| This can happen only in India. Introspection is always with retrospective effect. On June 23, 2005, the Special Economic Zone (SEZ) Bill was passed by Parliament into a law. Six months later, in February 2006, the Ministry of Commerce notified the rules. An empowered Group of Ministers met eight times and haggled over the fine points, or so we assume, and on a cap on the number of SEZs. Even as they met, the government had, by September 2006, cleared a total of 267 SEZs, of which 150 got formal and 117 in-principle approvals. It was perhaps the biggest push for industrial expansion in post-Independence India. Although the finance ministry and some economists had been wondering on the efficacy of the policy and the need for tax sops, there was little reaction or application of mind in the political theatre. Suddenly, even as the chatter in the corporate world rose to a crescendo on the "big bang economic opportunity", the political class seemed to have woken up to what they think is a hydra-headed monster in their midst. |
Within less than a week, virtually every major party had the special economic zones on its agenda. In Kolkata, the CPI(M) Politburo began the tirade asking for amendments in the Act to curb revenue loss. In Patna, JD(U) Chief Sharad Yadav described it as the biggest real estate fraud.
The Akalis aligned with eight other organisations to stop trains and charge the Punjab government with defrauding farmers. In Delhi, V.P. Singh and Raj Babbar of the Jan Morcha, along with CPI general secretary A.B. Bardhan, went to meet President A.P.J. Abdul Kalam, presenting him with a memorandum asking him to intervene against the land grab and tax sops.
CPI(M) MP Sitaram Yechury led a rally of protestors in Maharashtra against the acquisition of farm land for the 12,000-hectare Reliance Industries-led SEZ in Navi Mumbai. Almost on cue, SEZs were discussed at the Congress chief ministers' conclave at Nainital. As the party deliberated the distress of farmers, Congress President Sonia Gandhi was compelled to intervene and declare that agricultural land should not be acquired for SEZs. It was as if the rebellion had reached the palace. The BJP, which had not reacted to ex-MP Kirit Somaiya's letter to the prime minister on the subject, too, has gotten into the act creating a cell to study the long-term impact of the SEZ policy. Indeed, the three-letter buzzword SEZ could well be the next political four-letter word.
|DREAM LANDSCAPE |
| SEZs come in all shapes and sizes. They range from the 1,000-hectare-plus multi-product zones and 100-hectare sector-specific zones to the mini 10-hectare zones hosting it, biotech, jewellery and non-conventional energy sectors. |
| SHOPPING MALL |
| SEZs promise units and residents ultra-modern shopping facilities. Developers can use the facility to draw multinationals and mega-brands to invest in the zone. |
| AIRPORT |
| Larger SEZs will have their own helipads and airports. While it will help exporters conduct business in real time, it will also provide more travel options to residents and tycoons. |
| INDUSTRIES |
| Industries located in SEZs have been blessed with a no-strike eco-system. Besides assured power and water, they will also offer speedy access to rail and road connectivity. |
|BOON TIME |
| 53% SEZs are in the sunrise sector of IT and IT-enabled services |
200 SEZ proposals are awaiting approval from the government
$5bn foreign direct investment expected in SEZs by December 2007
SOPS FOR DEVELOPERS
Ten-year tax holiday (out of 15 years in phases) on all income
One-time waiver of customs duty, central excise, service tax, central sales tax, local taxes for all inputs
FDI permitted to develop township within SEZs with residential areas, markets, playgrounds, clubs, recreation centers, etc.
Supplies from DTA to SEZ units treated as deemed exports
Reimbursement of central sales tax paid on domestic purchases
Ten-year tax holiday from all export income across a block of 15 years
SOPS FOR UNITS
SEZ unit to be positive net foreign exchange earner within three years
Exemption from customs and excise for raw materials used
No cap on foreign investment for SSI-reserved items, which is a bonanza for FMCG majors
FDI up to 100% allowed through the automatic route for all manufacturing activities
Bigger SEZs will provide units and residents a shot at world-class lifestyle. The developers can import-without paying duties-anything from cobblestones for the pavements to Italian marble and customised fittings for the houses.
