SPECIAL ECONOMIC ZONES

Dear students of ANALOG IAS and THE IAS FORUM.As i have not given you any printed material related to SEZ,so i am posting this article ,which will help you immensely in your preparation for GS,Interview and paper-2 SOCIOLOGY .  SPECIAL ECONOMIC ZONES

	Saroj Kumar Samal        M.A(Gold-Medalist) M.Phil & LL.B        Director, Saroj Samal’s I.A.S, New Delhi        Email: sarojksamal@gmail.com

            Special Economic Zones (SEZs) denote geographical areas which enjoy special privileges as compared with non-SEZ areas in the country. The main motivating force for setting up SEZs came from the Ministry of Commerce with a view to boost exports by attracting both Indian and foreign corporates to undertake investment in these areas. Earlier Export Processing Zones are now also being converted into Special Economic Zones.

            The main argument to establish SEZ is to promote exports by concentrating resources in some pockets (designated as SEZs). The policy was introduced tract labour to any extent. The contract Labour (Regulation & Abolition) Act is also proposed to be amended to include certain peripheral activities.

SEZ Policy Motivated by the Chinese Experiences

            China established in 1980 special economic zones (SEZ) in 14 coastal cities. The main purpose was to provide a dual role for SEZs to act as “Windows” in developing the foreign-oriented economy, thus, generating foreign exchange by boosting exports and importing advanced technologies. Consequently, SEZs became “radiators” in accelerating economic development. In these zones, to attract foreign investment, custom duties and income tax were eliminated. This helped China to improve the coastal regions and thus accelerate the development of these regions. The policy helped to attract foreign-funded enterprises to invest over $20 billion in China and over 5,000 domestic enterprises from all over the country to invest about 30 billion Yuan in SEZ regions. As a result, six pillar industries took firm roots in China. They are: automobiles and spare parts and components, micro-electronics and computers, household electrical appliances, bio-medicines and optical, mechanical and electrical products.

CRITICISM OF SEZ POLICY

            The critique of SEZ policy has emerged from within the UPA government as well as from the left parties and even independent sources. It would be relevant to review the debate going on.

            Firstly, the Finance Minister Mr. P. Chidambaram, disagreed with the Commerce Minister on issues of key concessions, land use and the future of existing export-oriented units. A study made by the National Institute of Public Finance and Policy (NIPFP) found that the Government will lose Rs 97,000 crores in tax revenues during 2005-10 as a consequence of the tax concessions to SEZ units. This works out to be an annual average loss of Rs 19,400 crores to the state exchequer. The IMF Chief economist estimates that the loss of revenue to the public exchequer will be of the order of Rs 1,75,000 crores. These figures are being quoted by the Left that the SEZ policy needs a review because it is bound to add to fiscal deficit whereas the Finance Minister was making efforts to reduce the budget deficit every year. The Reserve Bank of India has also expressed its reservations about it. The basic question is: shall these tax concessions bring about any dramatic change in giving an impetus to the export growth? The fact that the SEZ projects in 2004-05 were able to provide exports barely to the tune of Rs 17,729 crores (4.9 percent of the total exports) indicates the capacity of these units to accelerate exports. In contrast, the small scale sector provided exports of the order of Rs.1,24,416 crores during 2004-05 or 34.4 percent of the total exports. The question which the nation must decide is: should it promote the SME sector which has much greater potential or the SEZ units which contribute relatively much less in terms of foreign exchange earnings? Although Mr. Chidambaram is being dubbed as a conservative vis-a-vis the reformist but there is much more sense in his point of view. Mr. Narendar Pani observes in this connection: “The FM knows that he will  be in trouble if the economy as a whole does not do well, while the Commerce Minister concerns are only with export-oriented industries that are expected to benefit from SEZs. “(Narender Pani, SEZs as a Chinese Puzzle, Economic Times, September 22, 2006). The basic issue is that the assumption of closer links between sectors benefiting from globalisation and the rest of the economy has not been validated by international experience.

            The second issue pertains to acquiring huge tracts of prime agricultural land for SEZ units. For instance, the UP government had given a corporate house 2,500 acres of land in Dadri to set up a power plant which required only 50 acres. Similarly, West Bengal Chief Minister has handed over prime agricultural land for the Tata Small Car Manufacturing unit at Singur. This land was capable of producing three crops a year. Moreover, acquisition of land is done at prices determined by the Government and not market prices which is the legitimate right of the farmers. Obviously, this was being done to feed rich industrial houses and developers at the cost of poor farmers. Congress President Mrs. Sonia Gandhi felt seriously disturbed about the way things were going on. She laid down the following guidelines for Congress-ruled states on 23^rd September 2006.

            “Prime agricultural land should not normally be diverted to non-agricultural uses. Industry required land. But this must be done without jeopardizing agricultural prospects.”

            She added “farmers must be compensated well for their land, rehabilitation policies must be strengthened to reassure displaced people, and farmers could perhaps be given a stake in projects set up land acquired from them.”

