Special zone called India

Saturday January 20 2007 07:30 IST
Ila Patnaik

The establishment of new Special Economic Zones faces another hurdle,
this time from unexpected quarters. It comes from the prime minister’s
suggestion that they be put on hold till a rehabilitation policy for
displaced people is formulated. The empowered Group of Ministers is
scheduled to meet on Monday in this regard. Reports also suggest that
the government is working on a proposal that only vacant land be
acquired for SEZs.

One of the reasons for the difficulties in the SEZ policy is said to be
the use of arable land. But is arable land a constraint? Reports suggest
that up to 0.2 million hectares have been sanctioned for over 200 SEZs.
India has a land area of 297 million hectares, out of which 162 million
hectares are arable. The land sanctioned for SEZs thus constitutes a
minuscule 0.12 per cent of India’s total arable land. Even if the
allocation of land to SEZs went up eight times, it would constitute a
mere 1 per cent of the country’s total arable land.

Claims about loss of India’s self-reliance in food production owing to
SEZs are nonsense. Yields in India are so low, that even minor
improvement in productivity would overwhelm the loss of 1 per cent of
land. For India to become a developed country, the area under
agriculture has to shrink; urban and industrial land development has to
take place; and about a 100 million workers have to move out from
agriculture into industry and services. This is the only way forward for
bringing prosperity to the rural population. Every developed country in
the world has undergone this process, and a clear-headed appreciation of
India’s path in the next 10 years is required. Urban development gives
rural landowners extremely good deals when their land is sold; the
government should be supporting voluntary transactions, instead of
preventing them.

What is true about SEZs is that the land where urban development makes
sense tends to be located near ports, rivers or lakes, and has a
pre-existing dense population. In India’s SEZ policy, the state has come
into the picture by playing the role of forcibly acquiring land. This is
done under the ‘eminent domain’ principle, but at non-transparent
prices. The sharp hike in land prices that naturally follows
consolidation and development often leaves the original owners of land
feeling cheated.

Going beyond land, the SEZ effort is afflicted by many deeper questions.
It was never clear that the policy was aimed at promoting exports or
FDI, as is the case with Chinese SEZs. A variety of tax concessions were
being given for the development of real estate. It is estimated that
about Rs 1.7 lakh crore in tax revenue is to be forgone. Revenue forgone
is no different from money spent by the government. Small enclaves of
development were to be created instead of spreading public resources
across all tax payers. Growth in exports is good if it reflects
improvements in productivity in the country. Here the growth in exports,
to whatever extent, was to come from a few artificially created pockets
in the country. The bribes that would be earned by politicians and the
profits that would be earned by developers were sources of discontent.
The finance ministry said it did not have enough custom officials to man
the boundaries and checkposts of SEZs which would be Free Trade Areas.
RBI opposed giving convertibility within SEZs. Finally, Sonia Gandhi
chipped in with her opposition to the use of arable land for SEZs.

One attractive benefit of doing SEZs could have been a suspension of
Indian labour law, just as trade barriers do not apply for SEZs. If SEZs
had changed labour law, then many of the infirmities of SEZs might still
have been worth living with, in order to create millions of jobs and
Chinese-style exports. But this key ingredient was blocked by trade unions.

The best strategy now appears to be to go back to the pre-Kamal Nath
path of strengthening the all-India situation on labour law, urban
governance, trade reforms and capital account convertibility, in a
framework of full compliance with tax laws. This appears to be a better
path than trying to build enclaves where politicians help their friends
obtain land and then taxes are exempted.

The SEZ policy debacle has had one positive contribution. It has put the
land market on the agenda for reform. One factor which attracted
developers and industrialists to SEZs (other than tax concessions) was
the role the government was going to play in solving the problems of
purchasing land. When small plots of land are owned by a large number of
farmers and it is not easy to buy a large contiguous plot of land, a few
holdouts can extract a king’s ransom. In addition, there are obsolete
laws which reduce flexibility of land use between farming and
non-agricultural applications. A clear land title is difficult to
obtain, unless land is purchased from the government. These frictions
pose genuine problems.

The lesson from the SEZ story so far is therefore that the government
should focus on developing good land markets. There are four factors of
production: land, labour, capital and enterprise. The worst state
induced distortions of a factor market are found with land. Better land
title systems need to be built, and the legal foundations of private
land ownership need to be strengthened. Developing well-functioning land
markets, removing government involvement in land use, acting as an
enlightened middleman who helps to consolidate holdings and auction land
to the highest bidder in transparent, publicly visible procedures —
these are the areas which require state involvement. Training programmes
ahead of time, facilitating schemes through which farmers are given the
option of buying shares in the enterprise of the buyer and pushing for
greater transparency and information in the plans of the developers,
would allow the state to strengthen the interests of the farmers while
facilitating industry to develop. The government’s focus should be on
solving these problems for 297 million hectares that are India, rather
than for merely 0.2 million sanctioned for SEZs.

The writer is senior fellow, National Institution of Public Finance and
Policy, New Delhi

ila.patnaik@epmltd.com
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