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SEZ Frenzy

ECONOMIC AND POLITICAL WEEKLY SEZ Frenzy It is a telling commentary on the state of policymaking in India that it required the presiding deity of the party leading the ruling coalition to caution the government about the pitfalls of a major new policy

September 30, 2006 ECONOMIC AND POLITICAL WEEKLY
SEZ Frenzy It is a telling commentary on the state of policymaking in India that it required the presiding deity of the party leading the ruling coalition to caution the government about the pitfalls of a major new policy – the promotion of special economic zones (SEZs). Not a day passes without some arguments for or against being aired in the media and the government reacting to it by issuing newer and newer “guidelines” to meet the criticisms. In the process, no serious in-depth analysis is made of the case for SEZs (if any) and the fallout of the manner in which the government is going about pursuing an SEZ-centric growth policy almost like a crusade. The idea of demarcating certain areas within the country as special economic zones to promote investment and growth is not new. It has been practised for decades in many developing countries, with remarkable results in some instances like China. A large country unable to provide the kind of facilities and environment that can attract foreign investment throughout the country often finds it feasible and attractive to carve up some of its areas where such facilities can be provided. The laws and procedures for setting up new industries are waived to make the area business-friendly with developed infrastructure and a one-window interaction with government. In addition, huge tax benefits are promised to lure investors. China’s experience shows that if chalked out and implemented with care such a policy can help to accelerate the flow of capital and technology from abroad and thereby push up growth. There can be a healthy spillover on the hinterland as well. However, SEZs have their cost and may not be the best option, in all situations, to clear the bottlenecks in growth. India’s experience with export processing zones (EPZs) and export-oriented units that have been in existence for over three decades bears this out. They have failed in India for the simple reason that the factors that made the SEZs successful in China have been absent here. In India, as in China, EPZs were thought of as a way of providing an escape route from the rigours of the stranglehold of the controls that prevailed over the Indian economy. But even while promising to ease the rigours of controls, Indian policy-makers could not give up their penchant for micromanaging from the centre and undoing the promised relaxations with all kinds of qualifications and “guidelines”. Much of the rigours have disappeared but the flow of foreign direct investment has not reached anywhere near the levels of China. Besides, infrastructure building has fallen far short of what is required. Even after three years of the enactment of the Electricity Act, private investment in electricity generation is still a trickle with the states refusing to give up the monopoly of their electricity boards in the matter of purchase of the power generated. While swearing by growth, governments at both the centre and the states cite the fiscal responsibility laws to plead their helplessness in making the required investments to improve infrastructure. Hence the wooing of the private sector with all kinds of sops. Given this situation, the SEZs have apparently been thought of as a simple way out. A whole new law – the SEZ Act – was enacted in 2005. But the idea was almost debased no sooner than it was conceived. In its enthusiasm for SEZs the commerce ministry forgot two critical lessons of the Chinese experience, viz, that an SEZ must be of an adequate size to provide opportunities for reaping the benefit of large-scale operations and their number should be few. While in China the usual size of an SEZ is not less than 1,000 hectares, in India even small IT enabling units of no more than 10 hectares can ask for recognition as SEZs. Whereas a restricted number of zones also constituted a key element in the success of the SEZs in China, 150 such zones have already been approved in India and over 250 are in the waiting. Every industry or economic activity worth its name is now seeking SEZ status. There is even a demand for identifying cyber hubs as an “IT city” with SEZ status. Proposals are now being floated to invite foreign educational institutions to come to India

with promises of SEZ treatment! The finance ministry apprehends a loss of nearly Rs 1,75,000 crore in direct taxes, customs duties and excise duties over the next five years. This may not be an exaggeration, even if the figures put out by the commerce ministry of the expected investments are taken as plausible. Not only are the normal income and corporation taxes going to be waived, along with customs, excise and the state sales taxes, even the minimum alternate tax will not be charged from the developers, leave alone the exporters.

There is a widely shared perception that the SEZs are going to generate a developers’ scam of a scale not seen in India. To allay these fears the government is laying down all kinds of norms for the net worth of investors, size of buildings to be built, employment required to be generated, safeguards against relocation and so on.

But can any government ever succeed in enforcing norms of employment generation or size of new construction? It is time to ponder if India with a basically market economy and a well developed capital market needs SEZs to develop. Are the likely benefits worth the costs going to be incurred in terms of discrimination against non-SEZ industrial units, the resulting regional disparities and the revenue expected to be forgone?

EPW

Economic and Political Weekly September 30, 2006

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