India’s drive to set up special economic zones (SEZs) has run into high-decibel criticism and faced more than its fair share of controversies. It has also been retarded by unresolved policy and fiscal issues, as well as being starved for capital due to the global economic slowdown.
Nevertheless, it has picked up momentum. Although the process was first mooted way back in 1965, it has only been pushed in the four years since the enactment of the SEZ Act, 2005. Since then, over 570 SEZs have been formally approved. About half of these have been able to secure land and receive notification. About 100 SEZs are operational; 80 of these launched operations in the past three years. Over a trillion rupees have been invested in these zones.
The story doesn’t end there. SEZs continued to record significant positive growth in exports in contrast to the rest of India, which has been grappling with falling exports.
SEZs promoted as manufacturing hubs are drawing plenty of interest from global telecom vendors, who are attracted by a mix of tax incentives, subsidies and vast areas of available open space.
This dramatic change in attitude has led to India’s telecom exports multiplying from the negligible levels of five years ago. Then, telecom equipment manufacturers avoided setting up Indian facilities, even to supply to the domestic market, owing to a slew of tax and regulatory bottlenecks. Today, majors like Nokia, Motorola, Foxconn, Flextronics, Aspocomp and Salcomp have set up shop to drive exports.
The total export earnings from IT/ITeS, telecom and engineering product-based SEZs was Rs 249.9 billion 2008- 09 compared to Rs 172.76 billion in 2007- 08 and about Rs 78.32 billion in 2006-07. Nokia led the product-specific SEZs with exports of Rs 103.85 billion.
Key trends
Success stories and status checks
Nokia SEZ: Set up with an initial investment of $150 million, the Nokia SEZ has been operational in Chennai since 2006. The zone achieved cumulative physical exports of Rs 103.85 billion in three years (2006-07 to 2008-09). The Finnish equipment maker hosts several global component manufacturers such as Salcomp, Aspocomp and Foxconn. Economies of scale and logistical advantages are evident with all the component manufacturers housed in the same SEZ. For instance, Taiwan-based cellphone manufacturer Wintek has set up a cellphone panel backend module plant in the Nokia SEZ to meet Nokia’s demand. Wintek targets monthly production capacities of 9 million cellphone panel units at the Chennai plant.
About 14,859 persons have been provided direct employment by various units in the SEZ. A total of Rs 22.25 billion has already been invested in this SEZ, including foreign direct investment (FDI) of Rs 8.33 billion. The total projected investment in the SEZ is Rs 29.3 billion and it is expected to eventually provide direct employment to 20,000 people.
Flextronics: The SEZ became operational in 2008 and exported Rs 360 million worth of goods in 2008-09. Flextronics’ SEZ operations support the manufacturing requirements of local and global original equipment manufacturing customers. By co-locating manufacturing and logistics operations with strategic suppliers on site, the SEZ aims at minimising logistics costs and improving manufacturing cycle times. It offers a plethora of vertically integrated services including design, plastic injection moulding, mechanical and enclosure integration, distribution, logistics and repair.
Foxconn: Foxconn has set up an engineering goods SEZ at Sriperumbudur at an initial investment of about $110 million. Apart from developing an SEZ, Foxconn has also set up a manufacturing unit inside the Nokia SEZ to build components on a purchase-to-build basis.
Apart from vendors, telecom operators like Reliance Communications (RCOM) are also showing interest in developing SEZs. In end-2008, RCOM contracted its group company, Reliance Infrastructure, to implement an SEZ at Dhirubhai Ambani Knowledge City (DAKC) in Navi Mumbai. The company is developing part of the 132-acre campus at DAKC on the outskirts of Mumbai as an SEZ focused on IT and IT-enabled services with an estimated project cost of Rs 10 billion.
Others: While Nokia, Flextronics and Foxconn have been involved in SEZ development beyond merely setting up their own units, several telecom equipment makers and service providers have set up shop in IT/ITeS and other electronic hardware SEZs (not restricted to just telecom gear). Some of these are listed below:
Operators gain
For manufacturers, the SEZ concept has brought in gains in terms of fiscal benefits as well as reduced red tape due to singlewindow clearances and other simplified procedures. As the number of SEZs, industrial parks and townships increase, it will become more and more critical for developers to gain a competitive advantage by offering superior facilities. One possibility is offering voice, data and media as a “digital utility”. With over 550 SEZs in operation and most opting for a digital setup, this has emerged as an important segment for telecom operators.
Recent deals in this space include Marg Limited. This integrated infrastructure company has recently signed an agreement with state-run Bharat Sanchar Nigam Limited (BSNL) for providing telecommunications services at its upcoming township project near Chennai. BSNL will provide complete telecom solutions, including voice, data, Wi-Fi hotspots, video and audio conferencing facility, broadband, leased lines and wireless services at Marg Swarnabhoomi. The complex, promoted by Marg’s subsidiary, New Chennai Township, will have two SEZs, 15,000 apartments, shopping areas, a theme park and hotels. BSNL will take care of the specific needs of the various types of industries that will be located in these SEZs.
Hirco Developments and TTSL have signed an agreement for setting up worldclass telecom infrastructure at Hirco’s integrated township and proposed SEZ. The township and SEZ will be located at Oragadam near Chennai. TTSL will provide complete telecom solutions including an optic fibre network, voice and data services, Wi-Fi hotspots, broadband services, leased lines and wireless services to the tenants and residents of Hirco’s projects.
Risks and concerns
While the SEZ concept has driven investment, employment and infrastructure development, it carries certain risks and concerns as well. SEZs are largely dependent on the global and domestic economic scenario and are exposed to economic cyclical changes.
The economic downturn has added to the risks since global trade shrank just as Indian SEZs were taking off. Declining global demand and tight liquidity situations have forced several developers and units to drop their SEZ plans or postpone development. For instance, Jabil Circuit, a US-based electronics manufacturing service company housed in the Nokia SEZ, has closed down operations and opted to shift base to China. Jabil had invested over $100 million in its facility at Chennai before it decided to cut its losses.
FDI flows, which are a key feature of the SEZ policy, have also been low with FDI of only a little over Rs 100 billion coming in since 2006.
Analysts remain optimistic and take refuge in the belief that SEZs foster longterm economic activities. The risks associated with cyclical downturns will be compensated for by upswings in the long term.
Issues relating to supporting infrastructure like roads, railways, airports and power, are still evident. In some SEZs, the connecting roads are barely motorable and airports cannot cope with the traffic. Many state governments are providing all possible support in terms of building ports and airports and entering public-private partnerships for building new roads and bridges. It will take time, however, before these projects are up and running.
Overall, SEZs remain at the take-off stage. The concept obviously has huge potential and industry stakeholders are looking to tap this and aggressively promote telecom manufacturing in India.