Residents and users of SEZs will have access to multiplexes, hotels, shopping malls, jogging tracks, swimming pools and specialised spas.
| SHIPPING |
| The larger SEZs on the coast will boast of container port facilities as also berthing for tycoons' yachts. The marina will be a bonus for residents. |
26,800 hectares of land needed for the first 150 SEZs that have been approved
Rs 22,510 crore earned from exports from special economic zones in 2005-06
|All SEZs, big multi-product ones or the smallest it and ITEs zones, will boast of modern infrastructure ranging from independent water and power supply to broad band and Wi-Max services. |
| The SEZ policy makes it possible for residents to live like they would abroad. Most zones are planning golf courses to woo overseas investors and residents. They also promise gaming zones, bowling alleys and a sports complex hosting squash and tennis courts. |
OPTICS OF GROWTH
But are we getting the trade off between allowing tax sops and creating jobs right?
There is every reason for India to promote the concept of SEZs. Manufacturing constitutes barely 17 per cent of the gross domestic product (GDP) and unless Indian manufacturing becomes competitive, new investments won't come and without new investments job creation will languish. If jobs are to be created for the burgeoning youth and the over-40-million registered unemployed, India has to move its huddled masses from the rural economy to the industrial economy. Manufacturing is the bridge to draw at least some of the 56 per cent of the populace dependent on agriculture. Subir Gokarn, chief economist, CRISIL, says, "Every emerging economy, be it China or Malaysia, has used special economic zones as a vehicle to transcend local issues." If China set up SEZs in 1978, it was to overcome the problems of ownership of land and labour issues. Similarly, Malaysia created SEZs to circumvent the politically rich but economically inconvenient quota for bhoomi putras in industry.
| 1,129 sq km is the total area that will be needed for 267 SEZs. |
"May be I did the wrong thing. I should not have come into the industry 40 years back."
RAHUL BAJAJ, CHAIRMAN, BAJAJ AUTO
"We had suggested that special regions be located in backward areas without tax benefits."
C. RANGARAJAN, CHAIRMAN, PM'S EAC
India is no stranger to SEZs, having set up one as early as in 1965 when the Kandla export promotion zone was established. The National Council for Manufacturing Competitiveness (NCMC) estimates that it costs Rs 100 to produce something that is produced for Rs 70 in China. Power shortage, labour law rigidity, reservations in the small-scale sector, and pathetic road and port connectivity are some of the factors, besides the inverted tariff structure (taxes are loaded at different levels), which add to costs. Correcting this needs political muscle, which coalition governments lack. So governments have stuck to the safe piece-meal route. Given their penchant for abdication, SEZs offered a way out for the government, which could create a window of opportunity to tap investments flowing into other emerging economies like Vietnam, Indonesia or even Bangladesh.
| 388 sq km (highest) needed for SEZs in Haryana. |
541 sq km required for SEZs in Maharashtra and Gujarat.
"Why're they targeting farm land? Why aren't developers going to backward regions to set up SEZs?"
RAGHUVANSH PRASAD MINISTER, RURAL DEVELOPMENT
"We want the centre to change the SEZ act. Such sweeping tax sops will adversely affect the government."
PRAKASH KARAT, CPI(M) GENERAL SECY
The comatose SEZ Bill, once mooted by Murasoli Maran and authored by the NDA, beckoned. Union Commerce Minister Kamal Nath promoted the concept and piloted the Bill through Parliament. Not surprisingly, given the optics of economics and the dividend of job creation, the Bill was passed with some ado as the Left forced Nath to drop the clause allowing states to design flexible labour laws.
The idea was simple. Allow the private sector to set up SEZs, create townships and thereby transfer the burden of infrastructure to private players. In return, SEZ developers were offered tax holidays and units' exemption from input taxes and export income. It seemed fair enough since investments in infrastructure already get sops and so do exporters. But the difference was in the magnitude and the wide array of sops. Finance Minister P. Chidambaram raised the issue of excessive sops through two letters of 17 pages and 14 pages to the prime minister in March and in August. He also presented a study by the National Institute for Public Finance and Policy (NIPFP) and put the revenue loss at Rs 1,75,000 crore. Chidambaram's argument was that incremental exports would shift to SEZs and in four years' time, given the sops, all exports would shift to SEZs.
| INTERVIEW | KAMAL NATH |
"Revenue of Rs 44,000 crore will be created"
Commerce Minister Kamal Nath spoke with Managing Editor Shankkar Aiyar on allegations, protests and the buzz about the SEZ rush being stymied by political opposition. Excerpts:
Q. SEZ Act has been there for over 15 months. Why the sudden ruckus?
A. We had put the rules on the Net for six months precisely to address these concerns. This is a new idea and new situations arise. I am not worried. The point is, there has to be a better understanding of the issues. Much of the criticism is largely uninformed.
