Ensure SEZs serve their purpose

Instead of throwing the baby out with the bath water, we now need
adequate checks and balances

S NARAYAN
Posted online: Wednesday, October 11, 2006 at 0000 hours IST

The Congress party’s discussion at Nainital on Special Economic Zones
(SEZs) has been the subject of much analysis, speculation, discussion,
comment and, indeed, political posturing. There are two groups: the
first, that argues that the concept is sound, that such enclaves are
necessary to harness export-oriented growth, and that minor matters like
displacing a large number of farmers from their livelihood can be
remedied through suitable advice to state governments. At the other end
are those that question the soundness of the policy, the loss of
revenue, the distortions that are likely to be caused by SEZs and claim
that this policy would encourage acts of rent seeking and patronage
dispensing.
At the core of the dispute is the issue of developers cornering large
tracts of agricultural land, and the inadequate resettlement and
rehabilitation mechanisms. Information is now available in the public
domain about the approvals given for each state, and the land that the
SEZs require. It makes interesting reading. The concession seekers fall
into three major categories. A majority (over 130) of the approvals are
for SEZs that would occupy less than 40 hectares, or around 100 acres.
Of these, over 60 have sought 20 hectares or less. Most are IT-related
software parks or technology hubs.

In the second category is the state itself. Approvals for state
industrial development and other similar corporations cover over 15,000
hectares in all. In Maharashtra, for example, the figure is over 3,000
hectares, in Gujarat 2,000 hectares and in Andhra Pradesh 2,500
hectares. The immediate question is whether, given the recent advice of
the commerce minister, these projects will take off and if so, in what
manner. The third category—large, private initiatives—can be further
subdivided into two parts: real estate companies, such as DLF, the
Rahejas, Unitech and Ansals, who have cordoned off over 20,000 hectares;
and large corporations such as Reliance, Essar and the Adanis, who
account for another 20,000 hectares.

Several issues arise here. First, the zones are concentrated in only a
few states, and indeed, in a few locations. Haryana and areas in Delhi
extending into UP together account for over 25,000 hectares,
Maharashtra, 10,000 hectares, Andhra Pradesh (Visakhapatnam, in
particular) over 5,000 hectares, followed by Gujarat, Punjab and Tamil
Nadu. Clearly, there is strength to the argument that SEZs in the
neighbourhood of urban centres could further skew development in favour
of these already rapidly growing states.

Second, the rent-seeking behaviour of cornering approvals for these tax
havens is not limited to a few corporations—it extends to state
governments as well, and again those that are savvy enough to leverage
the developmental advantage and can profit by it. Given the fact that
state corporations are unlikely to have the expertise to devise a
well-formulated plan of development, the convergence in the strategies
of state corporations and large corporations is frightening. One only
has to look at the large number of real estate groups in the fray to
realise that export competitiveness is fairly far down on their agenda.
Given the nexus between state politics and large capital, one can safely
argue that the exhortations of Naini Tal will be soon forgotten.

Critical tax notifications were issued on May 11 and 12, 2004, when the
election results came out, before the new government came to office

Why do we see a large number of IT companies in the fray? Primarily
because their tax shelters under the existing dispensation in the Income
Tax Act will disappear by 2010, and SEZs provide an opportunity to
extend the benefits for another 30 years. So the ESOPs can continue and
the share market will be happy, while the firms continue to complain
about poor infrastructure in Bangalore and around, without paying any
taxes.

In short, the reason that state corporations, large corporations and IT
companies are so eager for a slice of the SEZ pie has little to do with
exports and export competitiveness and significantly more to do with
rent-seeking through real estate development, tax-breaks and getting
land at lower-than-market prices. As a final piece of evidence, the most
important tax (customs and excise) notifications were issued on May 11
and 12, 2004—the day election results were announced and the BJP-led
government was defeated. What prompted the interim administration to
issue such important notifications before the new government assumed
office? Add to it the fact that the positive net export commitment of
units is not really enforceable in law (there are no penalties under the
act), and we have a very porous public expenditure bleeding mechanism.

There is one way forward. Agricultural scientist Prof M S Swaminathan
has suggested diverting wastelands from agriculture. Certainly, with
urban property prices on the rise, the market itself will push land at
urban fringes away from agriculture. To rationalise land use, zoning and
land use planning needs to be introduced quickly in these areas. Also,
as exports would obviously need access to ports, geographical dispersal
could be ensured while granting approvals. Surely, SEZs in Gurgaon can’t
export if they have no access to ports.

Third, the commerce ministry needs to come out with a rehabilitation and
resettlement policy similar to the one for those displaced by government
projects. There could be public hearings for these acquisitions in the
same manner as public sector projects involving large tracts of land.
Finally, instead of throwing out the baby with the bath water, is it
possible to thoroughly scrutinise the projects already approved to
determine the kind of industries these SEZs will attract, the employment
generation and the export potential—before developers build their sheds,
sell them, and disappear?

—The writer is a former finance secretary and economic advisor to the
Prime Minister

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