The Hindu Business Line : These Special Uneconomic Zones

Special Economic Zones were established to promote exports and to draw a flood of investment. But there is the danger that these zones will remain oases of development within under-developed rural and urban areas, aggravating the problem of uneven growth across and within the States.

SHEPHERDS GRAZE cattle on land that is part of the 10,000 hectares near Gurgaon which Reliance has acquired to set up a Special Economic Zone. — V.V.Krishnan

The $5.5-billion plan of Reliance Industries to develop 10,000 hectares of prime land in Gurgaon on the outskirts of Delhi has focussed attention on the Government latest's obsession of setting up Special Economic Zones on the model of China. Reliance has similar plans for Mumbai. It is hoped that there will be $4 billion of foreign investments in five years in these SEZs.

China has been experimenting with development through SEZs for the past several decades. And yet, as The Economist points out, India was the early starter and set up Asia's first Export Processing Zone in 1965 at Kandla in Gujarat, to provide goods for Russia.

Though the inspiration is from China at the moment, there can be no comparison between India and China. The Chinese SEZs are vast, extending several square miles.

The SEZ Act, 2005

Desperate to develop infrastructure, the Centre floated the Special Economic Zones Act 2005 to provide for the establishment, development and management of SEZs to promote exports and for matters related to exports or incidental thereto.

The Act lays down guidelines for notifying SEZs and these include, apart from export promotion, generation of additional economic activity, creation of job opportunities and the development of infrastructure facilities.

The Act confers special fiscal benefits such as the exemption from payment of taxes, duties or cess falling in the First Schedule to the Act.

Amendments to the Income-Tax Act were carried out, surprisingly, through the Second Schedule of the SEZ Act, 2005, and these are vital covering exemption by way of interest, special provisions for export from the Export Processing Zone and the extension of benefits for new industrial undertakings, all with an eye on the development of SEZs.

Even the Insurance Act, the Banking Regulation Act, and the Indian Stamp Act were amended to provide for concessions to units in SEZs. The objective, as declared, is to make available goods and services, free of taxes and duties, and a package of incentives to attract foreign and domestic investments for promoting export-led growth. The Act will focus on matters relating to requirements for setting up of offshore banking units and units in the International Financial Service Centre.

The Flood

The response of industry and trade to the concept of SEZs has been electric. The tax and fiscal sops have proved a magnet attracting several new industries to SEZs. State governments have followed suit and are offering duty concessions and tax reliefs. Export Processing Zones have been functioning in India for more than two decades now. But the SEZs offer better incentives.

Units operating elsewhere have been tempted to shift production and processes to these tax-free zones. There is, therefore, the danger of failure to enhance capacities by shifting the units. There is no indication that the Government will insist on a guarantee of additional job creation in these SEZs as visualised in the Act.

A recent Boston Consulting Group study points out that countries such as India will benefit by shifting to labour-intensive mechanisms and lower capital costs by adopting new techniques in the manufacturing process. Capital requirements can be reduced. This calls for reform of labour laws for which India does not appear to be ready as yet.

Inequities in development

Economists have been quick to point out that the concept of SEZs can have only a limited application. SEZs will result in the creation of an oasis of development amid vast deserts of undeveloped rural and under-developed urban areas. There is already the problem of uneven growth across various States.

The BIMARU (Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh) States have long been considered a drag on the uniform development of India. UP's net State domestic product grew at about 4 per cent in the decade from 1993 onwards against the national average of over 6 per cent. And its GDP has been growing at half the national average. These disparities can now be expected to widen all over India and even within regions in one State.

With its proclaimed stance of a single-party state and professing the establishment of a socialist republic, China can get away with any type of economic policy, a luxury not available to the chaotic democratic polity that is India.

Promotion of regional disparities will only encourage fissiparous tendencies and result in a large-scale decline in revenues to the state.

We can learn much from the example of the United Kingdom. The British Government makes grants to `development areas' to expand investment and improve employment. Areas of persistent high unemployment are designated as assisted areas; these are either `development areas' or intermediate areas. `Development areas' with the most serious problems are eligible for grants from the European Union.

The present policy of allowing SEZs indiscriminately, even in such developed States as Haryana, Maharashtra and Tamil Nadu, will only result in exacerbating regional disparities, with the BIMARU States feeling more aggrieved.

These States account for more than 40 per cent of the country's population but get a mere 15 per cent of the total bank loans. They lag in poverty alleviation, job creation and promotion of the services sector.

The Alternative

Development should be thought of sans fiscal sacrifices and bureaucratic controls. Better roads and transport facilities, speeding up of the approval processes and concentration on smaller units spread all over India will result in harmonious all-round economic development.

Revenues cannot be frittered away for the sake of a few monopolistic joint-venture capitalists out to grab all the fiscal incentives in the guise of development of SEZs.

Thereby, we will only be developing special uneconomic zones. Both the UK and the US learnt a lesson when they sought to promote Enterprise Zones by relaxing planning regulations and by cutting taxes to stimulate economic recovery in decayed urban areas.

The policy resulted in such zones attracting investment and employment from neighbouring areas without an overall benefit to the community as a whole.

It is odd that at a time when efforts are on all over the world to break tariff barriers and promote free-trade areas in Europe and North America, India should seek to divide the country into tax-free and taxable areas and foment inter-State tariff wars.

These SEZs will come in the way of the proposed uniform Goods and Services Tax contemplated by the Kelkar Task Force. And the economic benefits may prove negative in the long run.

In promoting higher economic growth, India should, instead, concentrate on holistic development taking the underdeveloped regions also along..

(The author is a former Chief Commissioner of Income-Tax.)

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