Zones Of Contention

Paranjoy Guha Thakurta / Oct 16, 2006, 00:00 IST

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The Union government is making a special effort to resolve internal differences over modalities of establishing a slew of special economic zones (SEZs).

The Union government is making a special effort to resolve internal differences over modalities of establishing a slew of special economic zones (SEZs).
It may be worth reflecting on why the subject has become so contentious and how the controversy over the 'biggest land grab in modern Indian history' could have been resolved relatively amicably, had there been more foresight and political acumen.
The concept of a SEZ is hardly new; its earlier avatars were called free trade zones or export processing zones. The idea of setting up an insulated or a quarantined area, a country within a country, to promote exports by providing superior infrastructural facilities and to attract foreign investment by providing generous tax breaks, was first implemented by Puerto Rico in 1947 and thereafter by Ireland in 1960.
Significantly, Asia's first FTZ came up in Kandla in 1965. China's famous EPZs at Shenzen near Hong Kong and Pudong near Shanghai as well as Jebel Ali in the UAE came up much later, during the 1980s.

After Kandla, although seven EPZs were established in different parts of India, only a few were considered successful. A different version of the current SEZ policy was announced in 2000 and a new law was passed by Parliament last year. There was never really any major problem with the broad contours of the policy.
The devil lay in the detail, in the fine print of the rules framed by the ministry of commerce. The manner in which the rules were sought to be implemented raised quite a few eyebrows.

As reports came in about how large corporate groups were being helped by the local authorities in Haryana, Punjab and Maharashtra to acquire fertile land at dirt-cheap prices (as low as one-tenth their market prices), doubts were raised about whether provisions of land acquisition laws were being abused for private greed. State governments were accused of playing the role of real estate brokers.
Much of the opposition came from within the ranks of the ruling party. Bhajan Lal's son and Congress MP from Bhiwani, Kuldeep Bishnoi, levelled allegations about the agreement between the Bhupinder Singh Hooda government and the Mukesh Ambani-led Reliance Industries group.
Thereafter, an unlikely combination of interested groups came together.The BJP and Left opposed the establishment of SEZs on the ground that prime agricultural land was being taken away from farmers at ridiculously low rates.
IMF chief economist Raghuram Rajan argued that the tax concessions being given to SEZs may result in existing ventures getting relocated, thereby dislocating jobs instead of creating employment opportunities.
It was contended that the proposed SEZs would become islands of affluence in a sea of deprivation, widening the already acute regional disparities in the country, since most of the proposed SEZs were clustered around existing industrial areas.
For Nath, a cruel cut came when RBI directed banks to extend loans for SEZ projects at enhanced interest rates applicable to loans for commercial real estate development.
Finance minister P Chidambaram's opposition to the SEZs was on account of apprehended revenue losses. A study conducted by the National Institute of Public Finance and Policy claimed that the new SEZs could result in a loss of income tax, excise and customs duties to the tune of Rs 1,70,000 crore over the next five years.
The commerce ministry countered these statistics by arguing that economic activity generated by SEZs would more than compensate for short-term revenue losses.
Udyog Bhavan claimed that investments worth $60 billion could flow into SEZs over the next six years and that as many as 5,00,000 jobs could be created in less than two years.
Even as these claims and counter-claims are being researched and verified, Manmohan Singh stated that SEZs were here to stay.
What is now being acknowledged is that the commerce ministry should have first fine-tuned its rules before granting in-principle approvals to nearly 200 SEZs.
Since two-thirds of the proposed SEZs are small ones (of around 10 hectares) meant for IT ventures, there is a view that these should have been excluded from the purview of the SEZ Act, with the government extending the sunset clause exempting such units from payment of taxes beyond March 2009.
In order to counter charges of promoting real estate speculation, the commerce ministry had to specify that 35 per cent of the land in a SEZ (and not 25 per cent) must be used as a "processing area".
Nath's letter to state governments urging them to set up SEZs only on wasteland and non-agricultural land (with fertile land not exceeding 10 per cent of the total area) besides exhorting them not to intervene in land purchases made by private developers from original owners, came days before Sonia Gandhi told her party colleagues in Nainital that farmers should not get a raw deal if their land is acquired for setting up industries.
A host of questions have remained unans-wered. Are income tax concessions for SEZ ventures compatible with WTO regulations, or could these attract retaliatory measures? What happens to the structure of local governance inside the SEZs?
Can labour laws and environmental regulations be relaxed inside SEZs? It would have been far better if the government had clarified these apprehensions before rushing headlong into setting up these special world-class enclaves.
The writer is director, School of Convergence.

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