If there was one policy that the UPA Government enacted with some degree of decisiveness, it was the Special Economic Zone Act of 2005. If there was any policy that was undertaken in haste, without a thought either to the environment it was meant to improve or to the consequences of the privileged status it conferred on the developers, it was the SEZ Act.

The then Commerce Minister Mr Kamal Nath meant the SEZ to serve as the springboard for India's leap into the exalted club of leading exporters in much the same way that the Chinese SEZs had transformed the People's Republic or, rather, initially its south-eastern coastal provinces into the world's manufacturing hubs. He was, in fact, picking up from where the late Murasoli Maran had left off. In 2000, as the Commerce Minister, Mr Maran had found Chinese SEZs “an eye-opener” and recommended a similar policy; the old export processing zones had to be refurbished, transformed into more dynamic workstations for the post-Millennium launch of Indian exports.

An idea past its time

When Mr Kamal Nath's ministry finally notified the Act, the SEZ idea had lost its moment. India was already on the high-growth path, exports from the domestic tariff areas were booming; they were nowhere near China's but the effort had taken three decades while India in less than two was already soaring. The cumulative reductions in customs and excise duties and overall reforms of the 1990s paid dividends by unlocking India Inc's potential, led by the IT sector. The tax breaks that the sector enjoyed vis-à-vis manufacturing, and still does, no doubt sharpened its competitive edge, but the point is it did not take an SEZ to get them into the global markets.

In an environment already dismantling its high tax regime and liberalising in one way or another, enough for producers to access capital, engage in new projects, acquire global companies and establish footprints in world markets, what could the SEZ do other than create small islands of more privilege than what the liberalising environment was offering the national economy in a calibrated and inclusive manner —without the loss of revenues?

Developers saw the SEZ not as Mr Kamal Nath wanted it to be viewed but as an opportunity for tax breaks, operational management of a kind not found in the domestic economy, and for the exploitation of land as real estate.

An SEZ could be created in the image of its developer, with the State bending over backwards to provide various infrastructure whose shortages others in the national economy had to surmount. What the SEZ had created was a new industry, and it was not for exports.

PAC's critique is basic

The Public Accounts Committee report on Special Economic Zones, submitted recently to Parliament, has urged “serious consideration” of the policy on account of “persistent complaints that (it) has degenerated into a scheme to garner land at advantageous prices and obviate taxes without expected multiplier benefits.” The PAC's acuity lies not just in its description of the dubious ways exports are misrepresented but in the very serious flaw at the core of the idea itself. For the first time in five years, a non-partisan committee has expressed in the sharpest terms what many policymakers and commentators had felt ever since the Act was notified.

The then finance minster Mr P. Chidambaram was the first to raise objections to the revenue loss that would follow the tax exemptions offered by the Commerce Ministry.

His successor, Mr Pranab Mukherjee went a step further, and in the current budget slapped Minimum Alternate tax and Dividend Distribution tax on SEZ developers much to the dismay of the Commerce Ministry and the developers.

Ground beneath its feet

But it was the opposition from a most unexpected quarter that really showed the policy for what it was: a poorly conceived, yet arrogant public policy not worthy of policymakers expected to have their ear to the ground.

Since 2006, violence against the very idea of industrialisation has acquired a new target, with land acquisition appearing to the rural poor as the latest embodiment of oppression.

That attitude in large parts of rural India that were staked out for SEZ development grew out of the Indian State's abandonment of its mediating role in the transfer of rural lands.

To be sure, the Sardar Sarovar and other public utilities had shown how fraught with tension the acquisition of lands was. But when the UPA Government accepted Mr Sharad Pawar's casual suggestion for the Government to step away from ‘a strictly private transaction', never mind the unequal bargaining power of the seller, it created headaches for developers saddled with licenses and dimming prospects of land.

Setting back the clock

What was worse, the SEZ policy created a new and potent roadblock to industrialisation itself. Read any report of the ministry of programme implementation on tardy projects and the one detail that stands out is the problem of land acquisition.

Right now the picture is muddy: The SEZ still proves attractive for entrepreneurs with big money, and in some States the concept works. But not in all, and that very fact creates its own inter-State distortions with the perverse incentives of the SEZ pauperising host States without creating any “multiplier benefits”.

But most of all, the SEZ has set back the clock to industrialisation and job-led growth.

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