SEZ’s: Are They Really Special?

Even though was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia’s first EPZ set up in Kandla in 1965, the concept has not taken off in the same way as other major emerging markets, e.g., China. Indian EPZ’s have had difficulty attracting foreign and domestic investors. This is because of several reasons, state governments’ failure to manage the political tensions that arise when large infrastructure projects are undertaken. The compulsory acquisition of land from farmers and other property owners is always controversial. The lack of significant advantages offered by SEZ’s in terms of labour market flexibility has not helped the cause either. Another argument that goes against it is that this is merely a means of providing tax shelter to the favoured. The major tax incentives will simply make the taxation system more complex, that will open up avenues for avoidance by major players.


Revenue losses aside due to tax incentives that act as a fiscal burden on the government account, SEZ’s pose a greater problem of welfare losses too. The age old land acquisition laws that still exist have led to considerable discord among the farmers and the people from whom land is acquired at throwaway prices. An example of this comes from Kalinganagar, Orissa where land was bought from the local tribes at Rs 30,000 per acre and sold to Tata steel at Rs 3, 35,000. It is important for the government to realise that the farmer is like “the son of the soil” and taking away land from him is just like taking away the mother. Added to this is the fact that it has not generated the kind of employment for the displaced as planned. This is because most of the farmers and their family is unskilled while the SEZ jobs require mostly semi-skilled to skilled labour once the infrastructure is set up whereas land is like a life long asset to the poor that never undergoes depreciation. The violence in Nandigram is again a stark example of the popular dissent against the SEZ policy. The fact that political parties have politicized the issue and used it as a political gimmick has only added to the long list that criticizes the entire policy as such.


A possible solution to this could be that the government gives added incentives to developers who set up facilities in non populated geographical areas and the incentives could be directly related to the level of the societal upliftment it brings to the area, as well as environmental friendliness etc on a case to case to basis.


It is also important to realise that there are opportunities of Using SEZ’S to catalyse infrastructure development, a way to attract a large NRI base who have traditionally invested less in Greenfield Development in India, lower the high transaction behind the border costs to exporters and to tap the advantages of WTO to increase India’s small share of world trade.


SEZ’s, especially could yet play a significant role. But unless State governments (who have not been associated in the past with export promotion activities) are directly made responsible for the management of SEZ’s, the political leadership and bureaucratic set up may not have any incentive to push the initiative forward. But what also might give SEZ’s a shot in the arm is revisiting, even on a modest or gradual scale is the relaxation of labour norms and regulations. This might be justified to the domestic lobbies on the grounds that they are exposed to uncertain international market conditions. Now that key state elections are out of the way, and the Lok Sabha elections around the corner, the climate for taking forward such reforms might be a little stormy but the time could not be better.


Mridul Kumar



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