Frenzy called SEZ vanished into thin air by year end

For the business biggies, nothing was perhaps hotter than a SEZ investment proposition at the start of 2008, though towards the end of the year, the queues of special economic zone-seekers had virtually vanished, with promoters finding few takers of units in their special zones.

The extent of disillusionment can be gauged from the fact that even tax sops for units in the SEZs could not help revive the dampening spirit.

The year has seen a change in the sentiment, which has turned for the worse in the last three-four months. Scores of big corporate houses were making a beeline for developing special economic zones, billed as the new investment destination that assured tax-free income.

But as the tumultuous year comes to a close, investors' frenzy has given way to withdrawal symptoms, though well over 270 tax-free havens have been notified by the government.

Be it DLF, Parsvnath or the Rahejas, initially most of the reality players saw a great opportunity in SEZs.

However, with the deteriorating investment climate and real estate majors wanting to cash in on the SEZ boom seem to be developing cold feet on the once-hot proposition.

In fact, DLF has officially approached the commerce ministry for de-notification of one of its information technology SEZs to be located at a prime land in the national capital.

Parsvnath has put on hold 12 projects for which it has to acquire land and would go ahead only with five SEZs for which land is in its possession.

"We have put on hold some of the large projects, which is of luxury kind...like SEZs etc, where we need to invest a large sum of money," Parsvnath Chairman Pradeep Jain said.

With exports feeling the heat of the global meltdown, shipments from the SEZs may not meet the target of Rs 1,25,000 crore (Rs 1,250 billion) for the current fiscal.

The SEZ exports had increased almost two-fold from Rs 34,000 crore (Rs 340 billion) in 2006-07 to Rs 66,700 crore (Rs 667 billion) in 2007-08.

"Exports from these zones will decline. We have revised our export target for 2009 to Rs 1,00,000 crore (Rs 1,000 billion) from the Rs 125,000 crore (Rs 1,250 billion) targeted earlier," Export Promotion Council for EOUs and SEZs director general L B Singhal said.

While officials in the commerce ministry have described the developers' demand for pullout as 'isolated', the environment is certainly not as gung-ho as was the case in the early part of the year.

In terms of sectors, IT and ITeS dominated the approvals and notifications. Of the 270 zones, as many as 163 related to IT and ITeS.

While the sector has remained in the forefront of the India growth story, the main reason for the IT and ITeS firms rushing towards SEZs was tax incentives.

The full-blown recession in the US, which contributes 60 per cent revenue of the Indian IT firms, is bound to impact SEZs' attraction for these firms.

One of the positive outcomes of the slowdown in the development activity has been withering away of farmers' agitation against their land being acquired for SEZs.

Agitation against SEZs had rattled the state governments and developers in West Bengal, Goa, Maharashtra and Orissa.

Under political pressure, the Goa Government approached the Centre for cancellation of the zones, which had even been notified.

The fate of the issue still hangs in balance.

At the policy level, there was no material change except some procedural issues. However, there were some issues concerning alleged violation of rules by some of the developers.

While the empowered Group of Ministers condoned at least one of the largest developers in Gujarat, the promoter seems to be pulling out from the project because of the environment not being so investor-friendly.

One of the recommendations of the eGoM, headed by external affairs minister Pranab Mukherjee, and which has not been implemented by the Reserve Bank of India relates to treatment of a SEZ.

At present, the central bank treats SEZs as real estate activity, which makes the cost of borrowing high, given the increased provisioning requirement for the reality sector.

To be fair to the concept, SEZs remained one of the important destinations of investment, at least when the going was good.

Total investment of Rs 93,507 crore (Rs 935.07 billion), with employment potential of 1,13,000 people, has been made in SEZs in the last three years.

The SEZs have hit a roadblock, along with the rest of the economy.

As the growth bounces back, these zones would see early revival. At least that is what one expects!

• India's great rush for SEZs