The Hindu Business Line : Iniquitous enclaves

A policy that started out innocuously enough because it seemed so simple in its execution and apparent in its benefits has now acquired complexities that could well derail it. The Special Economic Zones Act 2005, inspired by the Chinese experiment in the coastal provinces, was legislated last year without much fanfare. When the Commerce Minister announced it to the nation this February he was justifiably proud in its quick success; applications from developers were pouring in. Soon it would be flooded with applications from just about every sector, domestic and foreign. At the recent enclave of Congress-ruled States, chief ministers from Haryana to Arunachal Praedsh stoutly defended the SEZ concept. And why not? Historically-backward States are vying for investments the best way they can and what is better than gifting away revenues and land to the SEZ developer in exchange for employment and growth? That is the logic of the Commerce Ministry too — that SEZs will add to the total corpus of productive investment and increase employment at an aggregate level.

That logic is flawed. The history of discrete or locational tax exemptions suggests a shift in investments not an addition; firms tend to move productive capacities to low-tax regions instead of adding fresh investments. Pharma companies are moving operations from neighbouring Punjab and distant Maharashtra to Uttaranchal because of the low excise duties. The same logic holds for SEZs. Given the huge tax privileges and the freedom to build — unfettered by labour laws and with all the power and other infrastructure — a brave new world of their own, firms will be tempted to shift capacities for cost advantages. But even if that were not the case, the SEZ concept is still faulty because it creates opportunities for the few.

Second, the SEZs' linkages are global and self-perpetuating like Guangdong's in China. Three decades later, the Chinese hinterland is still lagging, now even more so against the glittering coastal SEZs. Opposition to the SEZ must focus on the irrelevance of such enclaves for India's economic growth. Historically, the export processing zones have been poor exporters and even poorer forex earners compared to the domestic tariff area; now, the SEZs are required to perform even less in terms of forex earnings while being given more, precisely at a time when the overall economy with all its constraints and bottlenecks is performing excellently.

Too much is made of the land acquisition issue. Farmers can be given compensation for dry land and the promise of jobs; the Haryana Chief Minister has promised as much. The debate over tax revenues is pointless; losses are immediate because of the exemptions, and the gains are probable. The founder of Macdonald's once said he was in the real-estate business; at the end of the day so too are SEZ developers. It is the perversity of incentives that create no externalities or economies of scale for the rest of the "hinterland" that must be viewed as the biggest defect in the idea of special enclaves.

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