SEZs as gated communities

At first glance, the announcements had the fragrance of spring flowers, the promise of rejuvenation after a long and dreary season of helpless silence from New Delhi on economic prospects.

When the Commerce Secretary, Mr Rahul Khullar, asserted late last month, at an export-excellence awards ceremony in Chennai, that a set of reforms aimed at benefiting special economic zones and export-oriented units (EOUs) would be unveiled in May, one could be forgiven for assuming that, at long last, the government was taking its rhetoric on reforms very seriously indeed.

Mr Khullar, according to an agency report, had assured exporters that the “Department of Commerce is trying to make life simpler” for SEZs and EOUs. Definitely by next month-end or so, he asserted, they could expect changes in procedures and norms. “We are now at the last stages of the reforms.”

The fragrance vanishes even as he speaks: The proposed amendments that would make “life simpler” for exporters will “require clearances from certain Union ministers. Once it is done, it is my responsibility to put whatever is there in the policy in the public domain”.

Unease sets in. If experience is anything to go by, not many ministers may be so willing; certainly not the Finance Ministry that will have to take into account its own state of declining revenues occasioned by an apathetic economy.

Mr Mukherjee may not be as forthright as his predecessor, Mr Chidambaram, who was rather hostile to the idea of tax breaks promised for SEZ developers when the policy was announced in 2005-06. The differences between him and his counterpart at the Commerce Ministry, Mr Kamal Nath, went public; the FM was not willing to forgo revenues much, as Mr Kamal Nath contested the magnitude of the loss.

That was when the economy was cresting its own peaks, and revenues were buoyant.

No mood for sops

Now, Mr Mukherjee may have to scrape the bottom of the revenue barrel; every rupee will count.

One does not know what the Commerce Ministry proposes to deliver this month, but there must be something by way of tax concessions. One of the oft-cited reasons for the declining interest in SEZs was the imposition of minimum alternative tax and the decision to do away with tax-free status for these enclaves by 2014. 

But interest has been dropping for more fundamental reasons: Difficulties in land acquisition, resistance from local citizens to the creation of privileged islands that would stretch their local resources.

In Goa, for instance, local opposition to SEZs proposed by both real-estate barons and industries led the government in 2008, headed by Mr Digamber Kamat, to scrap all 15 SEZ projects in the pipeline.

Flaws in SEZ ointment

That was just three years after the Special Economic Zones Act had come into force. Since the Goa Government's decision to date, the Commerce Ministry has cleared 45 applications from SEZ developers for de-notification.

Suddenly, the SEZ has lost its flavour among developers and the reasons they give offer a glimpse into the basic weakness of a policy predicated on creating islands of privilege.

Most developers threw in their towel because of the economic downswing, land acquisition face-offs and the removal of the mouth-watering tax breaks.

At the height of the economic boom, the SEZ was viewed as an avenue for real estate and, at best, by manufacturers eager to escape the “mainland” complexity of central and state taxes.

The SEZ was, therefore, considered a refuge, a safe haven from the warp and weft of the ‘domestic tariff' area, still trapped in arcane laws and regulations and multiple taxes.

China in India

In its limited success, the SEZ emulated the Chinese model, but perversely so. In China, such zones were exclusive export zones in the most literal sense of the word.

Built along waterways and coastlines, the zones produced goods (and services later) that were shipped straight out to Western markets.

These were free-economy islands grafted onto a domestic area still too backward and vast to modernise (Westernise) fast enough for an impatient government.

The SEZs were meant to serve as torch-bearing agents of national growth, but they remained neon islands of entrenched privilege.

Typically in India, the SEZ model, turned at the hands of purblind policymakers into a handy convenience for rent-profiteering.

Too general in its goals, much too precise with incentives, the SEZ became an open-door opportunity for large-scale real-estate investments. That is why so many builders applied for SEZs, close to urban centres whose glitter would add lustre to the proposed townships.

The ambiguity of purpose lies here. In China, the zone was meant to be literally, workshops for the Western consumer. In India, they were meant to earn dollars, but if they did it by simply building townships as gated communities, so be it.

At a more positive level, and in the southern States that Mr Khullar complimented, the SEZs are controllable sprawls for IT industries and multinationals, exhausted by India's rough and tumble environment. Both avatars of the SEZ remain the economic equivalent of gated communities.

Come to think of it, India's growth since over the last decade has been no different.

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