Q. There are allegations that we are giving away too many tax sops.
A. Obviously you are not objecting to sops for exports that are already there. Similarly, there are already sops for infrastructure too. Why is it a sin to give sops for infrastructure in SEZs? Why will somebody invest in infrastructure? Should we promote industry or not?
Q. But surely tax sops to retail shops, multiplexes are not justifiable?
A. Don't you need facilities commensurate with the investment and the number of jobs being created? Who will create housing? Should we have industrial training institutes or not? Who will pay for this?
Q. The rush seems to be for townships to tap real estate opportunity.
A. We have restricted housing to 25 per cent of the jobs created. If they want more, they have to come back to the board of approvals.
Q. The finance minister is concerned about loss of revenue.
A. I don't agree. We have presented a paper which says that additional revenue of Rs 44,000 crore will be created as SEZs will act as a trigger and catalyst for economic activity.
Q. Do you think you rushed too fast?
A. No. Do we need industry and investments or not? We are competing with other countries for investments. We have to move fast.
Q. Are other countries giving similar sops?
A. Of course. China gives much more, like flexible labour laws and 20 years' tax holiday, and so do others.
Q. With Sonia Gandhi ruling out use of farm land, political optics suggests you have run into a wall.
A. No, that is not true. I had written to all the state governments that fertile land should not be acquired. In fact I have letters from many chief ministers pushing for SEZs.
Q. Political parties are alleging that farmers are being cheated, that this is a land grab.
A. While we have said wasteland should be acquired, please understand that land is a state subject. This is why Sonia-ji expressed concern to chief ministers.
Q. What is the total investment you are expecting?
A. It is early days yet. We see an investment of around Rs 1,00,000 crore, including $5-6 billion foreign direct investment by December '07.
Q. Corporates say a lot of investment will be diverted. Would not these investments come without SEZs?
A. No. This is incremental, additional investment that is coming because of the facilities being offered.
Q. Is creation of exclusive enclaves like SEZ consistent with the UPA's theme of inclusive growth?
A. It will lead to inclusive growth eventually. Where will jobs come from? We have to create some.
The buzz in Udyog Bhavan is that the MOF's protestation is all about losing the SEZ turf to moc. Apparently the Finance Ministry had, in January 2005, asked that under the rules of business, SEZs be parked in the North Block. The joke in Udyog Bhavan is that this is the real loss of revenue. Be that as it may, Nath contested Chidambaram's arithmetic and produced his own, projecting additional revenues of Rs 44,000 crore. The jury is still out on the loss of revenue and diversion of investments. Interestingly, Chidambaram's calculations account only for the loss of revenue from processing units-be it manufacturing, trading or services. But SEZ developers are not just exempt from income from establishing units, but also from ancillary activities. It stands to reason that they get exemptions or tax breaks for providing facilities like power, water, roads, transport, etc. Developers also get tax breaks for activities that range from running golf courses to spas, multiplexes and shopping arcades. They can import the best, from cobblestones to Italian marbles, and not pay customs. Every fitting in the zone comes minus the excise and all services are exempt from tax.
| 22,440 hectares to be developed by Reliance Ind with partners. |
3,658 hectares of land will be developed by Adani Group.
"SEZs offer a big window of opportunity for industry and the economy. it is a bet that we must take."
AMIT MITRA, DIRECTOR-GENERAL, FICCI
"Haryana has sold land at Rs 20 lakh per acre in Gurgaon. You can't even get a flat at this price."
