Primitive accumulation

C.P. CHANDRASEKHAR

SEZs pave the way for private capital to make huge profits at the
expense of the small property owner and the state.

CPI(M) LEADER SITARAM Yechury at a farmers' rally against the Reliance
SEZ in Navi Mumbai.
LIBERALISATION, its advocates argue, is a flattening device. By breaking
down barriers and abandoning state policies that privilege the few, it
ensures that the market rewards the fittest and the best, whether large
or small. This perspective is wrong because the state never withers or
disappears, but merely changes the rules of the game. And since the game
under a neoliberal order is defined as one in which the private sector
must lead economic development, growth "success" is predicated on
protecting and enhancing private profit. New forms of state intervention
are inevitably used to realise this goal.

The policy to establish Special Economic Zones (SEZs) is a recent
example of this tendency. Legislated into effect only a year back, the
policy is already proving controversial because of its partial success.
Partial because few (new) SEZs have been in operation for long enough to
be evaluated for export success.

On the other hand, the government has received a large number of
applications to establish such zones and reports indicate that
permission to develop more than 180 SEZs involving thousands of acres of
land across the country has been granted. Thus far the success of the
scheme has to do with its ability to attract the interest of real estate
developers and the ability of the state to use its power of eminent
domain to mobilise the land need to ensure this limited success.

There are two questions that arise in this context. Why is there such an
interest among private developers, including property developers, to
rush into the area of SEZ development? And, what are the prospects that
this would make India a major exporter with a global footprint of the
kind that China (whose example ostensibly inspires this policy) has?

Tax concessions

The interest of developers of the SEZs is easily explained. So long as
they have the support of the state with its power of eminent domain,
they would be able to obtain access to large tracts of land at prices
that are likely to be cheap relative to their post-development values
and possibly also relative to prevailing market prices. In addition, in
return for their activity contributing to an expected export effort they
are provided huge tax concessions. When computing their total income for
tax purposes, developers are allowed a deduction of an amount equal to
one hundred per cent of the profits and gains derived from SEZ
development for any 10 consecutive assessment years during the 15 years
after the notification of the zone concerned.

These benefits come on top of duty free import/domestic procurement of
goods for development, operation and maintenance of the SEZ and
exemption from Service Tax/Central Sales Tax. Further, the income of
infrastructure capital funds/companies and individuals investing in
these SEZs is exempt from Income Tax, facilitating the mobilisation of
capital for development.

The issue that remains is whether the developer would be in a position
to earn an adequate income from the activity to capitalise on the tax
concessions. This would depend on the set of activities that the
developer can engage in for commercial gain and the attractiveness of
SEZs as potential sites for units that would serve as the clientele for
the developer. The activities, of course, are multifarious. Provision of
built-up sites and space with township infrastructure for approved SEZ
units on a commercial basis, provision and maintenance of services such
as water supply, security, restaurants and recreation centres on
commercial lines, the right to generate, transmit and distribute power,
and so on.

Thus, so long as the developer can find the clientele, huge untaxed
profits are guaranteed. But would producers and service providers rush
to SEZs just like the developers who are moving in to create them? The
SEZ policy is an extension of the earlier policies with respect to free
trade zones (FTZs that have now been converted into SEZs) and 100 per
cent export-oriented units (EOUs). Under the latter, even units set up
in the domestic tariff area (DTA) specifically for export were to be
provided benefits like duty-free access to capital goods and inputs for
export production and a direct-tax holiday on profits earned from
exports to the extent of 100 per cent for the first five years and 50
per cent for a further five years.

The logic of the 100 per cent EOU policy was that units unwilling to
locate in FTZs but achieving the export targets and accompanying
conditions associated with FTZ units should not be deprived of the
benefits offered to the latter. Now, in a turn of policy, the SEZ policy
seems to once again favour clustering of exporting units provided
special benefits in an earmarked space. This would obviously mean, if
everything else remains the same, that unless starved of land and
infrastructural facilities elsewhere in the country, there would be no
rush of exporting units to the SEZs. In a large country like India, this
is unlikely to be a motivation.

