It’s a debate that is unlikely to wind down anytime soon. Since the time the Special Economic Zones (SEZ) Act, 2005 has kicked in, a slew of projections of the costs and benefits are being bandied about with little convergence on what they are likely to achieve. SEZs were China’s biggest draw for the foreign investors and are believed to be the key driver in putting the country right on top as the world’s biggest recipient of foreign direct investment (FDI). Over the years, inflows of FDI into China have climbed up steeply in sharp contrast to Indian trends. Thus, UNCTAD’s World Investment Report 2006, records FDI inflows into China at $72.4 billion in 2005. India FDI’s inflows of $6.6 billion barely match up. It has been presumed that the SEZ Act may just be the enabling trigger. Export provision of world class infrastructure and a raft of special fiscal provisions including exemptions from customs duty, excise and service taxes, drawback on goods and services supplied to SEZs form key attractions to potential investors and are outlined in sections 26-30 of the Act.
Media reports estimate that around 263 companies have already received formal approvals to set up SEZs and another 169 have been granted clearance in principle by the government. An examination of the bare details available for approved SEZ’s reveal that they cover a wide range and include multi product ones to sector specific enterprises such as pharmaceuticals and biotechnology, engineering products, IT/ITES, gems and jewellery, textiles and electronics. Broadly, SEZs are spread over 15 states including Andhra Pradesh, Maharashtra, Uttar Pradesh, Madhya Pradesh, Haryana, Punjab, West Bengal and Karnataka. Of course, the total number of SEZs as well as their sizes differs across states.
While corporate India is focused on the analysis of the business model and time horizons when profits start pouring in, it is important to touch upon the key issues and concerns which are yet unresolved as the SEZ bangwagon rolls out.
Rehabilitation policy and environment
Concerns abound over several aspects of the operationalisation and implementation of the SEZ Act, ranging from diversion of prime agricultural land and consequent implications on displacement of farmers, alternative livelihoods and overall food security, revenue losses with attendant linkages apprehensions over real estate grab in lucrative locations, non-application of protective legislations for workers in SEZ areas to environmental issues. There are also misgivings relating to the exemption of SEZ’s from application of other Central Acts and rules as laid down under section 49 of the Act, including denial of popular participation in local self government.
The acquisition of large chunks of fertile agricultural land in and around urban agglomerations such as in Haryana and Maharashtra has led to protests by farmers and public interest groups. In Haryana, for instance, the SEZ big players like Reliance Industries and DLF have projected acquisitions of land to the tune of 10,000 hectares and 9,000 hectares respectively. In Maharashtra, the Mumbai SEZ alone measures 14,000 hectares.
It is inevitable that large parts of the acquisition would involve a diversion of prime agricultural land to industry which is yet to be firmly quantified. It is important to note that while the Act does mention minimum area requirement, ceilings have not been set as laid down under Section 5 (2). Displacement of farmers and agricultural workers arising on this count would but follow in the absence of a National Rehabilitation policy. Besides, the government seems only too willing to step in and facilitate the purchase of land at prices which are significantly below the market value of the land. Thus, the land sought to be acquired for the Mumbai SEZ has been reportedly priced at Rs 1.7 lakh to Rs 2.5 lakh an acre whereas the market price for the same is in the range of Rs 20-40 lakh per acre.
What are the larger implications of the SEZ Act?
Projections of staggering revenue losses by the Finance Ministry to the tune of Rs 1,75,000 crore as against the projected investment of Rs 3,60,000 crore are deeply worrying. This is bound to put government budgets under strain if we also factor in future revenue losses on account of India’s commitments in the making at the World Trade Organisation. Taken together, there is bound to be an impact on the social sector and other welfare spending of the government in such a scenario. The Planning Commission and the Reserve Bank of India (RBI) have also sounded a cautionary note on this count. In its Annual Report 2005-06, the RBI notes that the revenue losses can only be justified if the SEZ units ensure forward and backward linkages with the domestic economy. To what extent this would happen is not at all predictable.
Are we promoting regional inequity?
At the beginning of economic reforms in China, Deng Xiaoping propounded his policy of ‘letting some areas and people getting rich for achievement of common prosperity ultimately’. There was no forethought about the potential for regional inequities embedding in such an approach. There are reasons to believe that a similar pattern may be witnessed in India which would further accentuate the uneven development of regions, as underlined by the RBI annual report, by drawing out resources from less developed areas.
While a detailed discussion on other provisions of the Act is beyond the scope of this write up, suffice it to say that in the light of the foregoing concerns, the SEZ Act needs to be comprehensively reviewed. Current policy seems to be hinged on the principles of padding up gains and discounting losses imminent on account of the operationalisation of the Act. While land is a state subject, the Centre does need to step in to appropriately regulate its acquisition and its ultimate use. Importantly, the constitution of the Board of Approval needs to be broad based with all the major stakeholders represented in the decision making process. Civil society actors need to play a role at every step in the governance of the SEZ right from the policy formulation stage to its actual implementation.
This article was published in Budget Track, February 2007
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