Treasure Islands?

But slowly, and surely, the pressure on them is building up. At every level—political, economic and social—SEZs have become the subject of discussion and debate, with prominent and vociferous supporters on both sides of the fence. For every Kamal Nath, there’s a P. Chidambaram—the finance minister has opposed the plan from the beginning. For every Mukesh Ambani, who hopes to build the largest SEZ in the country, there’s a critic like hdfc’s Deepak Parekh. For every pro-SEZ economist, there’s an expert who points a finger at the policy.

No one opposes the underlying philosophy behind SEZs. No one denies that they may lead to huge economic and social benefits. Most agree that this is one way India can catch up with its neighbouring economic power, China. And almost everyone feels that SEZs can prove to be a critical policy tool to make India a truly global superpower. The concerns are more about the nitty-gritty of the policy and the manner in which it’s being implemented by the various states. It’s about the checks and balances in the system to ensure transparency and fairness.

Let’s begin on a positive note and introduce commerce secretary Gopal K. Pillai, who reels out figures to justify the policy. Of the 237 SEZs that have been given a formal clearance—and where land has been acquired—63 have been notified. Another 166 have got an in-principle go-ahead but involve land acquisition. If the proposed 237 are set up, they’ll entail an investment of Rs 2,50,000 crore, create 30 lakh jobs, and clock an annual turnover of Rs 15,00,000 crore. To buttress his argument, Pillai adds that SEZs will contribute 2 per cent ofGDP in the next three years, and help India achieve a five-fold increase in exports to $500 billion by 2015.

Borrowed from China’s policy of setting up huge economic zones, these were the compelling objectives behind Indian SEZs. Although the idea has been floating around for decades—India’s first SEZ came up in Kandla in 1965—it got concretised in 2000, when existing export processing zones were converted into SEZ under the Exim policy and after the passing of the SEZ Act in 2005. Since then, almost every builder, business group and budding entrepreneur has entered the race to set up SEZs, includingDLF and Ansals, Mukesh Ambani and Anand Mahindra, and relatively-unknown entities like Omaxe and Uppal Developer.

That is when the issue erupted and became the full-blown controversy it is currently. Prithviraj Chavan, minister of state in the prime minister’s office, plays it slightly safe: "The rules are consistent with the original objectives of setting up SEZs, but it’s still to be seen whether the desired results would be achieved. It’s too early to say." Congress supremo Sonia Gandhi feels there is a critical need to address accompanying social issues of displacement, and of rehabilitation and compensation to farmers whose land is being acquired for the purpose (see previous story). The 237 approved SEZs are spread over an area of 34,861 hectares.

With the clamour rising, the UPA government’s swung into action. Initially, it capped the number of SEZs to be set up, and later appointed a ministerial group headed by external affairs minister Pranab Mukherjee to study these issues. Chavan is hopeful the Mukherjee panel will come up with a national policy on rehabilitation of the displaced. He thinks the problem lies in the status quo where state governments have to oversee the land acquisition and rehabilitation process and hence there’s no overall consistency in its implementation.

Explains Sharad Pawar, agriculture minister, "The general approach should be to take over wasteland, and not well-cultivated land. But that’s not happening. There’ll be less heartburn if farmers are able to get market price, and not be forced to sell under a government directive." He cites an example in Navi Mumbai, where the local farmers put up resistance when the state was trying to acquire 34,500 acres in the 1980s. Through an administrative decision in 1986-87, Pawar, in his capacity as chief minister, forced developers to return 12.5 per cent of the acquired land back to the original owners after a time-bound development of infrastructure. This gave farmers an option to sell at least a part of their original holdings at much higher market prices since land cost definitely goes up after infrastructure development.

