"A golden milestone in the process of broadening and deepening India's export base." This is how Kamal Nath, union minister for commerce and industry, described the passage of the special economic zone (SEZ) bill in the parliament last week. Golden it is, but not glittering. The sparkle has been robbed by deletion of the labour laws clause.

Succumbing to the demand of the Left, the UPA government bartered exclusion of section 50 (b) of the bill for assurance of support to the SEZ bill. Section 50 (b) of the bill proposed to vest the powers with the states to exempt SEZs from provisions of state laws related to trade unions, working conditions, provident fund, employers' liabilities, maternity benefits and invalidity and old-age pensions. With this deletion, though the government seemed to have mollified the Left for a while, it has slowed down the expected double-digit growth rate, which these SEZs are expected to ring in.

Nevertheless, the fiscal sops announced seem lucrative. According to the bill, all SEZ units will be eligible for 100 per cent tax exemption for the first 5 years, 50 per cent for the next five years and 50 per cent of the invested export profits for the next five years. The developers of the SEZs will be eligible for a 100 per cent income tax holiday for 10 years in a block period of 15 years. Industrial undertakings shifting base from urban areas will be exempted from capital gains tax.

A finance ministry notification further exempts goods produced or manufactured in an SEZ and brought to any other part within India from the 4 per cent additional customs duty. The bill also provides single-window clearance and approval mechanism for establish for establishment of SEZs as well as production units inside the zones.

Last fiscal, the country's exports touched $80 billion. For the year 2005-06, the target is $92 billion. With the Special Economic Zone Act in force, it is expected, according to Nath, to be able to attract foreign direct investment to the extent of $2 billion in the next two years.

India has nine SEZs operational in Surat, SEEPZ (Mumbai), Kandla, Kochi, Noida, Vishakhapatnam, Chennai, Falta (West Bengal) and Indore. Several projects are under development and some of them have been proposed. Some of these new SEZs promise to be ambitious having their own infrastructure inclusive of ports, airports, stations and inland container depots.

SEZ is a rather new concept in India. The role model was the Chinese economic growth contributed mainly by the success SEZs. Realising this to be one of the important instruments of giving thrusts to exports, the erstwhile commerce minister, Murasoli Maran, had first proposed it in the Exim Policy 2000-01. In a drive to move towards a SEZ model, away from the EPZ (export promotion zone) which failed to achieve export targets, some EPZs were converted into SEZs.

Nonetheless, these conversions did not work out optimally, as the required structural changes were not looked into and taken care of. Conceptually, an EPZ is an industrial estate, a SEZ is an industrial town. With supportive infrastructure SEZs have the potential to generate industrial growth, employment and both domestic and foreign investment to an extent which the EPZs could not.

China took the SEZ route to growth two decades ago and is reaping rich dividends out of it. Their five primary SEZs managed to attract immense foreign investment, first from non-resident Chinese from Hong Kong but later on from MNCs as well. The Chinese central government formulated special policies and flexible measures for SEZs. For decades now, there is special tax incentive for foreign investments and independence on international trade activities. Economic policies and activities are predominantly driven by the market and the products manufactured are primarily for exports.

These apart, China also enjoys the benefits of liberal labour laws. Considered to be a serious impediment for achieving a double-digit growth and catching up with the dragon, several industries — the readymade garments industry being the most vocal — have been voicing their concerns, which the government has once again ignored for its convenience.

In India, under the current labour laws, companies with more than 100 employees need to seek the permission of the government to fire employees. The companies are also required to hire contract labourers, if they keep them for more than three months. For the manufacturing sector this is quite a dampener.

By passing the bill, the ministry of commerce has given the initial push required to invite foreign direct investment. The Foreign Investment Promotion Board (FIPB) and the Foreign Investment Implementation Authority (FIIA) too should follow suit to make SEZs a success. And hopefully the Left, before its too late, will relent to add the glitter to the gold.