Can the Empowered Group of Ministers Demand RBI Changes

The press trust of India is reporting that the Government of India's Empowered Group of Ministers (EGoM) has asked the Reserve Bank of India (RBI) to classifies SEZs as infrastructure projects rather than as speculative real estate projects. This matters because of the interest-rate implications of being an infrastructure project (the rate is lower), and because of tax benefits that could accrue to infrastructure-based projects. This is particularly true of manufacturing-based SEZs, where there are various tax- and duty-deferring or other such credit schemes in operation, including many for exporters.

The EGoM and the supporters of this proposal justify the move as necessary given the global economic slowdown. This has manifested itself in the form of drastically reduced credit availability, but also in the form of declining Indian exports, which were down 12% in October on a year-to-year basis -- the first decline of any kind in more than five years.

Apart from the long-term policy issues involved, the immediate questions that arise are whether the EGoM is indeed empowered to take this decision -- or, if merely advisory, what status it has as an input to future cabinet decision-making -- and whether such authority, if it existed, would be a good thing. Looking forward, we can anticipate further controversy surrounding the mechanisms through which such a decision should, could, or would be repealed. There is also the reasonably robust politicial-economy rule of thumb that says that it is harder to take away an existing benefit than it is to deny the granting of such a benefit in the first place. So, regardless of which agency is authorized to reverse such a decision, were it to be effected (and thus far the RBI has not taken specific action), it will face great pressure, once the economic climate improves, to leave in place a tax benefit put in place to cope with stormier times.

Through What Channels Does Industry-Wide SEZ Lobbying Take Place?

This piece is an indication of the kind of lobbying undertaken by the SEZ-promoter industry as a whole. But it also raises the question quoted in the title to this post: through what channels does this lobbying take place? And, furthermore: can such lobbying only work on issues of common concern to more or less all SEZ promoters (in this case, who does NOT want a more comprehensive form of tax relief)? Are there conflicts of interest within the SEZ business lobby that cause friction in determining which agenda items get priority, assuming a finite amount of political capital? And, with reference to the earlier Posts of 4 Dec and earlier, what impact does the financial crisis (as a narrative-framing device, more than as an actual economic force) have in affecting the chances for successful lobbying on something like this? That is, will the government decide that SEZs are in danger, and that tax relief will save them from being a costly failure? Or is a pending government-revenue crisis more powerful a motivation -- leading officials to prioritize resource mobilization over business promotion/rescue?

SEZ proposes new I-T process BS Reporter / Chennai/ Hyderabad December 5, 2008, 0:34 IST The special economic zones (SEZs) are lobbying for a new method to calculate income tax based only on the turnover from the SEZ. This would not include revenues from non-SEZ units of the company, according to LB Singhal, director general, Export Promotion Council — export-oriented and SEZ units. Speaking at a conference on SEZs, organised by the Confederation of Indian Industry, he said the SEZ Act currently allows companies to get cent per cent income tax exemption from export incomes for the first five years. However, since the present method of calculating income tax is based on the total turnover, it is resulting in lower exemption. He stressed the need for the Reserve Bank of India to identify SEZs as industrial parks and not as real estate units, as considered now. This will enable the former to raise capital from banks and through external commercial borrowings. The matter has been placed before the Empowered Group of Ministers, he added. The exports from SEZs this year are projected to touch Rs 1,25,000 crore from Rs 66,600 crore during 2007-08. The Centre has approved 531 SEZs in the country and as many as 270 of these have already been notified while 87 have started operations. Earlier, state industries minister J Geeta Reddy said only wastelands or single crop lands were being acquired for SEZs. The 56 SEZs spread in 15 of the 23 districts in Andhra have till now provided direct employment to 25,000 people.

State withdraws SEZs from Real Estate Category and puts them in Purview of Infrastructure

SEZs and IPs get major relief

Created on : 12/02/2008 2:18:48 PM (NORMAL )

New Delhi, Dec 2 (UNI) A day after it became officially known that India's exports declined by 12 per cent in October as compared to the month a year ago, the government has taken a major policy decision to spur export growth by withdrawing special economic zones and industrial parks from real estate category and putting them in purview of infrastructure.

