Admission of failure

Last Updated: Wed, Jun 13, 2012 19:51 hrs

The latest attempts to relax the rules for Special Economic Zones (SEZs) are a good example of all that is wrong with India’s economic policy. SEZs were conceived in 2005 as a means of providing exporters with China-style tax-free enclaves outside the purview of the country’s restrictive labour laws, the idea being to stoke exports and employment. It is an open secret that far from achieving these objectives, SEZs have degenerated into real estate plays, or means for infotech companies to extend tax breaks they lost under the Software Technology Parks of India (STPI) scheme (a large proportion of approved SEZs are in the IT sector). By Commerce Minister Anand Sharma’s own admission to Parliament, only about a fourth (154) of the 587 SEZs that the government approved under the 2005 Act are operational. That’s less than half the 380 that have been notified. Far from the millions who were expected to find jobs in these enclaves, the total direct employment generated is 800,000. According to Mr Sharma, SEZs account for a quarter of India’s export earnings, a figure that sounds impressive were it not for the fact that IT accounts for a significant portion of that value.

The current proposal to relax operating rules is a tacit admission that the SEZ initiative has been a signal failure. Consider the proposal to reduce the minimum requirement for multi-purpose SEZs from 1,000 hectares to 250 hectares and similar reductions for other SEZs (such as gems and jewellery and so on). One of the key successes behind the gigantic east-coast SEZs that powered China’s exports was the advantages of massive economies of scale. Shenzhen, for example, covers 32,000 hectares. It was this (and, admittedly, an undervalued currency) that enabled China to attract foreign direct investment – SEZs accounted for 20 per cent of China’s FDI – and derive the dominant price competitiveness that rivals have struggled to emulate. In India, if SEZs are to be reduced to a quarter of the stipulated minimum size, why have them in the first place? Why not revert to the policy of providing specific export-oriented industries with tax breaks and add in labour law exemptions? After all, some SEZs for infotech companies and infotech-enabled services consist of single buildings — hardly the point of the original policy. Since SEZs are now subject to the minimum alternate tax and dividend distribution tax, they no longer have much raison d'être anyway.

The commerce ministry has explained that one key reason for diluting the minimum size is that land acquisition has become a major problem for developers. This is undoubtedly true, as the troubles with the stalled Navi Mumbai SEZ demonstrated. Land acquisition is a state responsibility, and it appears that many state governments remain unconvinced of the benefits of sacrificing large tracts of agricultural land and the livelihoods of those dependent on them when they judge the benefits to be so uncertain. Little attempt was made to bring the states on board before the SEZ Act was passed — ironically, in contrast to autocratic China, where local governments and farmers were incentivised. Indeed, the fact that 33 zones were denotified between 2008 and 2011 suggests that, at least as far as India is concerned, SEZs have lost their appeal.

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