IT SEZs: PM says size not an issue

It needed the prime minister’s intervention before the fued between commerce minister Kamal Nath and finance minister P Chidambaram over the size of SEZs could be resolved

By Amar Drall

It was a fight between commerce minister Kamal Nath and finance minister P Chidambaram that was threatening to derail the government's supposed plan to create an industrial infrastructure that would help India rival China.

This was until Prime Minister Manmohan Singh decided to call in the third umpire.
Let's start at the beginning: The government recognised long ago the negative impact of bureaucracy and corruption in government systems, as a whole, and came up with the concept of a Free Trade Zone (FTZ). The first FTZ was set up in Kandla in 1965. Subsequently, this concept was modified to that of the Export Processing Zones and then further transformed into Special Economic Zones (SEZ) in 2000.

The objective of all these zones was to provide an internationally competitive environment for exports, making available goods and services free of taxes and duties, supported by integrated infrastructure for export production, expeditious and single-window approval mechanism, and a package of incentives to attract foreign and domestic investments for promoting export-led growth.
The SEZ programme remained on the backburner for almost five years when, in May 2005, the Manmohan Singh government notified the SEZ Act. However, it took another year to notify the rules governing the SEZs, sparking the tussle between the two ministries. Also, while the SEZs were supposed to cover all industrial sectors, it was the IT sector that took centrestage, because, as matters turned out, it was the conditions for setting up the IT SEZs that brought to the fore the differences between the finance minister and the commerce minister.

Apparently peeved by the continuous bickering between the Chidambaram and Kamal Nath, the prime minister first constituted an Empowered Group of Ministers (eGoM), headed by defence minister Pranab Mukherjee. Its other members were the feuding finance minister and the commerce minister, law minister H R Bhardwaj, telecom minister Dayanidhi Maran, and deputy chairperson of the Planning Commission Montek Singh Ahluwalia.

But, even before the eGoM could debate the issue, the Prime Minister's Office (PMO), taking up the excuse that the SEZ scheme "in its present form did not meet the objective of spreading the growth of the software industry across small cities and towns", asked the department of information technology (DIT) to constitute a study group to assess the impact of the SEZ Act and the phasing out of concessions being granted to the IT and software industry under the Software Technology Park (STP) scheme. The study group's report was to be considered by a committee chaired by the member-secretary of the Planning Commission. And it was this study group's report that has been forwarded by the PMO to the eGoM for "necessary action".

The genesis: finmin says size matters
The dispute had its origins in the objections raised by the finance ministry on what should correct size be of the SEZ be set up for the IT and software industry. According to the finance ministry: "IT SEZs should have minimum area of 25 hectares along with built-up area of 1 lakh sq meters. There should be no relaxation for gems and jewellery sector SEZs, biotechnology and non-conventional sector SEZs and these should have a minimum area of 100 hectares as applicable to sector specific SEZs as against 10 hectares prescribed in the SEZ Rules."

The basis of its objection was that there were administrative constraints in monitoring small SEZs and it was the international practice to have large SEZs with sufficient minimum area and space for infrastructure. The ministry pointed that this would also lead to some duplicity, since the Industrial Park Scheme of the department of industrial policy and promotion takes care of small urban areas. It further contended that fiscal incentives should only be for large SEZs.

To this, the commerce ministry contended, "IT, gem and jewellery, biotechnology and non-conventional energy SEZs do not need large space as these do not entail the use of large machinery. These are predominantly knowledge-based sectors, employing a large and skilled workforce, which is available only in the proximity of urban areas.

Prescribing larger area limits for such sectors would render the scheme inoperative as such large tracts of land would not be available near the urban areas. Importantly, the suggestion of department of revenue to have a built up area of 1 lakh sq meters for the IT sector SEZ has been accepted and no useful purpose will be served by having a large area of 25 hectares with the same minimum built-up area limit as prescribed over 10 hectares. Sectors such as biotech, IT, non-conventional energy do not require much administrative control/monitoring, since most of these sectors attract zero customs duty. Lower minimum area requirement has been considered absolutely essential to these sectors keeping in view the nature of the industry and to take advantage of our comparative advantage in these sectors." [Rule 5(2)] Another objection the finance ministry had was that "there should not be any special dispensation for the SEZs, which were approved by the board of approval for the SEZs before the commencement of the SEZ Act and Rules but which were not notified by the department of revenue. This dispensation is provided in Rule 5(3) read with annexure-II of the SEZ Rules."

Countering this objection, the commerce ministry said: "There was no minimum area requirement for sector specific SEZs prior to the coming into force of the SEZ Act and Rules. The proposals were considered by the board of approval on a case-by-case basis. Out of the 16 cases, which are covered by Rule 5(J) read with annexure-11 of the SEZ Rules, objections were raised in respect of only five of the proposals. The earlier proposals were not objected to and, in fact, smaller area SEZs have also been notified by the department of revenue. Some of the smaller area proposals notified by the department of revenue are:
- GIDC Apparel Park at Surat over an area of 141.6 acres
- WBIDC Gem and Jewellery SEZ at Manikanchan over an area of 5 acres
- Wipro IT sector SEZ at Kolkata over an area of 16 acres
- Mahindra Apparel SEZ at Chennai over an area of 86 Acres
- RIICO Handicraft SEZ at Jodhpur over an area of 180 acres
- RIICO Gem and Jewellery SEZ at Jaipur over an area of 110 acres."

The solution
With both the ministries adamant on their stand on the minimum size of an SEZ, the government first constituted the eGoM. But, even before the empowered group could take any action, the PMO stepped into the act: it got the department of information technology to constitute a study group ostensibly to assess the impact of the SEZ Act and the phasing out of concessions under the STP scheme. On its part, the DIT entrusted the study to management consultants Ernst & Young. The consultants' report was approved by a committee headed by the member-secretary, Planning Comm- ission and this was then forwarded to the eGoM. The PMO said, "The eGoM may be requested to examine these recommendations in the light of the importance of the software industry and the need, if any, to address specific issues relating to this industry through appropriate amendments to the SEZ policy."

In its recommendations forwarded to the eGoM, the committee noted:
"IT SEZs may be subjected to a combination of built-up area and employment parameters." Accordingly, the eligibility threshold requirements for SEZs being set up in mega cities should have a built-up area of 1 million sq ft and must provide jobs to a minimum of 10,000 people; SEZs in Tier II cities should have a built-up area of 500,000 sq ft and must provide jobs to a minimum of 5,000 people; SEZs in Tier III cities should have a built-up area of 250,000 sq ft and must provide jobs to a minimum of 2,500 people.

Thus, in one swift move, the PMO put up an option before the eGoM that did away with what had become a bone of contention between Kamal Nath and Chidambaram. Agreeing to a large extent with Kamal Nath's stand, the committee pointed out that "an important character of the IT industry is that it is different from the classical manufacturing industry which is inherently equipment-intensive and is, therefore, based on horizontal expansion and requires large area for its operations. The IT and ITES industries, on the other hand, are manpower-intensive and are capable of working in a virtual environment. [The] knowledge industry requires infrastructure like highly reliable connectivity for data transmission, good network coupled with good quality uninterrupted power supply, but not necessarily land, for achieving the same level of value-addition and employment as manufacturing. Here, the space required for expansion could be vertical. It was pointed out that in a land-scarce country like India, it would be better to encourage intensive use of land rather than its extensive use, which was inherent in the SEZ policy as it stands.

"In view of this, it was felt more appropriate to delete the 10 hectares requirement and instead insist on the parameters of built up area and associated facilities, coupled with employment generation."