Terms relaxed

The expectation of a major rush of units to SEZs that warrants the large
number of applications for setting up such zones must therefore be
related to some other factors. In particular, it must be related to the
likelihood of better concessions being afforded to units set up in SEZs
relative to those located outside. What then is the difference between
the SEZ policy and the earlier one relating to 100 per cent EOUs?
Principally, under the new policy, the government has relaxed conditions
required for a unit to be considered an exporter needing special
concessions.

Units that qualified as 100 per cent EOUs under the earlier policy
needed to: (i) be net foreign exchange earners, which earn more foreign
exchange through exports than they spend on imports, technical fees,
royalties and repatriated profits; and (ii) sell (after paying
applicable taxes) goods in the DTA to the extent of 50 per cent of the
FOB (free on board) value of their exports (10 per cent for gems and
jewellery units).

Thus, there were clear limits (defined relative to export contribution)
on the extent to which even units that were net foreign exchange earners
could sell their wares in the DTA, with the limits being higher in the
case of items with low domestic value-added products such as gems and
jewellery.

The change in the new policy is that there is no limit, defined as a
ratio to the FOB value of exports, that applies on sales in the DTA by
units in SEZs. The only requirement for qualifying as an exporter is to
ensure positive net foreign exchange earnings. This should increase the
flexibility of an SEZ unit in terms of its sale to the domestic market,
subject to the customs duties applicable to the commodity concerned.

However, since imports from the Indian market (DTA) are to be deducted
from export revenues when calculating the net foreign exchange earning
of the unit concerned, this increased flexibility is limited. Hence,
there is no overwhelming reason to believe that units of a kind that
were not interested in operating as 100 per cent EOUs under the earlier
policy would choose to locate in SEZs.

There would be a few areas where the policy is likely to encourage
production aimed at the domestic market through units established in
SEZs. These are sectors restricted to large firms, such as those
producing items reserved for the small-scale sector, which would be able
to undertake such production within the SEZs.

Moreover, with foreign firms allowed to set up units with no cap on
equity holding and with access to the full range of concessions, they
too may find production based in SEZs for the Indian and regional market
a desirable option relative to export from abroad. The export success of
SEZs would then depend on attracting substantially export-oriented
units, including transnational firms that choose to use SEZs as sourcing
hubs for exports to the regional market.

But, given past experience, it is not clear that the mere creation of
SEZs would change substantially the trajectory of export growth from
India as happened in the case of China.

Expectation without basis

In sum, there is no definitive basis for the expectation that a large
number of units would be willing to set up shop in SEZs so as to ensure
adequate clients for the developers. This has implications for the
future direction of the SEZ policy. If export zones fail to attract an
adequate number of clients, what happens to the land acquired by
developers through the state?

There is reason to believe that the state, to justify its actions, would
have to relax its definition of net foreign exchange earnings and
regulations on land use to make the scheme a "success". There have been
other instances, such as the migration from a fixed licence fee to a
revenue-sharing scheme in the telecom sector, which reflect adjustments
made to render liberalisation a success. If that happens, SEZs would
become locations to produce for the domestic market with adverse
implications for the existing domestic producers.

The real gainers would be the developers, who would make large tax-free
profits partly at the expense of the state. Add on the fact that the
state is using its powers of eminent domain to acquire land at
relatively low prices for these developers and there is additional
profit being made by the developer at the expense of the original owners
of the property concerned, with the explicit support of the state.

In sum, the whole scheme is one that paves the way for private capital
to make huge profits at the expense of the small property owner and the
state with limited benefits in the form of foreign exchange revenues - a
process that is nothing short of a crude form of primitive accumulation
of capital.

Not surprisingly, the rush to set up SEZs has set off opposition to the
government indiscriminately using its power of eminent domain to
mobilise land for the purpose; spawned criticism of inadequate
compensation afforded to the original owners of the land in a situation
in which it is being transferred to speculative, profit-making
developers; and raised concerns about the likely transfer of cultivable
or potentially cultivable land away from agriculture to industry, with
implications for the country's agricultural production capabilities.

All this is legitimised by neoliberal ideology, which privileges the
"notion" of export over production for the domestic market, favours
private capital and benefits it with "public-private partnerships", and
honours profit-making independent of how it is ensured: apologies for a
policy regime that while pretending to "roll-back" the state, uses it to
enrich big investors, including speculators.

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