Subversive enclaves

V. SRIDHAR

The SEZ policy encourages the creation of enclaves where national laws
will mean little.

ASHOKE CHAKRABARTY

A DEMONSTRATION in front of the State Assembly in Bhubaneswar on behalf
of the people living in the Posco project area.
EVERYTHING about the Special Economic Zones (SEZs) sprouting across the
country is special. Entities in these enclaves will pay little by way of
taxes, enjoy access to state subsidies of various sorts, and be immune
from the rules that normally govern the running of businesses. Indeed,
the particularly special aspect of the SEZs in the pipeline - about 300
at the last count - is that they are "phoren" enclaves in what for
everybody else is India.

The "approvals", given on a first-come-first-served basis, have only
fuelled the frenzy of SEZ developers. The Board of Approvals (BoA) has
already given approvals for nearly 200 SEZs. Another 100 are likely to
be given permission soon. While cynics would regard the Congress' recent
attempts to retool the SEZ policy as an attempt at obfuscation, there
are no indications that the government is making any attempt to correct
the most controversial aspects of the policy.

Three aspects of the policy controversy are significant. The first
relates to issues of land for the SEZs. The second aspect - probably the
most significant - relates to the financial losses caused by forgone
taxes, which arguably is the fulcrum on which the policy is to spin. The
third crucial aspect, largely ignored in most critiques, relates to the
implications for industrial organisation, particularly those that relate
to the working class.

LAND FOR SEZs

It does not take great intelligence to recognise that when the state
uses its clout to provide land to private interests, a land scam is
bound to emerge. The point is that when the state intervenes in order to
further private interest, it raises the possibilities for payoffs by
those who obviously benefit from such intervention.

Indeed, this is the reason why allegations of "land grabbing" have
erupted in various parts of the country, which forced the Congress to
attempt a reworked scheme for the SEZs. The threat of a scam is so
obvious that Sumit Sarkar, the eminent historian, described it as "the
biggest land grab movement in the history of modern India".

It is obvious that the Congress, in the days since the conclave of its
Chief Ministers in September, has been concentrating its attention on
the land issue. In particular, it has tried to allay fears that prime
agricultural land is in danger of being diverted to the SEZs. It has
also been responding to criticism by stating that adequate compensation
will be paid to farmers whose land is acquired for establishing SEZs.

It is indeed striking that most sections of the political class have
focussed on the land issue while ignoring other substantive issues. To
understand why this may be so, it may be useful to step back six years
in time. In April 2000, inspired by the "success stories" of the Chinese
SEZs, Murasoli Maran, then Union Minister for Commerce in the National
Democratic Alliance (NDA) government, announced a policy for the
formation of SEZs in India. Indeed, the 2000 policy statement set the
ground for the "consensus" among most of the non-Left political parties
on the issue. The fact that two successive coalition governments have
remained committed to the policy perhaps explains why most of the
non-Left political Opposition is training its guns almost exclusively on
the land issue.

The BJP, which piloted the SEZ policy in 2000, has called for a
"balanced approach" to "rectify" the mistakes in the SEZ policy.
Indications are that a recently formed party panel, which will submit
its report to party president Rajnath Singh, will mainly highlight the
plight of farmers affected by the policy. Another proposal, apparently
under consideration, is that the Investment Commission, currently headed
by Ratan Tata, be given the authority to scrutinise the proposals for
establishing SEZs.

This is not to say that land is not an issue. Commentators have, for
instance, pointed to the fact that most of the SEZs are not in the vast
hinterland but close to the larger urban agglomerations such as Mumbai
and Delhi.

Moreover, anecdotal evidence suggests that land prices have fallen
sharply in the country's suicide belts. It is obvious that the issue is
much more than paying distraught peasants "market prices" for their
land. Indeed, the perverse logic of the situation is such that this is a
good time to buy good land cheap from peasants. The point is that even
if peasants are paid a fair price for their land, and even if the
government ensures that good agricultural land is not diverted to SEZs,
there will still be several serious unresolved issues.

It would appear that those focussing exclusively on the land issue,
wittingly or otherwise, ignore the grave financial losses that are in
store. These are obvious giveaways by the state, which amount to hidden
and obvious subsidies for those who develop and operate from these
enclaves.

FINANCIAL DRAIN

The so-called spat between two Cabinet colleagues, Union Minister of
Commerce Kamal Nath and Finance Minister P. Chidambaram, has engaged the
attention of the media. Initial media reports suggested that the Finance
Ministry was worried that there would be losses amounting to Rs.100,000
crores between now and 2009-10 on account of lost revenues. The Ministry
estimated that Rs.57,000 crores would be on account of losses on the
direct taxes front and the remainder would be on account of the customs
and excise concessions offered to units operating from these enclaves.