Announcing this at a function here today, a senior government official said the government has issued a directive to Reserve Bank to withdraw its SEZs and IPs categorisation under real estate category and put it in purview of infrastructure to spur up exports which are badly hit due to global slowdown in the developed markets the United States and European Union nations.

The announcement made by Director General, Export Promotion Council for EOUs and SEZs, L B Singhal has come as a big relief to exporters who have been demanding a special package to check the slide in export growth.

Industry chambers, Ficci and Assocham- only yesterday had reiterated their demand for the relief package, saying if not given immediately it would lead to huge loss of jobs, particularly in labour-intensive sectors like textiles, leather, handicrafts and gems and jewellary- all hard hit by drop in exports.

Commerce Secretary Gopal Pillai, too, had recently warned of five lakh job loss in textile sector alone by March next on account of worldwide slowdown.

The Commerce Ministry, which overseas the SEZ policy, has been demanding for quite some time that Reserve Bank allow SEZ units in the infrastructure sub-group to raise loans at lower core sector interest rates.

Core sector interest rates are almost two percentage points lower than the rates applicable to real estate project. This categorisation, the Ministry contended, would complement its recent efforts to support private investment in infrastructure finance.

Source: http://www.uniindia.com/unilive%5Cunisite.nsf/All/EB73F06CB9C13C30652575130049086A

RBI To Categorise SEZs, IPs Under Infrastructure Head To Spur Up Exports : D.G., EPC, EoUs & SEZs
Tuesday, December 02, 2008

The government has issued a directive to Reserve Bank of India (RBI) to withdraw its SEZs and Industrial Park (IP) categorization under Real Estate category and put it in purview of infrastructure to spur up exports which are badly hit due to global meltdown.

Announcing this at ASSOCHAM organized National Summit on Special `Economic Zones : Resolving Policy and Tax Issues’, Director General, Export Promotion Council for EOUs and SEZs, Mr. L B Singhal said that the decision of RBI to categorise SEZs and IPs under purview of real estate dampened growth of SEZs and IPs due to which exports have suffered severely.

Mr. Singhal, therefore, suggested that the RBI should immediately implement decision of Group of Ministers (GoM) to bring SEZs and IPs under purview of infrastructure, especially when centre has already issued a directive to RBI.

The Director General, Export Promotion Council for EOUs and SEZs during Interactive Session with ASSOCHAM members here today pointed out that in the last 35 years, Rs.8000 crores of exports were effected through various SEZs. However, after the SEZ Act of 2005, exports activities through number of SEZs and IPs were held to an extent of Rs.66,000 crore and their exports by end of current fiscal would reach over Rs.1 lakh crore.

The SEZs and IPs that are currently operational have a total investment amounting Rs.94,000 crore and providing 3.62,000 direct employment to various people and therefore, their categorization under infrastructure head is the right call given by the central government to premier apex bank – the RBI as it is this institution which is empowered to categorise SEZs and IPs under purview of infrastructure, said Mr. Singhal.

In a bid to spur up exports through SEZs and IPs, the SEZ and IPs would be exempted from the service tax and a notification to this effect would shortly be issued, said Mr. Singhal, clarifying that the central government has already decided to provide service tax exemptions to SEZs for services they are providing outside the SEZs.

Mr. Singhal also said that the Department of Commerce and Industry is also finalizing a notification in consultation with the Ministry of Finance to provide Duty Entitlement Passbook Scheme (DEPB) as well as Duty Drawback benefits to SEZs and IPs. In addition, the Ministry of Finance is also coming out with directives to provide CENVAT credit benefits for manufacturing of various articles within SEZs, he added.

According to him, India would extend these benefits to its SEZs and IPs as their are total 138 countries that have such facilities for their SEZs and IPs which have created direct employment for 68 million people with investments of US$ 1600 billion and export worth of US$ 750 billion.

