Simmering discontent over SEZs

S. D. NAIK

The consensus among experts seems to be that the economic and other
costs of SEZs are likely to outweigh the so-called benefits because of
the way the rules have been formulated and the loopholes in the policy.
The RBI has, thus, stated that SEZs be treated as commercial real estate
rather than as a priority sector proposition for bank lending, says S.
D. NAIK.

No other major policy of the Government in recent years has been mired
in such unending controversies and sharp inter-ministerial differences
as that on Special Economic Zones (SEZs). The simmering discontent over
the policy in many quarters came into sharp focus after the Nandigram
incident in West Bengal where 12 persons were killed in police firing on
a violent mob. Following the unfortunate incident, the situation became
explosive with nation-wide ramifications.

There are now indications that some of the approved SEZs in other States
may also face trouble. For instance, in Maharashtra, the Finance
Minister, Mr Jayant Patil, has voiced his opposition to his own
government's policy on the issue. Besides making it clear that farmlands
should not be acquired for setting up SEZs, he expressed unhappiness
over too many sops being offered to these zones when no consideration is
being shown to the country's 150 backward districts.

FLAWS AND SHORTCOMINGS

Though much of the public criticism of SEZs, of late, has centred on the
land acquisition process, right from the beginning, the policy has been
riddled with flaws and shortcomings. The overwhelming consensus among
experts seems to be that the economic and other costs of SEZs are likely
to outweigh the so-called benefits because of the way the rules have
been formulated and the loopholes in the policy.

Many have termed the proposed SEZs as real-estate ventures rather than
production and export zones. For the rules require that only 35 per cent
of the area in a SEZ be devoted to productive activity and a developer
can use the rest of the land to build apartments, hotels and commercial
offices.

Not surprisingly, the Reserve Bank of India (RBI) has stated in no
uncertain terms that SEZs must be treated as commercial real estate
rather than a priority sector proposition for bank lending.

The SEZ Act was passed in 2005 and the Commerce Ministry notified the
SEZ law in February 2006. What is most surprising is the unprecedented
rush of applications since then and the speed with which the Ministry
granted some 200 in-principle approvals.

It even succeeded in getting the cap on the number of SEZs removed
despite opposition from the Finance Ministry which was worried about the
estimated revenue loss of Rs 140,000 crore on account of tax exemptions
on raw materials and finished products.

Though India's SEZ policy is said to be modelled on the Chinese
experiments, there is no comparison either with the economic conditions
of the time, the size and location of the zones, their numbers or the
kind of giveaways.

China started with only four SEZs and now has six. It had much greater
compulsions to set up SEZs in its totalitarian regime so as to ensure
its calibrated integration with the global markets by attracting
large-scale foreign direct investment. The conditions in today's India
are different.

GROWING OPPOSITION

The opposition to SEZ policy in its present form has come from several
experts and institutions, including the Ministry of Finance, Ministry of
Rural Development, and the Reserve Bank of India. Dr Jagdish Bhagwati of
Columbia University, the world's most ardent advocate of globalisation,
feels that India does not need SEZs.

"We don't need to learn lessons from China any more, because the main
lesson was outward orientation. We should concentrate on making the
additional reforms for reducing trade barriers."

In September 2006, the then IMF Research Director, Mr Raghuram Rajan,
described India's SEZ policy as a tax give-away that was likely to shift
Indian production to SEZs rather than create new economic activity. He
expressed his opposition to misdirected subsidies, guarantees and tax
sops that a stretched budget could ill afford.

Reservations about the SEZ policy in its present form have also come
from others including Mr Rahul Bajaj, Chairman, Bajaj Auto Ltd; Mr
Narayana Murthy, Chief Mentor, Infosys; and Mr Montek Singh Ahluwalia,
Deputy Chairman, Planning Commission. While Mr Rahul Bajaj suggested
export obligation of 60-75 per cent of production, 60-75 per cent land
for production units and fairer land acquisition process, Mr Murthy has
warned against roping real-estate players into SEZs.

DAMAGE-CONTROL MEASURES

This has now become a classic case of a government announcing a policy
in haste and resorting to a damage-control exercise in instalments as
more shortcomings and gaps in the policy become evident with each
passing day.

That the SEZ approvals in some cases are becoming real-estate scams has
become evident from the emerging evidence of a secondary market in such
zones. According to reports, the zones that have been approved are on
sale at a premium.

The mind-boggling rush of applicants and the number of approvals itself
is sufficient to raise doubts about the intent and purpose of the
developers. Many of the promoters, including politically well-connected
business houses, were sanctioned land to set up SEZs at amazing speed.
However, with SEZs becoming the zones of contention, efforts seem to be
on to restrict the number of such zones by inserting new rules and clauses.

For instance, the validity period of in-principle SEZ approvals has been
reduced from three years to one year.

According to new rules announced by the Centre, developers of SEZs will
have to rehabilitate displaced farmers and landless farm workers.
Moreover, they may have to get the approval of local authorities such as
the Gram Sabha for starting their projects.

It has been notified that the final approval from the Government will
come only after the developers obtain a nod from local authorities.

NEED FOR A FRESH LOOK

Though it may appear too late, considering the serious flaws and
shortcomings that have come to the fore, the Government would do well to
take a fresh look at its SEZ policy. The Prime Minister, Dr Manmohan
Singh, has already indicated that the Government would not hesitate to
correct itself if it had erred in the SEZ policy. What is needed,
however, is a complete recast of the policy and not just a few corrections.

SEZs may have had some rationale some 15-20 years ago. But in today's
India, there are no such compulsions to go for special enclaves at a
time when exports are growing at a healthy rate, the economy is on a
song and foreign exchange reserves are poised to cross the $200-billion
mark.

Our real concern now should be about the growing regional disparities,
the impoverishment of the countryside and the fast-widening rural-urban
divide.

At the most, the country may need 20-30 large integrated zones, each
with several 100 square km area, away from major cities and towns that
are strategically located.

They should be provided with only a few select fiscal incentives but
should be well connected to cities and ports by highways, rail and air.
Moreover, it should be ensured that such zones help create externalities
or economies of scale for the country's hinterland aimed at balanced
regional development.
http://www.thehindubusinessline.com/2007/03/31/stories/2007033100130800.htm