Chairman of the Asia Region, McKinseyClusters in the form of SEZs marked by special economic systems and policies have the ability to tremendously boost export performance and FDI investments. For example, today China has more than 500 economic development zones that receive over 75 percent of FDI and drive over 50 percent of the country's exports. However, it's unfortunate that over the years the debate around SEZs in India has been acutely political, resulting in a lacking of understanding around their ability to accelerate employment generation and export growth.
If India, were to have robust policy framework around SEZs, the country could stand to gain. Some of the key aspects around SEZs that India needs to think about include:
- Empowered governance: To begin with the governing body for an SEZ needs to be insulated from political changes and pressures, and be sufficiently empowered. This includes the ability to respond to the needs of its tenants; to enforce the expectations from businesses and to withhold benefits when they fail to deliver; to simplify administrative procedures that enable efficient start-up and closure of units and to amend labor laws as required.
- World-class infrastructure: While, infrastructure build-outs within the SEZs are the prime responsibility of developers, the government must ensure it facilitates connectivity to SEZs by constructing roads, railroads and ports.
- Attractive environment: The environment in an SEZ should appeal not only to businesses, but also to talented workers increasingly required by companies as they establish a global footprint. A place lacking the necessary soft infrastructure will not succeed in attracting superior talent.
- Anchor tenants: Each SEZ must have a few anchor tenants that aspire to significantly increase operating scale and size through substantial capital investments. Consequently, they are likely to be the larger beneficiaries of the incentives e.g. tax holidays provided by SEZs.
- Access to the domestic markets: Companies located in SEZs should be allowed to sell their products in the domestic market on payment of local taxes as well as duties on imported raw materials, similar to China's dual-book system. This will create a level playing field for units inside and outside SEZs and potentially help attract foreign investments.