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SEZs in India Dr. R. Shashi Kumar17

8. PROBLEMS OF SEZs

8.1. Why is the SEZ Policy being opposed?

When the SEZ Act was passed in 2005, it generated a euphoric response from the private

sector. The general feeling was that the government had finally given the space and incentive forprivate industry in upcoming sectors like IT-ITES, BT, real estate, and pharmaceuticals to boom.The last eight months have seen an unprecedented rise in SEZ fever with state governments

undertaking widespread acquisition and leasing out/selling land for SEZ development; thecentral governments blitzkrieg approval for over 250 SEZ projects and private entrepreneurs

seizing this opportunity. All of these have raised concerns in the eyes of those who do not seeSEZs benefiting them but rather increasing hardships for economic livelihood and sustenance.

And these concerns are not unfounded. Some of the prime concerns being raised by farmersgroups, fisher folk communities, marginalized communities and other movements on the

governments SEZ policy are:1. Large scale and unjustified acquisition of land

2. Inadequate resettlement and rehabilitation policies and plans3. Inadequate employment opportunities for local people through SEZs leading to

loss of livelihood4. Increasing burden on natural resources and the environment and alienation of

local communities from these resources5. SEZs contributing to real estate boom and creating real estate zones

6. Potential revenue loss from heavy subsidizing in SEZs7. Concerns over the process of approving and implementing SEZs where is local

government consultation and sanction?8. No wider public consultation

9. Threat to water security10. Bypassing local governments and ignoring local communities

11. Increases regional disparitiesThe main question that voices and agitations across the country are raising is if SEZs

are truly meant to boost growth, what is the intended growth and for whose benefit? Going bythe SEZ policy, private profit seems to be the barometer of growth and the preference by policy

is for private players to lead the nations growth. The issue of development and the links betweengrowth and development are however missing.

In a country with 65 percent of the population depending on agriculture as a means oflivelihood, industry ought to be complementary to agriculture. Through SEZs however, industry

is being promoted at the cost of agriculture. Valuable resources spent to create SEZs will be atthe cost of building better infrastructure for the rest of the country, something that will affectboth the domestic industry as well as agriculture.

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9. STRATEGIES FOR STRENGTHENING SEZs

1. Capping months of debate on the pros and cons of developing SEZs, the commerceministry has issued a caveat that prime agricultural land should not be used for business purposes

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India's commerce ministry has asked the chief ministers of all Indian states to ensure that primeagricultural land was not allotted to business houses for development as SEZ, and that in any

event agricultural land must not exceed 10 percent of land allotted.2. It said that SEZs should serve as a bridge between rural and urban economies. The

concept of PURA (Provision of Urban Facilities in Rural Areas), which is how developed

countries have holistically conceptualized their rural habitations, needs to be remembered at atime when India is entering an era of SEZs. The explosion in the economy envisaged throughSEZs will have to be linked to integrated infrastructure in rural and urban areas. India should

focus on comprehensive and integrated spatial planning within and beyond SEZs. This howeveris a dream come true here.

3. Encourage the development of several manufacturing clusters: Permitting greaterflexibility in the use of contract labour, simplifying administrative procedures and extending

SEZ-like benefits to existing clusters or implementing the concept of virtual SEZs will help.4. Implement and govern them effectively, streamline the processes of availing them, avoid

delays and corruption in the system.5. Creation of Zonal Administration like:

Zone management: It manages the general administration. Investor services: It co-ordinates with EPZ units and helps in processing

import/export documents, custom clearance, helps in issuance of visas.

Engineering services: It looks after infrastructure matters

Security: It provides all security related matters Industrial relations: It looks after labour related problems.

Finance: It receives payments towards, ground rent, water bills, import, export

and other charges, taxes including stamp duty. Internal audit: The unit ensures monitoring of financial areas.

