Special zone called India

Indian Express, 20 January 2007

Special Economic Zones (SEZs) are in trouble again. This time the move to put them on hold is reported to have been caused by the Prime Minister's suggestion that a rehabilitation policy for displaced people be put in place first. Reports also suggest that the government is working on a proposal that only vacant land be acquired for SEZs.

One of the reasons for the difficulties in the SEZ policy is said to be the use of arable land for SEZs. But is arable land a constraint? Reports suggest that upto 0.2 million hectares have been sanctioned for over 200 SEZs. India has a land area of 297 million hectares out of which 162 million hectares is arable. The land sanctioned for SEZs thus constitutes a miniscule 0.12 percent of India's total arable land. Even if the allocation of land to SEZs went up by 8 times, it would constitute a mere 1 percent of the country's arable land.

Claims about loss of India's self reliance in food production owing to SEZs are nonsense. Yields in India are so low, that even minor improvement in productivity would overwhelm the loss of 1% of land. For India to become a developed country, area under agriculture has to shrink; urban and industrial land development has to take place; and about a 100 million workers have to move out from agriculture into industry and services. This is the only way forward for bringing prosperity to the rural population. Every country in the world has gone through this process, and a clear-headed appreciation of India's path in the next 10 years is required. Urban development gives rural landowners extremely good deals when their land is sold; the government should be supporting voluntary transactions, instead of preventing them.

What is true about SEZs is that the land where urban development makes sense tends to be located near ports, rivers or lakes, and has a pre-existing dense population. In India's SEZ policy, the State has come into the picture by playing the role of forcibly acquiring land. This is done under the 'eminent domain' principle, but at non-transparent prices. The sharp hike in land prices that naturally follows consolidation and development often leaves the original owners of land feeling cheated.

Going beyond land, the SEZ effort is afflicted by many deeper questions. It was never clear that the policy was aimed at promoting exports or FDI, as is the case with Chinese SEZs. A variety of tax concessions were being given for development of real estate. It is estimated that about Rs 1.7 lakh crore is to be lost in tax revenue foregone. Revenue foregone is no different from money spent by the government. Small enclaves of development were to be created instead of spreading public resources across all tax payers. Growth in exports is good if it reflects improvements in productivity in the country. Here the growth in exports, to whatever extent, was to come from a few artificially created pockets in the country. The bribes that would be earned by politicians and the profits that would be earned by developers were sources of discontent. The finance ministry said it did not have enough custom officials to man the boundaries and check-posts of SEZs which would be Free Trade Areas. RBI opposed giving convertibility within SEZs. Finally, Sonia Gandhi chipped in with her opposition to the use of arable land for SEZs.

One attractive benefit of doing SEZs could have been a suspension of Indian labour law - just as trade barriers do not apply for SEZs. If SEZs had changed labour law, then many of the infirmities of SEZs might still have been worth living with in order to create millions of jobs and Chinese-style exports. But this key ingredient was blocked by trade unions.

The best strategy now appears to be to go back to the pre-Kamal-Nath path of strengthening the all-India situation on labour law, urban governance, trade reforms and capital account convertibility, in a framework of full compliance with tax laws. This appears to be a better path than trying to build enclaves where politicians help their friends obtain land and then taxes are exempted.

The SEZ policy debacle has had one positive contribution. It has put the land market on the agenda for reform. One factor which attracted developers and industrialists to SEZs (other than the tax concessions) was the role the government was going to play in solving the problems of purchasing land. When small plots of land are owned by a large number of farmers and it is not easy to buy a large contiguous plot of land, for a few holdouts can extract a kings ransom. In addition, there are obsolete laws which reduce flexibility of land use between farming and non-agricultural applications. A clear land title is difficult to obtain, unless land is purchased from the government. These frictions are genuine problems.

The lesson from the SEZ story so far is therefore that the government should focus on developing good land markets. There are four factors of production - land, labour, capital and enterprise. The worst State induced distortions of a factor market are found with land. Better land title systems need to be built, and the legal foundations of private land ownership need to be strengthened. Developing well functioning land markets, removing government involvement in land use, acting as an enlightened middleman who helps to consolidate holdings and auction land to the highest bidder in transparent, publicly visible procedures: these are the areas which require State involvement. Training programmes ahead of time, facilitating schemes through which farmers are given the option of buying shares in the enterprise of the buyer and pushing for greater transparency and information in the plans of the developers would allow the state to strengthen the interests of the farmers while facilitating industry to develop. The government's focus should be on solving these problems for 297 million hectares that are India, rather than for merely 0.2 million sanctioned for SEZs.

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