The Hindu Business Line : SEZs: India must develop its own model

The impact of SEZs in China has been mixed. India's ability will lie in securing the benefits of SEZ through institutional reforms, and avoiding the negative fallouts.

Special Economic Zones were first set up in China in 1980 along the coast. At that time, the per capita incomes of India and China were nearly equal. Today, China's is nearly double that of India, and its rate of economic growth has touched double digits.

According to World Bank data, there has been a 7.3 per cent increase in per capita household consumption in China in the last 20 years compared to 2.6 per cent in India. Only 16 per cent of Chinese people live below one-dollar-a-day, against 34 per cent in India. Surely, some of this is thanks to the SEZs.

A mixed impact

The impact of the SEZs in China has been mixed. On the plus side, absolute poverty has declined and growth rate has risen. On the minus side, there has been a sharp increase in pollution, crime and inequality. Though the SEZs have a positive role to play in the economy, their negative consequences cannot be ignored. Air pollution has increased; the sky over Shenzhen is often smog-covered. The crime rate has also risen. The Shenzhen SEZ plans to set up a "Battle Training Centre" to train the police to handle urban protests. Farmers' land has often been taken away for setting up SEZs.

The Chinese Premier, Mr Wen Jiabao, admitted that one of the "greatest threats to the country's stability'' comes from the seizure of rural farmland for construction projects. "In some places, illegal seizure of farmland without giving reasonable compensation and resettlement have provoked uprisings," he said. According to Civil Society Exchange, there were 74,000 riots in China in 2004 — up seven times in the last ten years. There has been a sharp increase in inequality. A holistic reform effort, covering law and order, labour laws, infrastructure, and so on, is the key to enabling domestic industries face international competition. With many layers of governance, this can be accomplished only in phases in large countries such as India or China. But in an SEZ, since the area is small, this process can be implemented quickly. China has achieved some success by this process and India can learn to secure the benefits of SEZs through institutional reforms, even while avoiding the costs.

China has adopted an export-oriented growth strategy and is encouraging consumption of Chinese products by the world, especially the US, rather than its own people. India's strategy, on the contrary, is to increase consumption by its people. It is not advisable, therefore, to give `foreign territory' status to the SEZs.

The Chinese economy was controlled by State-Owned Enterprises in the 1970s. Land and industries were nationalised during the Communist Revolution of 1949 and businessmen were compulsorily sent for `retraining' to the countryside during the Cultural Revolution of 1965. The provision of special facilities to industries set up in the SEZs did not have a negative impact on the domestic economy as there was little private business there. The State-Owned Enterprises faced many problems but they were not worried about making profits or incurring losses. The condition in India is different. For instance, if a garment manufacturing unit is set up in an SEZ, it must be provided with a continuous supply of electricity, telephone and broadband connectivity, road, and other amenities. It is also entitled to tax reliefs.

The production cost of the SEZ unit will be less than running a garment unit in the Domestic Tariff Area. The net impact of the SEZs will be a heavy loss of revenue for the government — one, on account of the concessions given to the SEZ units and, two, because of the impact on the domestic units, many of which even have to close down. The impact on employment will also be negative. The creation of employment in the SEZs will be offset by loss of jobs in the DTA.

The SEZ model can be used to usher in positive changes such as, for instance, improved governance in the domestic tariff area. Infrastructure can be upgraded. It must lead to repeal of archaic laws such as those on labour, shops and establishments and weights and measures. SEZs must not be tax concession plays.

India should thus work towards reforming its domestic economy rather than supplanting it with an SEZ model. It should not blindly follow China in this regard.

(The author, a freelance writer, can be contacted at bharatj@sancharnet.in)

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