9.1. Advantage IndiaIndias stability beneath the surface arises from:

Low labour costs;

A well-established legal and dispute resolution system; Fully-functional financial institutions and transaction management systems;

A large and young population;

Government de-regulation in certain industries; An English-speaking workforce.

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10. CONCLUSION

The SEZ policy in India underwent gradual relaxation of procedural and operationalrigidities. The changes effected in this policy since 1991 have been far reaching and significant.

It is believed that the overall and EPZ investment climate has an overwhelming bearing on theSEZ performance. In India, however, a conducive policy framework has had only a limited

impact on the zone performance. Though the gross exports, foreign exchange earning andemployment increased phenomenally in absolute terms, their growth rates declined substantially.

Growth in exports per unit of employment also slowed down indicating deterioration in theexport performance. Net value addition performance compares favourably with other Asian

countries but it has not been consistent and the trend growth rate in value addition had not beenstatistically different from zero. Furthermore, zones also failed to promote non-traditional

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exports. Traditional sectors namely electronics and gems and jewellery dominate the zones. Thiscould be due to the piecemeal nature of the policy changes. Various committees were set up to

examine the performance of the zones. These committees made far reaching recommendationsregarding incentive package, development of infrastructure and improvement in governance.

However, policy changes remained slow and extremely cautious. Even the introduction

of the SEZ policy did not impact on the SEZ performance. Their performance continued to slideSEZs are expected to induce dynamism in the export performance of a country by eliminatingdistortions resulting from tariffs and other trade barriers, the corporate tax system, excessive

bureaucracy, and missing infrastructure. Fall in the protective walls and reforms in the taxsystem reduced the gap between EPZ and other units in the wider economy in respect of tax

incentives. There should have been significant improvement in the quality of infrastructure andgovernance to compensate them for the lost benefits. But this did not happen. Dysfunctional

policies, regulations, lack of single window clearance facilities, poor attitude of the officials,centralised governance, stringent labour laws and poor physical and financial infrastructure, all

accounted for an undesirable investment climate. The Draft Bill 2004 may not lead us far. Thestudy argues that the SEZ scheme requires a complete re-orientation if the hype created over

SEZs is to be justified.With so many complications involved, will this SEZ finally materialise at all? And finally

for what? What kind of a development goal is one that will render around 50,000 farmerslandless (per SEZ), destroy livelihood sources for a much larger number of people, pull all the

stops against exploitation of labour and cause huge chunks of resources, private and otherwise, topass on into private hands? Is the administration prepared for the huge backlash of discontent,

protest and social upheaval that oppression on such large scale could trigger? These questions arenot going to be easy to answer.

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PROBLEMS POSED BY SEZs

I. Loss of Tax Revenue

One of the issues raised by the opponents of SEZs is that they will result in the loss of Tax

Revenues. However, if the tax exemptions are available only to export income, the hit on the

exchequer will be minimized as most of the exemptions that have been listed exist in some form

or the other.

II.Land Acquisition

Land acquisition has emerged as the most prominent operational problem in the setting up of

SEZs. it not only has a financial impact but also has social repercussions. The landowner is

typically a farmer. The other dependents on the land include landless laborers who work for the

farmers. An agricultural based economic sty should be undertaken before acquiring any land.

Only barren or single-crop land should be used for the SEZ development.

1. One-time compensation

The landowner can be paid the prevailing market price up-front. This is not preferred because

farmers, usually being illiterate are not used to such large amounts of money. Besides, such apayment method also makes it necessary for the developer to incur a substantial cash outflow

upfront.

2. Equity ownership in the SEZ project

Farmers can be given an equity holding in the Special Purpose Vehicle (SPV) that is developing

the SEZ project. The farmers will get a part of the return earned by the SPV. Yet, the returns may

not be sufficient compensation to the landowners.

3. Providing jobs as compensation

The SEZ developer can offer a job to a member of the affected family in the SEZ or in an area

close to the residence. the inherent problem in this solution is that of matching the skills of the

family with that of the job offered.