The counter to such views comes from the likes of Anwarul Hoda, member, Planning Commission, who says that "the threat to food security due to diversion of land is an exaggeration". Others say that even if 10 times the land that’s now been acquired for the 237 SEZs is requisitioned, it’ll still constitute only 0.21 per cent of arable land, estimated at 162 million hectares. N. Raghuveera Reddy, agriculture minister, Andhra Pradesh (which plans to set up 45 SEZs), adds his state "is not entertaining any proposals to acquire wetlands, and only looking at wastelands and rain-fed areas. We’re ensuring that compensation is five times the land value".

Even on SEZs’ ability to generate millions of jobs, there’s disagreement. Sources in 10, Janpath, categorically say that most SEZs will not create too many jobs as "they are not promoting labour-intensive units". The fact is that a 515 MW power unit employs 80 people, a global-sized refinery of 10 MT can give jobs to 800, and a 4.5 million tpa steel plant could keep 1,800 employed. Considering that over 55 per cent of the 237 SEZs are IT-related, they’re unlikely to create rural jobs. Jairam Ramesh, minister of state for commerce, admits India does not need 600 SEZs. "They should be a tool for promoting labour-intensive units. If that’s not happening, the policy should be reviewed," he feels.

Experts think the unease about employment is warranted as 10 million people enter the job market each year, India is witnessing jobless growth, and there’s rising unemployment in the 15-24 age group. "Increasing unemployment can have social implications and may impact long-termGDP growth," explains Sukti Dasgupta of the International Labour Organisation, and adds that unemployment rate has crept up to 8 per cent in 2004-05. Sums up Rajeshwari Raina of the Centre for Policy Research, "Unfortunately, the government has no criteria to ensure that SEZs create employment and value addition for the rural economy."

However, not just policymakers and economists, even the business community seems divided on SEZs. The basic problem is in the financial and other incentives laid down for the special zones under the SEZ Act. As these zones, or delineated business enclaves, are treated like "foreign territory", they have special privileges. All units in them are exempt from income tax, service tax and sales tax. They’re also exempt from excise and custom duties, if they export their products or services. In addition, they can hire and fire their employees.

According to calculations by the finance ministry, the exchequer will lose over Rs 1,00,000 crore over the next four years by foregoing these taxes and duties. India Inc feels the SEZs will become industrial islands, where the units will enjoy more advantages compared to those outside these industrial pockets. This will compel every business group to move into SEZs to compete effectively. Existing exporters think it will not provide a level playing field for them as their costs will be higher than the units in the various SEZs. Basically, India Inc is concerned that SEZs will create an unequal and imbalanced economic playground.

But commerce ministry officials say a similar logic could have been used against export processing zones, which were actively promoted in the country in the 1980s and 1990s. SEZs are only a more efficient and effective way to promote the same concept, and bulk of the SEZs’ revenues will come from exports. They add that despite the revenue loss, the government will earn Rs 150,000 crore through direct and indirect taxes from the economic activity generated inside and outside these SEZs. To prove this contention, the commerce ministry has asked consumer body cuts to study the economic potential of SEZs.

A few experts, including Aradhana Agarwal, consultant, Indian Council for Research on International Economic Relations, agree. Agarwal, who’s working on a study commissioned by the finance ministry to look at SEZs’ revenue implications and has visited several SEZs in Bangladesh, Sri Lanka and India, says the losses will be offset by the gains. She also thinks SEZs can provide training and employment to people with low-level schooling. "My visits to SEZs support this belief," she says.

There’s, therefore, no consensus among interest groups on SEZs, although there’s merit in arguments on both sides. But being an election year, the perceived politics of policies has become more important, putting all other considerations on the backburner. With Sonia Gandhi forcing a freeze on SEZ-related decisions until the Mukherjee panel submits its report, and Chidambaram unwilling to back away, the economic justification for these zones has taken a backseat. It’s Kamal Nath vs The Rest in the policymaking arena. But as Pradeep Mehta, secretary general, CUTS, puts it: "There should be a balance between economic and political motives in the context of political agitation." If only it were that simple.

By Lola Nayar with Rajesh Gajra