KULDEEP BISHNOI, CONGRESS MP
That is not all. SEZs have to use only 35 per cent of the land for the processing zone and the rest could be developed as social infrastructure ranging from marinas to spas and multiplexes. Not surprisingly, the Reserve Bank (RBI) has raised concerns that SEZs could cause huge revenue drain and impact the government finances. Raghuram Rajan, chief economist at the IMF, went a step further and said that tax holidays made the government "forego revenue they can ill afford to lose" and also provided incentives for firms to shift facilities at a substantial cost to society. In a typical Indian formula, Marx has been blended with Adam Smith to deliver a concoction where costs are nationalised and profits privatised.
| 10,607 hectares will be developed in 10 SEZs to be built by DLF |
7,648 hectares being developed by Emaar-MGF in Haryana
6,000 hectares in two SEZs being developed by DS Constructions
"SEZs will promote exports and create jobs. India must act now."
VENUGOPAL DHOOT, CHAIRMAN, VIDEOCON
"We do need special economic zones to boost competitiveness."
ARUN NANDA, EXEC DIRECTOR, M&M
The key premise seems to be that a particular kind of eco-system is needed to boost investments and growth. But if these benefits are what is needed for growth, then why not provide them across the country? Why limit them to some people and to some regions? What is good for a zone is surely good for the country-why not make the country a special economic zone? Why pick and choose?
LOST IN TRANSLATION Even as political parties rally to the new-found cause, not many have taken the trouble to understand the policy. Nor has anybody questioned the logic of location or the size of SEZs. In some sense, one of the driving forces of reform in India now is the constant comparison with China. The perception of the Chinese success with SEZs has not been studied enough, nor has it been understood. To begin with, the Chinese set up only five SEZs between 1978 and 1991 before they realised that the entire country was becoming an SEZ. Importantly, the SEZs were not privately owned; they were owned by the government and stretched across hundreds of kilometres. Shantou, for instance, is 234 sq km. They could do it because acquisition of land is not an issue in China as it is in India. Also, the Chinese used flexible labour laws and work-permits to control wage costs.
Indian SEZs have little in common with Chinese SEZs, which are huge and are state-run
The Chinese established the primacy of FDI, exports and sector-specific zones tailored to score in the global markets. They also created the eco-system including flexible labour laws. Chinese SEZs deliver 40 per cent of the country's exports and account for a major chunk of the FDI. The Indian version of SEZs-ranging from EPZ to EOU and FTZ-added Rs 22,000 crore or about $5 billion of last year's total exports of over $80 billion. This is not to deny the over-one-lakh jobs created by these units or the new ones created by new outfits like Nokia in Chennai.
But the Indian version of the California gold rush (while 267 are cleared there are 226 in the queue) seems more about the opportunity of grabbing land than creating jobs, with many queuing up for tax sops and to get a shot at what they believe is the next version licence Raj. Significantly, the nine-member board of approval only checks if the proposals conform to the Act. There is no other criteria and indeed only last week did the government specify the net worth and investment conditions for large multi-product and sector-specific SEZs. A Morgan Stanley report suggests that "many of the applications are made in a rush to just block the land".
LAND GRAB POLICY
Lack of a coherent policy to take care of displaced farmers will hurt the most
India's record of rehabilitating farmers and tribals whose land has been taken away is pathetic and there are innumerable studies to vindicate this. What makes the perception worse is the fact that the antiquated 1894 law is being used for acquiring land not for a dam or a road or for government-run industrial estates, but for private corporations. Even though Nath claims the first 150 SEZs have not had to acquire land, the optics are not so clean. CPI(M) leader Sitaram Yechury reveals a shocking instance in Maharashtra where the government bought land from farmers at around Rs 50,000 per hectare. After holding on to it for years, it has now sold it to a corporate for Rs 62 lakh per hectare.
While the profiteering of the government is bad, the corporate in turn is now parcelling the land at Rs 10 crore per hectare to co-developers of its SEZ. Similar allegations are being heard across the SEZ landscape-from Sharad Yadav who has dubbed the SEZ policy as "the biggest real estate fraud" to Akali Dal leader Parkash Singh Badal and O.P. Chautala, who has vowed to cancel all SEZs when he comes to power.
Considering that all the SEZs cleared so far require 1,12,900 hectares or 1,129 sq km of land, acquisition and compensation policies are bound to be a political plank for parties which are in power and also for those out of power. Indeed, just the 31 SEZs in Haryana would require 388 sq km of land to actually take shape.
