The Hindu Business Line : From islands to walled cities?

The SEZ Act has lost its original rationale for existence and is now being peddled as a vehicle for new towns. That is not the best way to plan new urban centres, says ASHOAK UPADHYAY

The Parliamentary Standing Committee on Commerce, under the chairmanship of Dr Murli Manohar Joshi, recently submitted its report on Special Economic Zones for discussion during the monsoon session. According to print media reports, the Commerce Ministry defended the SEZs as viable hubs of economic activity that would offset any revenue losses occasioned by the various tax exemptions the SEZ Act provides.

The CPI(M) has called for a full discussion on the SEZ report. It has, according to a media report, praised the parliamentary panel for suggesting a curb on fresh licences for SEZs and “farmer-friendly” amendments to the SEZ Act. The Left Front has intermittently attacked the SEZ policy for what the party calls its anti-farmer land acquisition style.

The report on SEZs is yet to be made public; but the UPA government must agree to a full discussion to clear the ambiguity and misunderstanding surrounding the SEZs and, post the events in West Bengal, Maharashtra and Orissa, allay the anxieties of farmers fearing the loss of their lands.

The debate is essential for this reason alone. The SEZ Act has brought to the surface a problem that successive governments ignored because it seemed restricted to some public programmes, notably dams and power projects.

New Delhi could ignore land acquisition issues because they seemed to be a matter for States to contend with. The SEZ Act has made the problem a national issue.

Finding the centre

A debate has to have a central concern that fixes the coordinates for a meaningful resolution. So far, the debates on SEZs have focussed on the means of their creation: Land acquisition, and its consequences — revenue loss — or, as the Commerce Ministry would have it, on economic activity, rather than its original purpose — exports.

In 2000, the then Commerce Minister, the late Murasoli Maran, returning from a tour of the southern provinces of China, incorporated the SEZs into the Exim Policy; five years later, the Act framed the provisions “to provide an internationally competitive and hassle-free environment for exports”; the following year, the rules were notified for the fulfilment of those goals.

Admittedly, the Act diluted the export obligation by including “trading activity”. But it clearly stated that the SEZ would be a “specifically delineated duty-free enclave and shall be deemed foreign territory for the purposes of trade operations and duties and tariffs.”

The privileges that accrue to the SEZ developer and the units therein — from income-tax holidays and fiscal exemptions to the free imports of capital goods, services and the provision of world-class infrastructure — were meant to facilitate exports and bring in foreign exchange. In keeping with the seriousness of its intent, the Act morphed the existing Export Processing Zones, themselves exclusive export enclaves, into SEZs.

The first few SEZs — that of Nokia in Tamil Nadu, for instance — were tailored to fit this definition of SEZs-as-export hubs. But, as applications poured in, the original purpose was soon forgotten in the general enthusiasm generated by the overwhelming response. The Commerce Ministry saw in the SEZ a means of investment and employment generation; the critics detected in them an excuse for land-grab.

For Indian and foreign investors, the SEZ opens various avenues for least-cost returns to investment either in terms of real-estate, relocation of manufacturing operations from high tax zones, or, motivated by visions of immortality, create townships. Media and local resistance groups can be forgiven for playing upon the paranoia of land-grab but who can blame investors for responding to a favourable policy as it comes their way?

Lukewarm reminder

The opposition to the SEZ was, and continues to be, the result of such enthusiastic private sector response to the creation of privileged islands. Had the Commerce Ministry insisted on the export clause as a binding condition for SEZ approval the Opposition may have been less vociferous. India has had a history of such islands of privilege for more than 40 years.

The first EPZs, with all the tax exemptions, were set up in 1965 and sprouted over the next two decades when tariffs were far higher and the domestic economy more closed and regulated than it is now.

In February this year, the Finance Ministry introduced the idea of export obligation for the SEZs at an official meeting discussing the flak over the SEZs. It was shot down by the then IT Minister, Mr Dayanidhi Maran, and diplomatically by the Commerce Ministry, which felt that the introduction of such an obligation for those 63 applications already approved would appear rather injudicious.

Mixed record

Assuming the SEZ concept is given its original charter of export-driven enclaves, would the nation benefit much from it? From the viewpoint of the economy or forex earnings, chances are that the SEZ would not amount to much. Studies do not show the EPZs of yore in good light; the domestic tariff area has always been a better foreign exchange earner, with all the tariff walls and other roadblocks.

That was in the past; with systematic decontrol and financial deregulation since the 1990s, the economy has provided ample evidence of its ability to attract foreign investments and earn foreign exchange despite the poor infrastructure.

Exports are not faring as well as one might expect but, then, a good export thrust requires something more than exclusive privileges, given the strong pulls of the domestic market.

Outmoded concept?

So, is the SEZ relevant at all if its original purpose has little economic value for the national economy, in contrast to benefiting just a handful of investors? That is what Parliament must debate. Asserting that an export obligation may make the process more selective but in the larger context of exports, the SEZ concept would be irrelevant to India’s current needs.

Some argue that, regardless of the export obligation, at the end of the day, the SEZs can become townships, thus taking the pressures off present urban centres. The Commerce Ministry tacitly takes this view in its endorsement of SEZs as hubs of economic activity and employment. Besides, now that so many approvals are in the public domain, it would be impolitic to retract them even if, as media reports suggest, the Standing Committee has recommended a freeze on further approvals.

SEZs as Townships

It would be tempting to consider 63 approved SEZs as so many future urban hubs diverting the migration flow away from cities now collapsing under their own weight. But it would constitute a double perversion to use the provisions of the SEZ Act to sprout townships across the countryside, much as they might be required.

By its very nature, the Act exclaims appropriation of privilege; townships created by developers under its dispensation would have all the attributes of exclusion without the responsibilities attached to the original idea of the SEZ.

The islands of privilege that an export-driven SEZ can become would turn it into walled cities or gated communities. In a democracy that is unacceptable though it would not be illegal for the private developer of an SEZ to restrict entry.

In India’s thriving economy, new towns can provide the best refuge for those fleeing the stagnating hinterland. But the SEZ Act is not the policy instrument for that kind of hothouse development of urban spaces.

Policy-makers need to think of public-private partnerships for new towns that are planned differently from those that have grown organically, and rather messily, so far.

They need to be planned from the viewpoint of different stakeholder-interests and the common good. Like New York City’s vision of itself 50 years from now that accounts not just for shopping malls, housing and factories but parks, playgrounds, nature itself and the environment. The SEZ Act of 2005 is not the best place to start that process.