Tuesday, November 27, 2007

SEZs in India: The record so far

For some time now, Special Economic Zones (SEZs) have been touted across the developing world as one of the chief instruments through which a country can achieve rapid industrialisation through exports. SEZs differ from the older and more acceptable concept of industrial clusters, that is industrial zones that bring together different productive units, with good infrastructure facilities and simplified procedures.

This is because they go beyond basic infrastructure provision to what are called “enabling conditions”, such as tax and duty holidays and/or rebates, highly subsidised or even free land, little or no compulsory worker protection, and the like.

It is really these provisions, which exist to greater or lesser degree in the regimes governing SEZs in different countries, which are so potentially problematic and have become so controversial.

Indeed, it is not clear how much such concessions actually matter in attracting investment.

There is very little conclusive evidence in support of the idea that fiscal concessions are particularly helpful in ensuring more investment, despite the threats routinely issued by corporates in this regard.

Major areas of concern

While the gross benefits of SEZs are still open to debate, there is already much concern about the aggregate social and economic costs of this strategy, making the net benefits even more uncertain. There are three major areas of concern: the fiscal costs; the issue of workers rights and net employment generation; and land transfer, dispossession and displacement.

SEZs in India functioned under the provisions of the Foreign Trade Policy from November 2000 to February 2006. But since February 2006, they have come under the Special Economic Zones Act 2005.

Since then, it is the issue of land acquisition that has become the most controversial and raised the greatest political response in India. Of course this is an important issue, but it can be argued that the areas of policy concern relate more to the process of land transfer and the nature of compensation and rehabilitation of displaced persons, rather than to whether there should be a change in land use per se.

Some opponents of SEZs have argued that any transfer of agricultural land to non-agricultural purposes (whether it be for industry, real estate development or other activities) is invalid and should not occur. However, this is clearly an extreme and unjustifiable position.

Shift in land use

The process of development — even the most equitable, broad-based and democratic sort of development — will necessarily require that land use be shifted from agricultural to non-agricultural purposes as economies and societies become more diversified.

This is not only inevitable but even desirable in the long run, as long as food security issues are adequately taken into account.

However, it is absolutely necessary to ensure that those who are affected by changing land use — which includes not just those with land property titles but all those who had a source of livelihood from that land — are adequately compensated and rehabilitated. Since land use is certainly going to keep changing rapidly, and not necessarily only for SEZ development, this is one of the central policy questions of our times.

In the specific case of land appropriation for SEZs, the question of ownership and control is also critical. In India, the current rules require only 25 per cent of the land to be used for industrial processing purposes, allowing the remaining land to be used for any other purpose. This means that real-estate developers can engage in major land grab in the guise of SEZs. Clearly, the rules must be changed to prevent or at least reduce this possibility.

One response to the issue of land grab has been to argue that the state should actually stay out of this altogether. After all, it is the power of eminent domain of the state that allows land to be taken over for national development purposes. However, leaving land use to market forces — or to private developers to engage in transactions with individual landholders — may be even worse. Firstly, it means that there is no chance of compensation of all the other stakeholders who have been adversely affected, such as tenants and agricultural labourers on that land.

Secondly, it allows for the possibility of large purchasers using pressure tactics or other methods to acquire land, in effect making offers that can’t be refused.

In situations of unequal power it also means that small land holders are less likely to receive the true value of the land.

Therefore the government must be involved in this process, but in a way that ensures that all those who stand to lose through the land acquisition are properly compensated.

Another important issue is whether SEZs actually generate more employment than would otherwise have come about, and the whether the terms of this new employment are acceptable and desirable. A major problem with SEZs in many countries is that they propose to relax or even do away with many laws relating to labour protection and even crime, for the purpose of attracting investment into these zones.

The current Indian law does however provide for the same legal structure of labour protection within SEZs as in the rest of the economy, but of course it is necessary to ensure that these are implemented.

Fiscal losses

But the greatest problem with the SEZ Act in its current form is the huge fiscal losses that will occur because of the tax incentives and hidden subsidies being provided to SEZ developers and producers within the zone.

The offer of tax holidays in the SEZs goes beyond generous — providing 100 per cent exemption from income-tax on profits for the first five years of production and 50 per cent for the next five years. Even land developers are to be given tax breaks.

These amount to appalling losses in terms of foregone revenue — the Finance Ministry has estimated that if total investment in SEZs is around Rs 3,60,000 crore, the revenue loss to the state exchequer would be more than Rs 1,74,000 crore.

To give up such a huge amount of government resources is, of course, a major crime given the needs of Indian society today and in future. But once again, what is at stake is more than the revenue losses, enormous as they are. Providing such massive tax giveaways encourages investors to shift their production from other locations to SEZs, in order to benefit from the tax holiday. This means NO net benefit to the economy from additional investment, since it is simply moving from other areas.

Implementation by States

Given recent public concerns about land acquisition, it is worth examining how the SEZ Act has worked thus far in different States. Table 1 provides a summary of the SEZs that have been notified (as opposed to just approved) from February 2006 to October 2007.

It is evident from Table 1 that only a few States — indeed just five of them — have dominated in actually setting up SEZs, whether in terms of the number or the area involved. This is further clarified in Charts 1 and 2, which show the shares of these four States in total area under notified SEZs and total number of SEZs.

Andhra Pradesh and Maharashtra clearly lead the pack in terms of notified and actually functioning SEZs, and have actually given away very large tracts of land for individual SEZs unlike most of the other States. This is interesting to note, given the relative lack of public attention to such land transfer in these States.

It is also worth noting that the compensation given for such acquisition in these States has been well below that offered in some other States such as West Bengal, where there has been much greater and more vocal opposition to very small tracts of land being acquired.

In Andhra Pradesh, for example, just two SEZs in Kakinada and Vishakapatnam account for around 6,500 hectares. In Maharashtra, the Navi Mumbai SEZ alone is spread over an area of around 5,000 hectares, including 1,850 hectares of regional park zone.

It must be borne in mind that the notified SEZs constitute only a small proportion of the SEZs that have already been approved and, therefore, are likely to be notified and come into operation in the near future.

Table 2 indicates that nearly 400 SEZs have been approved as of October 3, 2007, that would cover well above 50,000 hectares of land. However, further acquisition of land for these has been kept on hold until the proposed new national compensation and rehabilitation policy is implemented.

It is evident that once again, the same few States are dominant in terms of the approved SEZs. Only three States — Gujarat, Maharashtra and Andhra Pradesh — account for more than 70 per cent of the land of the approved SEZs, although they account for less than half the number.


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