Zones Of Contention

The Union government is making a special effort to resolve internal
differences over modalities of establishing a slew of special economic
zones (SEZs).

It may be worth reflecting on why the subject has become so contentious
and how the controversy over the 'biggest land grab in modern Indian
history' could have been resolved relatively amicably, had there been
more foresight and political acumen.

The concept of a SEZ is hardly new; its earlier avatars were called free
trade zones or export processing zones. The idea of setting up an
insulated or a quarantined area, a country within a country, to promote
exports by providing superior infrastructural facilities and to attract
foreign investment by providing generous tax breaks, was first
implemented by Puerto Rico in 1947 and thereafter by Ireland in 1960.

Significantly, Asia's first FTZ came up in Kandla in 1965. China's
famous EPZs at Shenzen near Hong Kong and Pudong near Shanghai as well
as Jebel Ali in the UAE came up much later, during the 1980s.

After Kandla, although seven EPZs were established in different parts of
India, only a few were considered successful. A different version of the
current SEZ policy was announced in 2000 and a new law was passed by
Parliament last year. There was never really any major problem with the
broad contours of the policy.

The devil lay in the detail, in the fine print of the rules framed by
the ministry of commerce. The manner in which the rules were sought to
be implemented raised quite a few eyebrows.

As reports came in about how large corporate groups were being helped by
the local authorities in Haryana, Punjab and Maharashtra to acquire
fertile land at dirt-cheap prices (as low as one-tenth their market
prices), doubts were raised about whether provisions of land acquisition
laws were being abused for private greed. State governments were accused
of playing the role of real estate brokers.

Much of the opposition came from within the ranks of the ruling party.
Bhajan Lal's son and Congress MP from Bhiwani, Kuldeep Bishnoi, levelled
allegations about the agreement between the Bhupinder Singh Hooda
government and the Mukesh Ambani-led Reliance Industries group.

Thereafter, an unlikely combination of interested groups came
together.The BJP and Left opposed the establishment of SEZs on the
ground that prime agricultural land was being taken away from farmers at
ridiculously low rates.

IMF chief economist Raghuram Rajan argued that the tax concessions being
given to SEZs may result in existing ventures getting relocated, thereby
dislocating jobs instead of creating employment opportunities.

It was contended that the proposed SEZs would become islands of
affluence in a sea of deprivation, widening the already acute regional
disparities in the country, since most of the proposed SEZs were
clustered around existing industrial areas.

For Nath, a cruel cut came when RBI directed banks to extend loans for
SEZ projects at enhanced interest rates applicable to loans for
commercial real estate development.

Finance minister P Chidambaram's opposition to the SEZs was on account
of apprehended revenue losses. A study conducted by the National
Institute of Public Finance and Policy claimed that the new SEZs could
result in a loss of income tax, excise and customs duties to the tune of
Rs 1,70,000 crore over the next five years.

The commerce ministry countered these statistics by arguing that
economic activity generated by SEZs would more than compensate for
short-term revenue losses.

Udyog Bhavan claimed that investments worth $60 billion could flow into
SEZs over the next six years and that as many as 5,00,000 jobs could be
created in less than two years.

Even as these claims and counter-claims are being researched and
verified, Manmohan Singh stated that SEZs were here to stay.

What is now being acknowledged is that the commerce ministry should have
first fine-tuned its rules before granting in-principle approvals to
nearly 200 SEZs.

Since two-thirds of the proposed SEZs are small ones (of around 10
hectares) meant for IT ventures, there is a view that these should have
been excluded from the purview of the SEZ Act, with the government
extending the sunset clause exempting such units from payment of taxes
beyond March 2009.

In order to counter charges of promoting real estate speculation, the
commerce ministry had to specify that 35 per cent of the land in a SEZ
(and not 25 per cent) must be used as a "processing area".

Nath's letter to state governments urging them to set up SEZs only on
wasteland and non-agricultural land (with fertile land not exceeding 10
per cent of the total area) besides exhorting them not to intervene in
land purchases made by private developers from original owners, came
days before Sonia Gandhi told her party colleagues in Nainital that
farmers should not get a raw deal if their land is acquired for setting
up industries.

A host of questions have remained unans-wered. Are income tax
concessions for SEZ ventures compatible with WTO regulations, or could
these attract retaliatory measures? What happens to the structure of
local governance inside the SEZs?

Can labour laws and environmental regulations be relaxed inside SEZs? It
would have been far better if the government had clarified these
apprehensions before rushing headlong into setting up these special
world-class enclaves.