            Following, the indictment of SEZ policy by the Congress President, whereas the Left felt that its stand was vindicated, ministers within the UPA were keen to do a U-turn and declare that they were already following these guidelines. On September 25, 2006, Commerce Minister Mr. Kamal Nath announced that “the Board of Approval for SEZ has made it mandatory that no proposal for setting up SEZs on prime agricultural land be cleared.” The Agriculture Minister, Mr. Sharad Pawar, said: “The government’s idea of acquiring land at government rates was not good. The concept of economic development by putting the farmers out on the streets is not welcome.” Pawar expressed his unhappiness about the policy of state governments deciding the price at which farmers sell land to private companies. “Actually it should be between the industrialists and the farmers. If at all the government is involved, then it should ensure that the farmers get the rightful compensations and also some share (at least 12.5 percent) of the developed land.”

            Mrs. Sonia Gandhi’s guidelines produced an electrifying effect and the UPA ministers started singing a different tune on the policy of protecting the interests of farmers.

            Thirdly, a related question is about the land use. To stipulate only 25 percent land for export-related industrial purpose and the rest for infrastructure, housing, parks, golf-courses appears to be totally unjustified. Moreover, to suggest the construction of 25,000 housing units in a multi-product SEZ implies that instead of boosting manufacturing and rendering services for exports, the developers will be given total freedom to make enormous profits from housing. It would, therefore, be proper to lay down norms of land use and insist that at least 50% land in a SEZ will be used for industrial production, 25% for related infrastructure and only 25% is made available for other facilites like schools, a hospital, a housing complex for workers employed in SEZ and recreational facilities.

            Fourthly, the question of exemption from labour laws is another vital issue. In order to attract industrialists – Indian as well as foreign, state governments are over bending to promise SEZs from exemption of labour laws. What does this imply?

            This implies that state Labour Commissioners have no jurisdiction over factories in SEZs. The power of the Labour Commissioner will be transferred to the Development Commissioner and the Labour Commissioner will be required to take permission from the Development Commissioner to enter SEZ, even for inspection of ‘safety and environmental norms within the factory.’

            Mr. Mahesh C. Agarwal, Chairman – Managing Director of Brijbasi Hi-tech Group, in his article states in a very forthright manner: “So workers are completely at the mercy of the factory owners in the SEZs, and they either have to accept the inhuman and fascist conditions prevailing therein or lose their livelihood. The working conditions in the units set up in the SEZs are appalling, as expected, and there is often no restriction even on the length of the working day.”

            But the irony is that the Left parties, which earlier had an uncompromising stand on the application of labour laws vis-a-vis the Governement, are also having second thoughts on this question. Indications to this effect were noted in a article titled “Marxism and Left Front government’s efforts of Industrialization” published recently in the party organ Desh Hitaishai by Benoy Kumar, a member of the CPM Central Committee, where he argues: Bengal alone cannot afford to refuse the abolition of labour laws. If it does so, industries will come up in other states, thereby adversely affecting the interests of the working class. “If states like Maharashtra, Gujarat. Karnataka and Tamil Nadu announce that they will abolish labour laws as desired by the Centre and if the working class there fails to resist such a move, what will our state government do? If we insist on maintaining labour laws in our SEZs, there will be no industries here.” (Hindustan Times, September 19, 2006).

            The attitude of both the Centre and the State Governments on the application of labour laws is very questionable. The blame game is no use, the states putting the responsibility on the Centre and vice versa. The real issue is: When SEZs are provided land by the Government at below the market rate, they are provided exemption from a host of taxes, customs duty, excise duty, service tax, VAT etc., are these not sufficient incentives for them as against non-SEZ industrial units, then what is the justification of providing exemption from labour laws. Giving the industrialists power to exploit the workers and force them to work in inhuman conditions shall be violative of Article 38(1) of our Constitution which states: “The State shall strive to promote the welfare of the people by securing and protecting as effectively as it may a social order in which justice, social, economic and political, shall inform all the institutions of the national life.” Should the state forget its duties to provide citizens the ‘right to work’ and ensuring a ‘decent standard of life’ and full enjoyment of leisure?

            Lastly, the country will be  divided into two separate groups – SEZ and non – SEZ areas, Experience of locational preference with huge relative reduction in taxes and duties as also cost reduction on account of exemption of labour laws shall prompt industrial units to shift from non-SEZ to SEZ areas. This implies that net additions to total investment will be less than the projected level by the advocates of SEZ.

