Friday, September 22, 2006

Land for SEZs — Government as real-estate broker


Even granting, as the Commerce Ministry claims, that new Special
Economic Zones will draw investment of Rs 1,00,000 crore over the next
three years, with huge employment potential, there are several grey
areas in the way land is acquired for these Zones. Moreover, the
tax-break policy for export-led growth could accelerate inter-regional
differences and create islands of fiscal extravagance, points out R.

Special Economic Zones (SEZ) being created by the SEZ Act 2005 is an
intriguing economic decision that has been castigated by the Left,
criticised by the Finance Ministry, cautioned about by the RBI and
frowned upon by the IMF. These SEZs are supposed to replicate the
success of such zones in China and also carry forward the thrust of
export-led growth.

The SEZ Act 2005 came into force with effect from February 10, 2006 with
the rules vetted and approved for notification. The Commerce Ministry
says that investment of the order of Rs 1,00,000 crore over the next
three years, with an employment potential of over five lakh, is expected
from the new SEZs. Table 1 highlights some of the salient aspects of
these Zones.

Any proposal for an SEZ in the private/joint/state sector is routed
through the State government concerned, which in turn forwards the same
to the Department of Commerce with its recommendations for consideration
of the Board of Approvals. However, proposals for setting up units
within an SEZ are approved at the zonal level by the Approval Committee,
consisting of the Development Commissioner, Customs Authorities and
representatives of the State government.

Originally, there was an idea of having a cap on the number of SEZs but
recently that has been given up. The empowered Group of Ministers has
recommended lifting the cap of 150 SEZs but has suggested reviewing the
position after 75 have become operational, against the extant 25 fully
operational ones (/Business Line/, August 24, 2006).

Table 2 lists the formal and in-principle approvals given by the Board
of Approvals after the SEZ rules for different States came into force.

In all, 1,12,908 hectares — 2.80 lakh acres of land — have been
allocated for this so far. The units can be IT companies existing in
other locations which can relocate to the SEZ, as it is advantageous
since the tax exemption era for them is coming to an end and they can
continue to get the full tax-exempt benefit.

Actually, the real estate needs of the IT companies should be much lower
than for manufacturing activities. But the President of Nasscom, Mr
Kiran Karnik, has complained that SEZ schemes favour large companies and
not small start-ups, since the minimum land to be taken is 25 acres
(/Business Line/, July 15, 2006).

The Government has also permitted up to 75 per cent of the area of SEZs
to be used for non-export purposes, such as housing, schools,
entertainment and banks. There are also reports which suggest that
duty-free shops will be allowed in SEZ zones, with the current duty-free
shops in airports rushing to set up facilities in these SEZs. Actually,
it seems that exports are a mere afterthought.

The Finance Ministry estimates that at least Rs 70,000 crore will be the
tax loss and the RBI feels it could affect meeting the fiscal targets
set out in the Fiscal Responsibilty and Budget Management (FRBM) Act. A
State such as Haryana, which is far away from all ports, has got
approval for nearly one lakh acres of SEZ. Substantial exports do not
take place by air and, hence, it is intriguing that Haryana has evinced
so much interest in these Zones.

IMF note of caution

The IMF cautions on the "perverse economic incentives" underlying these
SEZs. Dr Raghuram Rajan, the Chief Economist of IMF, feels that tax
holidays will only "encourage companies to shift existing production to
new zones"(/Financial Times/, September 2). The Left parties in India
also want a re-think by the Government.

There is a need to look at this tax-break policy for export-led growth
since it will accelerate inter-regional differences and create islands
of fiscal extravagance.

When the domestic market is very large and efforts need to be taken to
augment the fulfilment of domestic needs, the slogan of the 1960s —
export or perish — is outdated and anachronistic. It could end up as
`export and perish'.

The rates vary for different locations and it is the State government
which acquires the land from agricultural owners, consolidates it and
assigns it. This task is done by the Industrial Development Boards in
many States. At an average price of Rs 50 lakh per acre, this totals
nearly Rs 1.4 lakh crore of rupees worth of real estate made available
for export purposes.

More insidious is the land-grab taking place in an opaque fashion under
this scheme. Sooner or later, the affected farmers are going to demand a
share in the " prosperity" enjoyed by these units and it would be
appropriate that a portion of the compensation is provided in the form
of cash and another portion is in the form annuity benefits till the
lifetime of the farmer and/or his spouse. This can be a pension scheme
for the farmers.

A Special Purpose Vehicle (SPV) can be created for all SEZs taken
together, which can act as a nodal investment vehicle for the farmers.
This would go a long way in making farmers real partners in the progress
of the IT companies and also bring in more transparency in land

Governments at the State level should publish the rates at which lands
are taken over from farmers and the nature of consolidation.
Unfortunately, in India, real-estate has become the major issue of
contention between different political parties and leaders, and it is
associated with substantial misdemeanour among the political class.

Unless and until the entire real-estate business is made transparent and
legitimate, wherein law-abiding individuals can participate without the
fear of the "land mafia", SEZ schemes may not really facilitate earning
foreign exchange or attracting FDI. It is indeed sad that many of the
State governments have become real-estate brokers.

Perhaps to become a global power we can declare the entire country to be
an SEZ so that the commission for agents is not limited to current
approvals and the so-called benefits of SEZs can be shared by all citizens.

(The author is Professor of Finance and Control, Indian Institute of
Management-Bangalore, and can be contacted at
<> The views are personal and do not reflect
that of his organisation.)


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