Mr. D S Rawat, ASSOCHAM Secretary General complimented Mr. Singhal for disclosing the government decision for directing RBI to bring in SEZs and IPs under purview of infrastructure as it has become necessary to push up exports at times when these are sinking.

Among others who attended the conference included Mr. B Vijayan, Development Commissioner, MEPZ, Special Economic Zone, Chennai, Mr. S Ramasundaram, CMD, Tamil Nadu Industrial Development Corpn., Mr. R Sannareddy, Chairman, Sri City Pvt. Ltd., Mr. Srinivasan K Swamy, President, Madras Chamber of Commerce & Industry and Mr. Murali Venkatraman, Chairman, ASSOCHAM Southern Region Development Council.

Source: http://www.assocham.org/prels/shownews.php?id=1795

Economic Slowdown Propels Legislative Change in Punjab

The economic crisis, which has dimmed hopes for the use of SEZs to promote the IT industry in Punjab (as in many other states), also appears to have been a factor leading to the passage of specialized state-level SEZ legislation. The article excerpt below indicates that perhaps only the most dedicated promoters will persist.


Global financial crisis hits IT industry in Punjab
Swarleen Kaur
Posted online: Dec 04, 2008 at 0125 hrs

ChandigarhThe information technology industry in Punjab , which began in the year 2008 on a positive note now faces harrowing times towards the year-end as the global economic slowdown started to spread its wings into India.

The impact of global meltdown spilled over to Punjab in October when a software major in Mohali, Quark, showed 147 contractual staffers the door. Besides the growth of IT, special economic zones (SEZ) in the state remained sluggish. Though there are more than 18 SEZ projects proposed in Punjab but till date only one SEZ belonging to Quarkcity became a reality.

The slow growth of these projects exhorted the state government to introduce SEZ Act, which suggested a single-window system so that developers get all the necessary clearances from one single point. The Act has received deemed approval and will be implemented shortly.

Economic Crisis Continues to Affect SEZs

It was no surprise, perhaps, when SEZ promoters who were engaged in highly leveraged forms of real-estate speculation, evaporated when access to credit became highly constricted. (The post of 17 Nov, below, indicates that the sites in question are thrown into a legal limbo from which certain actors may try to profit.) There is a broader question, however, as to whether a wider economic downturn--affecting growth, exports, employment, etc, and not just financial markets--will undermine the business models on which more legitimate SEZs are based. This article, dealing with the Hyderabad Municipal Development Authority SEZ (with Google as one of its tenants) gives a flavour of the rapidly shifting landscape.

IT firms interest in SEZ 'melts' away
Koride Mahesh
Time of India, 4 Dec 2008 (0335 hrs IST)

HYDERABAD: In view of the economic slowdown, companies are unwilling to set up their offices at the proposed IT and ITeS Special Economic Zone (SEZ) at Kokapet on the city outskirts.

The Hyderabad Metropolitan Development Authorities (HMDA) has proposed the SEZ exclusively for IT and ITeS companies on an extent of 119 acres at Kokapet village.

Land has been allotted to 11 companies by the urban development authority. Google has been allotted 20 acres, M/s Patni Computer Systems Pvt Ltd 24 acres, M/S Sonata Software Ltd 7.04 acres, M/s Intelli Group Asia (p) ltd 4 acres, M/s Conexant has got 4.36 acres, M/s C-bay System (India) Pvt Ltd 6.42 acres, M/s Cognizant Technology Solutions has been allotted 9.05 acres, M/s Qualcom 7.34 acres, M/s DQ Entertainment Ltd 2.87 acres, Infinite Computers Solutions Pvt Ltd 4.85 acres and M/s Tech Mahindra has got 8.43 acres.

The land is being given on a 20-year lease to the firms at the cost of Rs 25 lakh per acre and another Rs 25 lakh per acre for providing infrastructure at the SEZ.

