Why kill the goose before it lays its eggs?

 
For, SEZs will not only help boost India’s exports but also generate employment in rural areas
 
P VAIDYANATHAN IYER
Posted online: Thursday, September 28, 2006 at 0000 hours IST
 
       
 
 
 
 Disparate voices and opinions—in sections of the government and outside—on why special economic zones (SEZs) are a bad idea seem to miss the big picture. The SEZ policy is, perhaps, the only initiative by the United Progressive Alliance (UPA) government that reflects a strategy to make India a manufacturing hub for exports by utilising the pool of young but semi-skilled workforce in rural India.
The criticism of the policy on seemingly valid grounds—of revenue loss, uneven development, real estate exploitation, neglect of agriculture—does not hold much water if one foresees the paradigm shift SEZs can bring about in the country’s growth pattern. They come with the promise of attracting big-ticket foreign direct investment into the country and significantly boosting manufacturing exports.


 
India’s manufacturing sector, we all know, has lagged behind that of China’s in the past two decades. Its share in the country’s gross domestic product (GDP) has remained stagnant at 17% for over a decade. In China, its share is almost double. The services sector in India, on the other hand, has grown dramatically, contributing almost 54% to the GDP in 2005-06. While India has successfully exploited its burgeoning English-speaking and technology-oriented IT pool, it has hardly managed to get its act together where manufacturing is concerned.

According to the national strategy for manufacturing outlined by the National Manufacturing Competitiveness Coun-cil, the sector has to grow 12-14% a year to raise its contribution to 23% in the next 10 years. Yet, India will still not be able to match the Chinese manufacturing output. SEZs, though not an out-of-the-box idea, hold the promise of enabling India to compete with China.

Having said this, the action of say, the Reserve Bank of India to treat SEZ lending as similar to that for commercial real estate, and the views of the finance ministry which feels that the exchequer will lose Rs 2 lakh crore in revenues, only gives the impression that the government is not working as a cohesive team. As it is, India took a long time to put in place the policy. The SEZ concept was first mooted in the Exim policy of 2000-01 by Murasoli Maran, the commerce and industry minister then. It has taken five years and two governments to enact the SEZ legislation. After deliberating threadbare all the issues, if doubts persist, it is only a reflection on the government.

 
It is for state governments to ensure their farmers do not lose out on the
market value of their land when it is acquired 
 
Let’s consider the two main objections: one economic and the other socio-political, to SEZs. The biggest opposition to SEZs has come from the finance ministry which estimates revenue losses to be a staggering Rs 1.6 lakh crore. The estimates are only notional. SEZs will cater to the export market, but still generate huge economic activity in and around the region. Multi-product SEZs, especially, will be like large townships. Since the raison d’ etre of SEZs is exports, to think these would still have been set up otherwise can be termed only an assumption. Given the China experience, the trade-off weighs in favour of employment generation and FDI inflows. The commerce ministry expects SEZs to attract Rs 1,00,000 crore (Rs 25,000 crore in FDI) and create five lakh jobs by 2007-end.

The second relates to agricultural land being usurped by the State for setting up SEZs and farmers getting a raw deal in terms of compensation for their land. In a letter to the states, the commerce ministry has made it clear that prime agricultural land should not be given to SEZ developers. The zones must be set up on barren land. It is for state governments to ensure that their farmers do not lose out on the market value of their land-holdings when they are acquired for SEZ promoters.

Here, of course, the promoters must try and ensure that farmers who give away their land enjoy the fruits of prosperity that the economic development of the region will bring. This will be in the true spirit of corporate governance. And a rehabilitation policy by the concerned state governments should take care of farmers’ interests.

The RBI’s treatment of SEZs as commercial real estate is another indicator of the simmering discontent within sections of the government. By increasing the risk weightage and provisioning requirement for banks’ lending to SEZs, it just made life that much more difficult for SEZ developers by raising their cost of funds. Why kill SEZs even before they are set up?
 http://www.financialexpress.com/fe_full_story.php?content_id=141708