It is not surprising then that Sonia has pressed the alarm button and warned all her chief ministers against acquisition of farm land for such zones. But is that workable? Where, in Haryana or in Punjab-where Amarinder Singh claims 80 per cent of the land is agricultural-will the policy fit the SEZs?
POLITICS OF ECONOMICS
Is creation of exclusive enclaves consistent with the concept of inclusive growth?
It might be a coincidence but that many of the proposed special economic zones are coming up around major cities of Mumbai, Delhi, Chennai only adds to the psychosis. Rural Development Minister Raghuvansh Prasad wants to know, "Why is nobody going to backward areas? Why do they need sops to build townships next to cities? This is pure land grab." It is a perception that is only growing and some are weaving images of Soweto-like townships or the old American factory towns where private purse ruled the law. Sure, these are thoughts on the fringe but they beg the question.
The UPA regime came on the premise of inclusive growth. Many in the party have begun to question the creation of exclusive enclaves with apprehension. In the seventies and the eighties, the big challenges for Indian entrepreneurs were access to technology, capital and the licence. Manmohan Singh's first budget in 1991 put an end to all that.
The irony is that his government is now creating not just a new kind of licence system-after all the number of SEZs will be finite and so will be the units-to be practised by both the government and corporates who run the SEZs. Sure they will export and perhaps create jobs, but this is the re-institution of a kind of quota, of a new breed of business Brahmins. More importantly, by blocking land they have altered the perception that was growing to be pro-development and reforms.
Arun Nanda, who heads the SEZ foray of Mahindra and Mahindra, says the ruckus is unsettling because it could harm what is otherwise a laudable initiative. "We do need SEZs to boost our manufacturing competitiveness. In Chennai we have devoted 70 per cent of our area for units and created 50,000 jobs using 1,400 acres. Our model has been jobs first and then the social infrastructure. In Rajasthan too we have given a commitment of one lakh jobs. Unfortunately, some real estate players are playing in the field trying to make easy profits."
Interestingly, the CPI(M) too has suggested that the government up the ante and force SEZs to use at least 50 per cent of the land for processing and 25 per cent for social infrastructure. They also want a re-look at the tax sops.
AN IDEA UNDER THREAT
There is much that is wrong with the policy. The political clamour is a chance for correction.
Typically, politicians of every hue and ideology have sprung out of the woodwork against the SEZ policy. The CPI(M) may be playing for sainthood in Delhi, but in Kolkata it is facing Mamata Banerjee on land acquisition. The BJP too has spoken up, on pressure from its ally JD(U) in Bihar. INLD chief O.P. Chautala described the Hooda government as "the representatives of real estate agents". What was significant was the presence of Parkash Singh Badal, Farooq Abdullah, Chandrababu Naidu, Uma Bharati and Madan Lal Khurana on stage. Clearly the political class has smelt blood. Much of the clamour is really political opportunism. The danger is that they could throw the baby with the bath water.
The ideal SEZ policy would be creation of four or five special economic regions. The government could then have called for international and domestic companies to bid as they do for oil fields. The deal could have been weighed across parameters like the best project, least exemption, most jobs created and highest investment. It is a bit late for that but not too late to make amends. To start with, they should put together a viable comprehensive package for acquisition of land from farmers. Ajit Ranade, chief economist at AV Birla Group, believes that a two-fold package where farmers are given equity or options in lieu of their land besides compensation is the best way out. If industry has to grow, it cannot grow without land. Since it is a scarce resource, it would also be desirable to maximise the use of land.
This would also be a good time to look at the tax sops. Do they make sense in the era of falling duties under the WTO and FTAs? Is this the route to competitiveness? Also, should developers be given tax sops for creating shopping plazas or for building multiplexes? Since the government is already foregoing revenue to the tune of Rs 1,58,000 crore for industry and exports account for Rs 35,000 crore, can it afford to give more? What is the cost of jobs being created against the incentives? The votaries of rooting out non-merit subsidies should also look at the subsidies provided to industry and measure it against tangible goals like exports or job creation.
Evidently, in true Indian tradition, an opportunity has presented itself, even if by default. The UPA regime must use it judiciously. Introspection, even if retrospective, can be fruitful.
-with bureau inputs