up to R1,65,000 crore in FY12. Apart from the fact that this means very little exports are coming from non-Reliance manufacturing SEZs, it’s interesting to keep in mind Reliance has recently got 40% of this SEZ denotified since it finds it profitable to sell some part of its output in the domestic tariff area. And as the government reduces subsidies on diesel—bulk diesel sales are already at market rates—this increases the attractiveness of the local market. Any decision on reducing MAT or other levies on SEZs has to be made after taking into account these realities.