            To conclude: There is a need to have a reconsideration of SEZ approach to industrialization and export promotion. The Finance Minister and the Reserve Bank of India do not see any justification in having a system of differential taxation in SEZ and non – SEZ areas causing an erosion of tax revenues ranging from Rs 1,00,000 crores to Rs 1,75,000 crores according to different estimates. Moreover, the earlier policy of exempting tax revenues if new industrial units in the hinterland are set up to mitigate the additional costs required was justified. But most of the SEZ units are planned around the metropolitan towns. For instance, Reliance wants to set up Maha Mumbai SEZ, the second largest SEZ in the world – after Shenzhen in China – spread over an area of 35,000 acres. Nearly 100 villages covering 1.5 lakh families face eviction in view of the notices served by the Maharashtra Government. A government official admitted: “The entire region is the states’ rice bowl. Almost every family in these villages cultivates paddy though majority of them are small and marginal formers making land acquiring process more complicated.” (Report in Economic Times, 2^nd October 2006). Reliance has also proposed another multi – product SEZ in Haryana spread over 25,000 acres. Similar proposals of setting up SEZs in the vicinity of major metropolitan towns are also under consideration of state governments. Why should the government subsidise the big business houses – both Indian and foreign – at the cost of the farmers, is the moot question.

            Earlier the poor villagers have been suffering due to big power dams and Narmada Bachao Andolan (NBA) took up the cause of their rehabilitation. Social reformers have now taken up the cause of displacement of poor farmers by providing very low rates of compensation for acquiring their land. For instance, jagatsinghpur steel project by POSCO has already been allotted 1,100 acres of agricultural land for Rs 25,000 per acre falling within the fertile delta of Mahanadi by the Government of Orissa. This is a very low rate of compensation for the ousted farmers.

            Moreover, the experience of China suggests that the Chinese hinterland is still lagging, now even more so against the glamorous coastal regions. The Chinese have, therefore, decided to have a course correction in Eleventh Five Year Plan.

            While in the Approach Paper of the 11^th Five Year Plan, India set up as its primary goal “Towards Faster and More Inclusive Growth,” in practice through the policy on SEZ we are setting up “iniquitous enclaves” of development which will result in “exclusive growth.” Bringing out the flaws in SEZ Policy, Business Line in its editorial states: “The history of discrete or locational tax exemptions suggests a shift in investments not an addition; firms tend to move productive capacities to low-tax regions instead of adding fresh investments.... But even if that were not the case, the SEZ concept is still faulty because it creates opportunities for the few....Historically, the export processing zones have been poor exporters and even poorer foreign exchange earners compared to domestic tariff area; now, the SEZs are required to perform even less in terms of forex earning while being given more, precisely at a time when the overall economy with all its constraints and bottlenecks is performing excellently.” (Business Line editorial, September 26, 2006 titled Iniquitous Enclaves). On the one hand, India intends to emerge as a first – rate super – economic power by 2020, but on the other hand, it will have third – rate labour with deteriorating economic conditions with no income security or employment security or social security in SEZs which are destined to become industrial enclaves with super – profits. Does this all match with our concept of so – called inclusive growth? Whereas the ILO has set ‘decent work’ as their goal, we are generating forces which lead to ‘indecent work’ as their goal. It may be noted that the Second National Commission on Labour in its Report (2002) clearly stated that it was not in favour of granting any exemption from labour laws in respect of establishment in export promotion zones or special economic zones.

            Mr. Rahul Bajaj, Chairman, Bajaj Auto Ltd. Criticizing the SEZ policy mentions: “I believe that on the balance the SEZ Act and rules currently in force may not ensure that the nation would gain significantly. As they stand, they are possibly providing incentives to units in SEZs disproportionate to the incremental benefits that may accrue to the nation.” (Some straight talk on SEZs, Economic Times, October 4, 2006). There is a need to impose stiffer obligations on SEZs so as to justify the incentives. “with a stiffer export obligation of 60-75% of production, 60 – 75% reservation of land for production units and logical and fairer land acquisition process, SEZs may serve the ends that they should serve.”

            To sum up: India has been carrying forward the process of industrialization since the Second Five Year Plan started in 1956. Big industrial units were established in steel, fertilizers, shipbuilding, aircraft manufacture and several other basic and heavy industries related to infrastructure, and large tracts of land were acquired. But Government had established a relation of trust and thus, the process moved on smoothly, because it was motivated by ‘public purpose’. Moreover, for industrial units to be established in backward areas, Government provided incentives and tax concessions. Consequently, there was enthusiasm about industrialization of the country. Private sector also got strengthened to set up units, once basic infrastructure was made available.

            The Government has failed to create a sense of enthusiasm and motivation among the people about SEZs as the major vehicles of industrialization. Rather they are seen as promoting ‘crony capitalism’ in the country, as symbols of generating inequalities and totally inclined towards MNCs and big Business Houses to earn huge profits. There is, therefore, a need for course correction. SEZ alone cannot be the answer for rapid growth. They can only be supplements in the process of growth. If this view is acceptable, there is a need to bring about a balance between SEZ and non-SEZ units and thus, rationalization of incentives and tax concessions has to be undertaken, rather than tilting the balance only in favour of SEZ units. The basic difference between China and India is that whereas china operates under a single party rule, India has a vibrant multi-party democracy. In this political structure, the Government cannot ignore the perceptions of the people towards ‘welfare’ and ‘public purpose’. Consequently, it would be prudent to develop a unique SEZ model within the socio – political framework of the country, rather than blindly imitating China.