The Commerce Ministry responded to this by arguing that the buoyant
revenues, resulting from greater economic activity in these enclaves
would more than compensate the losses. Based on its own assumptions, the
Ministry projected that the government's tax collections would increase
by Rs.137,000 crores.

The ingenious efforts of the Commerce Ministry to counter the Finance
Ministry were however premised on serious flaws. First, the Commerce
Ministry's calculations, unlike the Finance Ministry's, included
software exports. It is well known that Information Technology (IT) and
Information Technology-Enabled Services (ITES) companies are gravitating
towards the SEZs because the current tax-free regime governing this
sector will lapse in 2009-10. In effect, these companies intend moving
into the SEZs merely to prolong their tax breaks.

Moreover, since the sector is growing at 30 per cent per annum fresh
investments would have come in the normal course. Besides, the Finance
Ministry has argued, the expansion of this sector - now within the SEZs
- would have happened anyway. The Commerce Ministry's inclusion of the
IT sector in its revenue estimates from SEZs is thus substantially
inflated.

The fact that a substantial number of the new SEZs are devoted to the IT
and ITES segments indicates that the Commerce Ministry's estimates are
rather optimistic. Although precise and up-to-date data on the number
and kind of units moving into the SEZs are still not available, there
are indications that in numerical terms software companies are among the
most significant occupiers of space in the SEZs. In fact, according to
one recent (but now dated) report, SEZs meant for the software and
pharmaceutical industries account for more than 50 per cent of all SEZs
approved.

Moreover, the Commerce Ministry's calculations did not reckon the losses
that would result from the tax breaks on profits made by SEZ developers.
By not taking these into account, the Commerce Ministry exaggerated the
gains and underestimated the losses that would result from the SEZ regime.

In effect, the Commerce Ministry's exaggerated projections of revenue
gains arise from a simple flaw. It would appear that much of the
investments that will come would have come, irrespective of the
concessions. And, if these fresh investments in the SEZs come at the
cost of substantial largesse because of lost or forgone taxes, then
these are losses for the exchequer.

The recent approval of the South Korean steel giant Posco's SEZ in
Orissa is the best example of such a case. The company, which already
won an outrageously good deal from the government, is set to gain even
more by locating its project in an exclusive SEZ. Initially Posco wanted
land and captive mines, which would give it access to iron ore in the
State, which is regarded to be among the best in the world. Now, its SEZ
status enhances its profitability even more at the cost of government
revenues. Why should companies that are already in profitable lines of
businesses be given more concessions for simply housing themselves in an
SEZ?

It is unlikely that the Finance Ministry, which is regarded to be the
most powerful Ministry, would not have had an inkling of the magnitude
of losses when the policy was notified earlier this year. Its outrage
now appears to be more a diversionary tactic, mounted at a time when the
policy has drawn flak. In any case, since the Cabinet is collectively
responsible, it matters little, from a public interest standpoint,
whether this or that Minister was in favour or against such a policy
course.

POLICY AS A TROJAN HORSE

It is still too early to predict whether industrial units would move to
the SEZs simply to avail themselves of the concessions on offer. Running
a successful business is much more than merely a matter of taking
advantage of tax breaks. A car manufacturer, for instance, cannot simply
move from an existing location to an SEZ in order to take advantage of
the tax breaks on offer. Indeed, if the past is any guide, it is much
more likely that existing manufacturers would demand "a level playing
field" so that they can compete with units operating from SEZs. The
demand for mainstreaming the policy regime that is now operational in
select enclaves can have important consequences for not only those
working in these enclaves but outside as well.

The labour legislation applicable in these enclaves is already a
watered-down version of laws that apply to the rest of the country.
Andhra Pradesh, regarded as a front-runner in the SEZ promotion
business, has laid down rules that apply significantly more pressure on
workers in the SEZs. The rules prohibit outsiders in unions, which will
significantly affect workers' ability to resist victimisation by company
managements.

Moreover, the SEZs enjoy the status of "public utility services"; this
will significantly reduce the scope for collective bargaining. The
provisions also enable the deployment of contract labour, without being
hindered by relevant legislation.

The functions of Labour Commissioners, who have traditionally taken the
first step in the conciliation process between labour and managements,
are to be vested with the Development Commissioners of SEZs.

Essentially, the Commissioner, whose main function is to woo investors
and keep them happy, is charged with the responsibility of adjudicating
disputes between workers and their managements.

Industrial lobbies have been calling for the repeal of "draconian" and
"outdated" labour laws. The SEZs, as islands where regular laws do not
apply, would then prove to be "models" to be emulated on a countrywide
scale. These subversive enclaves could thus play the role of catalysts
in a neoliberal recipe.

http://www.frontlineonnet.com/stories/20061020003601900.htm