‘6 months’ window can shift windfall from China to India’

“The coronavirus outbreak coupled with the US-China trade war have made special economic zones (SEZ) in India a lucrative destination for international manufacturers in China who are considering to move out,” said Sunil Rallan, Chairman and MD, J Matadee free Trade Zone Pvt Ltd. “But, these supply chains will not achieve economies of scale if they are compelled to set up discrete factories for domestic demands and for exports. This has been preventing companies from setting up shop in India,” he said adding that such companies have been moving to other ASEAN countries such as Vietnam, where the cost of labour is more than two times the price in India.

As per the existing rules, companies manufacturing in SEZ are allowed to export their products but not use them in the domestic market. “Because of this, there are several firms that manufacture in the country, export their products to other ASEAN countries only to import it back for sale in India,” said Rallan. “This increases the cost of the final product by 8 to 15 per cent,” he added.

Speaking about the obstacles that these firms face, the top executive said, “Currently, all DTA (domestic tariff area) customers pay for their imports through their regular banking channels. The same products, however, are not encouraged for supply by SEZ units to DTA customers. The payments made by DTA customers are not considered as being compliant with the SEZ rules. This defeats the Make in India policy as imports are being encouraged over Indian manufacturing.”

“The recalibration of the net foreign exchange rules will make the Indian SEZ attractive for new units and make the SEZ scheme WTO (World Trade Organisation) compliant,” Rallan said.

In a petition to the WTO, US trade authorities had stated that the existing net foreign exchange earning regulations by implication amount to an export subsidy since the upfront exemptions of taxes are deemed to be export linked and therefore a prohibited export subsidy.

Sharing details about the countries that have already shown interest in shifting from China to India, Rallan said, “Kenmec, a Taiwanese company that specialises in automation, has been showing a lot of interest as have other firms based in Korea and even a few Chinese companies that manufacture in China. And, a number of them have shown special interest in the SEZ along the Chennai-Bengaluru corridor,” he added. Bargavi Natesan, who co-authored a book on FAQ for IT SEZ which was jointly released by the Tamil Nadu government and NASSCOM, said that talks are underway with the government to seize the opportunity of the current trade scenario with China. “The matter is currently being handled with the Ministry of Commerce and we are expecting a change in policy in three to four months,” she said.

Claiming that India has about six months to make the best of the current situation and attract foreign companies, Rallan said, “The interest among international companies have peaked in the last three months. If we do not take advantage of this opportunity, we will miss out on boosting investment in the manufacturing sector, employment generation and growth in exports.”