While M/S Qualcom has dropped its plans, Google has not paid the full amount as yet. While Google, which owes Rs 10 crore towards the land and development cost, it has paid only Rs 4 crore, other companies like Patni Computers, Conexant and Cognizant Technology Solutions have paid the amount in full but did not get their land registered.

"Google was given time till the end of November this year but it did not pay the remaining amount. It is up to the government to take a decision on the cancellation of the land allotted to it,'' an official said.

HMDA initially proposed a second SEZ if the response was good from IT and ITeS industries. But many companies did not evince interest in the SEZ due to slowdown in the software industry and the land litigation cases at Kokapet.

It is only after some companies paid money and took possession of land HMDA began development works at the SEZ. Infrastructure facilities like a link road is being laid from Shankerpally to Outer Ring Road at Vattinagulapally and internal roads will be ready by next few months. Licences of two mining companies in this area have been cancelled by the state government to pave the way for internal roads in the IT SEZ.

"The HMDA will select core developer for providing facilities like water supply, drains, electricity and other facilities very soon. The companies have been asked to start their work at the allotted sites,'' HMDA chief engineer Vivek Deshmukh said.

Turning Crisis to Advantage: The Politics of Denotification

This piece indicates the likely extent of denotification of projects previously approved for SEZs. What happens to the land, and who benefits, is of prime importance in understanding the politics of SEZs over the longer term. Crisis forces SEZ developers to review plans Economic Times-17 Nov 2008

NEW DELHI: India’s SEZ story, which generated protracted controversies last year, seems to have lost its sheen fo r now, thanks to the global economic turmoil. As funds become scarce and demand for IT and industrial space diminishes, developers are looking to roll back their SEZ plans by seeking denotification or buyers for their projects. The country’s largest real estate developer DLF is looking for a buyer for its 10-hectare IT SEZ in Noida. Three more developers are seeking to sell their IT SEZ projects in Noida and Gurgaon. One notified IT SEZ project, looking for a buyer, is located on the Sohna Road in Gurgaon. Brokers have approached potential buyers with proposals, without much success. And that’s not all. Mumbai-based leading apparel exporter Alok Industries has decided not to go ahead with its proposed 80-hectare textile SEZ at Silvassa in the Union Territory of Dadra & Nagar Haveli. The company is understood to have decided not to seek notification for its SEZ, which received formal approval over six months ago. A company executive said Alok Industries did not see any rationale in pursuing the project as it will not give textile exporters duty-drawback benefit, thereby putting a question mark on the viability of the SEZ. One large developer in Kolkata is seeking denotification for its SEZ even as another developer is requesting the government to denotify part of an IT SEZ near Mumbai. Notification puts certain obligations on developers, whereby he is expected to construct a minimum built up space in three years and reserve areas for specific usage. Once denotified, a firm gets the flexibility to develop project at his own pace and without any restriction on usage. Meanwhile, India’s largest private company, Reliance Industries, has reportedly put on hold land acquisition at its proposed multi-product SEZ in Haryana.“Developers are facing severe cash crunch. They have no choice but go slow or exit projects. But who will pick these projects,” says property consultancy firm Cushman & Wakefield director (transaction) Kaustuv Roy. Companies are putting off expansion plans and squeezing their space requirements as slowdown grips the world. “In six months, most markets in India will see supply of IT space far outstrip demand, bringing pressure on most new IT SEZs,” Mr Roy said. A DLF spokesperson denied the company wanted to sell its IT SEZ in Noida. But a person close to the development said the company held negotiations with at least two Noida-based developers, though potential buyers later backed out as economic environment in general worsened, giving rise to fears that it may be unsustainable to have more IT space in a market like Noida, where supply has already edged out demand. In many other projects, including multi-product SEZs, developers have put on hold acquisition of land. “Anyone who hasn’t acquired land so far will definitely not go for acquisition,” property consultancy firm JLLM managing director Anuj Puri said, adding that funds are difficult to raise and there was no urgency to pay farmers a high rate, when rates were likely to fall further.