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4. Annuity-based payment depending on price of land

Here, the farmer will be paid a price as an annuity for a fixed period of time, say 15 years. The

amount of the annuity can be decided based on the prevailing market rates.

5. Annuity-based payment depending on productivity of the land

In this method, the average annual income of the farmer can be calculated by using various

factors like the kind of crop grown, the area of the land, and the total produce of the land. This

income of the farmer from the land is then assumed to be till perpetuity and the money is then

given as an annuity for a fixed number of years.

DEVELOPMENT OF SEZs IN INDIA: SOME ISSUESIn India, the SEZs have been introduced as a growth driver throughincrease in export potential of the country, development of infrastructure

facilities and generation of employment opportunities. The infrastructure

development in some of the regions has taken place due to the developmentof SEZs. However, Jagdish Bhagwati has remarked that given the currentprogress in reforms undertaken in earnest since 1991 in India, there is noneed to establish SEZs. He says that India needs only clear policies that

will integrate the country into the world market. Some are advocating thatthe SEZs are beneficial to certain business people rather than to the commonman. Some others attribute that there is huge revenue loss to the Governmentdue to various concessions extended to the SEZs. Some major issues in this

regard are discussed below.

Increasing Numbers of SEZs: Critics argue that developing a sizeablenumber of SEZs in the country may not be a viable solution to achieve thedesired goals. In India, more than 400 SEZs are in the pipeline to get notified,

in addition to 274, which have already been notified. Overall, therefore, 552SEZs have been formally approved, with an average land size of about 127Ha. Another 141 SEZs have been given in-principle approval with an averageland size of 869 Ha. The notified SEZs have the average land size of 118 Ha.

In China, the five SEZs, which are huge in terms of the land size ofabout 421,350 hectare encompassing all the amenities and with proximity toairports and sea ports have provided the necessary thrust for exports. The

USA and China, which have a large number of SEZs at 266 and 190, are still

behind India with 274 SEZs already notified, in addition to 19 existing zones.Majority of the investors have exhibited interest in specific product SEZs.Many of the African SEZs of this category have failed when the world production and consumptionpattern underwent changes. Bigger size multiproduct

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SEZs only could provide the required infrastructure and aresustainable options.

Are SEZs inherently anti farmers? This is the oft cited criticism againstSEZs in India. The minimum area of land prescribed for multi-products SEZis 1000 Ha. Small states like Jammu & Kashmir, Goa and the Union Territories

do not have sufficient barren land stretches to develop multi-product SEZs.

Therefore, the minimum land requirement has been prescribed at 100 Ha forthese regions. The reduced land requirement is applicable for sector specificSEZs also. Specific products where India has a comparative advantage, theminimum land requirement has been reduced further to 10 hectare (Table 9).

According to an assessment by the Government of the ground realities withregard to the land usage of SEZs, the total area for the proposed SEZs constitutesa miniscule share of the total land-size of the country. The approved land sizefor the SEZs (both formally approved and in-principle approval) would not

exceed 0.063 per cent of the total land area in the country and not be more than0.116 per cent of the total agricultural land in India.

Table 9: Minimum Land Area Requirement for SEZs

Classes of SEZ Area in Hectare1 2

Multi Product SEZ 1000

Multi Product SEZ for Services 100

SEZ in North Eastern Region 100SEZ in Jammu & Kashmir, Goa and UTs 100

SEZ for Specific Sector or Port or Airport 100

SEZ for Electronic Hardware/Software, IT 10SEZ for Bio-Technology, non-conventional energy, Gems & Jewellery 10

SEZ for Specific Sector in NER 50

SEZ for Specific Sector in HP, Uttarakhand, J&K, Goa and UTs 50

Free Trade and Warehousing Zone 40Source: Compiled from SEZ Rules, 2006.

24 RBIRBI Staff Studies 23

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