The Hindu Business Line : Making SEZs people-friendly

To carry along all the stakeholders, especially the owners of farmlands, the Special Economic Zones Act should not only be investor-friendly but also people-friendly. Towards this end, some fine-tuning of the Act will help greatly, says BHANOJI RAO.

IT IS UNLIKELY that the farmer surrendering land to the developer will be compensated to the tune of the lifetime income lost by him. — Shashi Ashiwal

The policy initiative of April 2000 for setting up Special Economic Zones aimed at providing an internationally competitive and hassle-free environment for exports. An important condition applied to the units set up in the zones was that they should be net foreign exchange earners. As part of the April 2000 initiative, the Export Processing Zones located at Kandla and Surat (Gujarat), Cochin (Kerala), Santa Cruz (Maharashtra), Falta (West Bengal), Madras (Tamil Nadu), Visakhapatnam (Andhra Pradesh) and Noida (Uttar Pradesh) were converted into Special Economic Zones.

Together, the zones accounted for exports of Rs 13,800 crore and Rs 18,300 crore respectively in 2003-04 and 2004-05. Given the value of India's total exports, the contribution of SEZs to total exports forms less than half per cent, too small to celebrate.

Despite the lacklustre performance so far, New Delhi decided to go for the Special Economic Zone Act, 2005. It came into force from February 10 this year. On the same day, the Ministry of Commerce and Industry notified the SEZ Rules, 2006. Since then, as The Economist (October 12) put it, there has been "the bureaucratic equivalent of a gold rush. Many companies, including most of India's famous firms, have filed over 400 applications to set up SEZs, and 212 have been approved."

Indeed, private entrepreneurs think they are better off being in an SEZ, given the slew of incentives and sops. The Economist quotes Mr Rahul Bajaj as saying that "any rational businessman would conclude he is better off being in a SEZ." This could, in fact, mean the diversion of investments from elsewhere to the zones and without new additions.

Different in India

Special economic zones have theoretical justification, especially for transitional economies that may not be able to go for complete liberalisation and free trade — for instance, Singapore and Hong Kong. In such an event, the SEZ option allows for islands to be created and assists in attracting investments, generating government revenues, etc., in addition to helping the policy-makers and the general public get used to the idea of free flows of investments and goods and services.

As the Economic and Political Weekly of September 30 commented, a large nation unable to provide facilities and environment appropriate for attracting foreign investment throughout the country can do so in a relatively much smaller geographical area, with a business-friendly legal and tax framework. "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 spill over on the hinterland as well."

But, then, why is it that the Indianzones have neither attracted a massive inflow of investment nor account for a high share of exports? EPW notes that "... 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... "

Should one welcome the SEZ Act of 2005 as an important facilitating mechanism for overcoming the erstwhile hurdles? EPW as well as The Economist point to India permitting too many zones of too little physical size, against the Chinese model of a few large ones.

Fine-tuning

To carry the people at large, including the key stakeholders such as labour leaders and civil society representatives, the Act should be not only investor-friendly but also people-friendly. Towards this end, some fine-tuning of the present Act in select areas will greatly help.

First, there is the issue of land acquisition. The people who count most critically in the initial stage of the development of an SEZ are the owners of land that might be needed for the zone. If the land in question is arable, providing income to the owner, it is not likely that the owner surrendering such land to the developer of the zone will be compensated to the tune of the lifetime income lost by the former. It is only natural to expect some sort of a market price to be paid, but such a compensation may not help much, especially in the case of farmers who have no other skills and know no alternative economic activity.

Here is a country where prime farmland is routinely converted to such alternative uses as housing, road building, and now SEZ development. Can this be stopped?

Notwithstanding the advice of the Congress President, Ms Sonia Gandhi, that agricultural land should not normally go for an SEZ, there is no guarantee that precious crop-lands will be spared given the `enthusiasm' of the State governments to have as many SEZs as possible in the name of economic development.

A way out

The best option is to have a constitutional guarantee that farmland will not be permitted for non-agricultural use. At the very least, some norms should be worked out when agricultural land can be converted for non-agricultural use and the norms should be part of the constitutional guarantee. Second, there is the issue of a broad-based membership of the bodies involved in approvals.

Given the criticality of transferring large chunks of land and the enormity of the concessions and freebies, it is only fair the body approving SEZs should have a much broader membership (not just of government officials) and include farm sector and civil society representatives.

At the zone level, there is an Approval Committee. The membership comprises the Development Commissioner of the zone, five officers of the Central government, two of the State government concerned, and a representative of the developer. Here, too, a much broader representation is desirable.

Third, there is the issue of what activities qualify for SEZ. The Union Government, while notifying any area as an SEZ or an additional area to be included in an SEZ is to take into account the following: generation of additional economic activity, promotion of exports of goods and services, promotion of investment from domestic and foreign sources, creation of employment opportunities, development of infrastructure facilities, maintenance of sovereignty and integrity of India, the security of the state and friendly relations with foreign states.

Justification of investment

Any investment can, indeed, be justified under such general economic considerations. For instance, a lush township for rich and super rich could be justified in terms of additional economic activity and promotion of investment. It is enough if conditions in general in the economy allow the development of such a township. It does not justify SEZ-type of concessions. There is thus a need to fine-tune the criteria for SEZ notification, beyond the generalities.

If the policy framework is right, if governance is efficient, if subtle and strategic regulation is put in the place of rubber stamping ad infinitum in the name of approvals and controls, if the country boldly goes for a uniform import tariff of say, 10-15 per cent, and if all biases against exporting go, who would need the SEZs?

The fine-tuned SEZ Act thus should look like a roadmap for achieving the phasing out of the zones as well.

(The author, formerly with the National University of Singapore and the World Bank, is Professor Emeritus, GITAM Institute of Foreign Trade, Visakhapatnam and Visiting Faculty, Sri Sathya Sai Institute of Higher Learning, Prasanthi Nilayam. He can be reached at bhanoji@gmail.com)

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