Free Trade Warehousing Zones (FTWZ) were introduced under the UPA Government, as a part of the Foreign Trade Policy 2004-09, to facilitate global trade of goods in free currency. The scheme was a part of India’s overall vision to increase India’s share in global trade, a meagre 0.8% then. FTWZs, although designated as a special kind of trading enclave, was clubbed under the overall scheme of Special Economic Zones (SEZ). SEZ policy itself was introduced based on experiences of countries like Dubai, Singapore and China which had considerable success in improving trade from such free zones; India hoped to boost exports through a similar framework of subsidies and improved trade infrastructure.
Introduction of the scheme saw significant traction in the SEZ space with many players, public and private, announcing plans to develop and operate SEZs, although, several SEZs (other than IT SEZs) have failed to take off even today, with internal issues of land acquisition, corruption and bureaucratic interference, and external issues of inability to compete with global players on quality, or with developing countries such as China on cost and price.
FTWZs, on the other hand, hardly ever got the attention they deserved. India currently has only 3 operational FTWZs, which have experienced limited success in the past.
Over the last 3-4 years, India has witnessed a major boom in warehousing. This can be largely attributed to, among other reasons, increased focus of the incumbent Government on logistics and transport infrastructure, the introduction of unified tax system under GST and growing penetration and popularity of e-commerce. Improving warehousing infrastructure and quality is set to play a key role in the Government’s objective to reduce logistics costs as a % of GDP from its current levels of 13-14%.
The country is currently riding a wave in the warehousing industry with a high demand for quality Grade A space. An interesting question is, was the FTWZ policy ahead of its time? With the warehousing boom, can FTWZs make a comeback and ride a new growth wave, specifically with the impending sunset of the income-tax holiday for SEZs? Below are my personal views.
Can benefits can outweigh the loss of tax holiday?
The benefits of an FTWZ for imports and exports can be quite notable. Some key benefits have been highlighted below –
- Duty Deferment on imports – Goods can be stored in an FTWZ for up to 2 years without payment of import duties. This allows several manufacturers and traders to follow just in time inventory of goods imported.
- GST and other duty exemptions – Value-added services done within an FTWZ are exempt from GST. Thus, importers, exporters and even re-exporters could carry out labeling, repackaging, kitting, branding, and similar services within an FTWZ thus, saving on costs.
- Smoother customs clearance – 24/7 and smoother customs clearance as compared to bonded warehouses.
- Quality control – QC prior to duty payment (imports) / dispatch (exports) saves significant costs and efforts on reverse logistics.
- Cheaper costs on value-added services – Re-exporters could also benefit from skilled labour at relatively cheaper costs on value added services.
These benefits can outweigh loss of income-tax holiday ending March 2020, provided one can apply these practically within the dynamics of the current economy.
Tapping on cross-border e-commerce
Online sales in India has risen from under 1% of total sales in 2014 to close to 5% in 2019. This is still significantly lower than most developed nations. With a projected e-commerce industry of USD 188 bn in 2025, India is one of the fastest growing in this segment. Creating a better trading infrastructure can significantly support the growth of cross border e-commerce. With large retailers such as Amazon and Walmart taking a keen interest in India, a healthy FTWZ ecosystem can attract more such players and contribute significantly in enhancing volumes of international trade and investments in the Indian e-commerce industry. Also, the ability to send goods into India without the requirement to have an Indian office through an FTWZ, can help bring in small to mid-scale international sellers onto Indian e-commerce platforms, both on B2B and B2C side. FTWZs could also expand to create co-working spaces for e-commerce start-ups within the facilities thus, promoting ease of doing business for global players.
Capabilities to become a Regional Distribution Hub
Most warehousing decisions are driven by commercial considerations of cost, price and proximity to clients. The Government should focus on leveraging India’s strategic geographic position in South Asia and long peninsular coastline to make it a regional distribution hub. The ability to transact in foreign currency in an FTWZ can be a big advantage in re-exports. Most global traders prefer Singapore, Hong Kong or Southeast Asian countries such Tokyo or Seoul, for setting up regional distribution centers. The % of re-exports of total exports from HK and Singapore in 2018 was over 98% and 48% respectively, aggregating to USD 720+ bn. With the ability of India to provide dollar rentals and cheaper skilled and unskilled labour, this is an untapped opportunity to create a large re-distribution base in India. India was recently ranked second in Agility’s Emerging Markets Logistics Index 2019. A strong trading environment supported by high quality and efficient transportation and logistics can boost India’s perception as a competent player for regional distribution.
Using size and scale to the advantage
FTWZs have a prescribed minimum land requirement of 40 hectares. Under the pre-GST era, this scale in a single state was economically unviable. However, with GST implemented, FTWZs can use size and scale to its advantage in creating hub-and-spoke models of distribution. Also, the ability to create railway access to and within an FTWZ is more feasible given the larger size, as it allows better economies of scale. This can add significant value in reducing logistics costs for end users.
India is a high import country as compared to many of its regional peers. While SEZs were promoted to boost exports (like Dubai, China and Singapore), under the scheme as it stands, FTWZ’s advantages can pull in significant value to Indian importers and exporters, even in the absence of income-tax subsidies. For re-exports however, India will need to become competitive with current global distribution hubs. The following actions could add value in making zonal based approach for economic development more effective in India –
- Providing tax incentives at par with global free zones;
- Improving the quality of logistics and international shipments;
- Ensuring seamless interface between state and central authorities, eliminating bureaucratic duress and improving ease of doing business;
- Improving railway infrastructure and quality of roads for cost-effective inter-state transportation and enhanced first and last mile connectivity
- Harnessing a mix of technology and low-cost labor to provide cost efficient and high-quality services to end-users
Despite growing protectionism world over, we still see countries continuing to focus on zonal based economic development to boost trade. Recently, Japan and the EU announced a partnership to develop the world’s largest free trade zone, and China is developing a number of economic zones to specifically cater to e-commerce.
A focused and proactive, rather than reactive, policymaking is the need of the hour to thrust India into the global league for trade, and FTWZs could provide an effective avenue for achieving this objective.
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About author: Devi Shankar has 15+ years of experience in private equity, investment banking and structuring. Devi holds an MBA from the University of Chicago and a CFA degree.