Jan 26, 2012

Nothing Special about Special Economic Zones (SEZs)


Some years back I delivered a memorial lecture at Rohtak in Haryana. The Haryana chief minister Bhupinder Singh Hooda was in the chair. Knowing how flawed his economic thinking of acquiring large tracts of farmland for the sake of industry in the name of Special Economic Zones (SEZs) was, I dwelled upon the dangers and the disastrous fallout waiting to happen as far as livelihood security of the masses and country’s food security was concerned. 

Hooda was obviously irked, and visibly angry. Cutting me short, he got up and intervened saying how right his policy was for the farmers, and for the state’s ultimate economic progress. I asked him where and when was a public discourse held to know whether SEZ was a good investment, and he retaliated by challenging me to an open discussion anytime later in Chandigarh, which of course never happened.

Several years later, I stand bemused to find Hooda take a complete u-turn: “It is true that SEZs have not succeeded, not only in the state but in the entire country. There was economic slowdown in the entire world, so SEZs could not succeed,” he said recently. Although he acknowledges the fault, what he says in its defence is also not correct. And this is true for the entire policy making process, which still refuses to accept the fundamental flaws in the SEZ policy. As IMF chief economist and an advisor to the prime minister, Raghuram Rajan, had stated way back in 2007: “India’s SEZ policy was a tax give-away and was likely to shift Indian production to SEZs rather than create new economic activity.” He was quoted in the Wall Street Journal as saying “these zones would be viable only if they focused on providing superior infrastructure, business-friendly regulations and exemptions from labour laws rather than offering often misdirected subsidies, guarantees, and tax sops that a stretched budget can ill-afford”.

By October 2011, ministry of commerce had approved 583 SEZs. As per news reports, one-third of these – approximately 202 -- have been already withdrawn. A majority of those who are still struck are known to be looking for better escape options. For instance, the realty giant DLF with its joint venture partner Hubtown, has recently sold its IT SEZ in Pune to a private equity firm Blackstone for Rs 810-crore. In Haryana, Reliance Haryana SEZ Limited (RHSL), a Mukesh Ambani’s Reliance Ventures Ltd and Haryana State Industrial and Infrastructure Development Corporation (HSIDC), is the latest one to drop out. It had earlier shelved its Jhajjar SEZ and converted it into a model economic township to be implemented by a new company.

Reliance was seeking further extension for its Gurgaon SEZ, but has been finally asked to return 1,383 acres that it got from the state government. In Andhra Pradesh, 109 SEZs were approved, only 36 are operational. The Andhra Pradesh Industrial Infrastructure Corporation has scrapped the MoUs with the major defaulters and taken back the land assigned, including from Unitech and Caparo. In Haryana, only 3 of the 46 approved SEZ are in operation. 

SEZ were promoted as a engine house of economic liberalisation. These were primarily set up to prop-up the slowing economy. These were supposed to drive exports, and, in turn employment and growth. All kinds of sops – tax waivers and giveaways – including precious land provided at a throwaway price, were given to energise manufacturing and exports. To blame the economic slowdown therefore for the failure of SEZs to take-off is to find an easy escape route for the fundamentally flawed policy. Even before the global economic meltdown of 2009-10, SEZs had failed to live up to the expectations and at the same time failed to demonstrate any significant upswing in export growth. In reality, it provided a massive windfall for realty developers. SEZ were perceived as real estate ventures and therefore an opportunity for land grab where developers could use 65 per cent of the acquired land to build hotels, restaurant and apartments.  

Why blame Hooda alone, prime minister Manmohan Singh too was mesmerised by the SEZ potential. At an award ceremony in Mumbai in 2007, he had said: “Special Economic Zone (SEZ) is an idea whose time has come.” Supported by all political parties, including the Left Front, he actually launched a nationwide campaign to forcibly acquire and make available land on a platter to the industry, displacing lakhs of farmers. What began with SEZ subsequently continued in the name of industrial development. Farmers resisted, and pitched land battles were waged across the country, the likes of which have not been witnessed in living memory. The resulting social unrest across the rural spectrum was considered to be a small price the country must pay for achieving long-term development. As companies lined up for SEZs, most state governments went aggressively into property dealing.  

As expected, not many states have realised the social and economic benefits that were originally promised. Except for the IT sector, which has very cleverly used SEZ to seek further extend the tax exemption period, the enthusiasm from other sectors was clearly missing. In essence, SEZ was a misplaced idea whose time had lapsed much before it caught the imagination of policy makers in India.

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