Sez- Challenges Before Indian Economy

Mundhe. Dept. of Business Economics, Siddharth College of Comm. & Eco. Mumbai. SEZ – Challenges Before Indian Economy Introduction : Over the years it has been seen that the growth rate of the Indian economy, employment generation, improvement in the standard of living of the people has not been as expected.It was realized that foreign (and even domestic) investments in India were much lesser as compared to the much smaller South East Asian countries mainly due to multiplicity of controls and clearances, absence of world class financial infrastructure, etc. With a view to overcome the shortcomings experienced in attracting investments, increasing exports and accelerating economic growth the Special Economic Zones (SEZs) policy was introduced by the then NDA government in April 2000.This policy intended to make SEZs a tool for economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at the Centre and the State level, with the minimu m possible regulations Further, to instill confidence in investors and signal the Government’s commitment to a stable SEZ policy regime and with a view to impart stability to the SEZ regime thereby generating greater economic activity and employment through the establishment of SEZs, a comprehensive draft of SEZ Bill was prepared after extensive discussions with the stakeholders.The over enthusiasm to push the SEZ policy as an instrument of rapid industrialization has met with a series of roadblocks especially after the Nandigram incident. The SEZ policy is a part of the policy of â€Å"Growth at any Cost†, with the cost falling on the marginalized section of the rural population. Thus, those who gain and those who lose will be different sections of the population. This simply means that the SEZs are not Pareto-optimal over a situation where SEZs are absent. Therefore, this policy can lead to various socio-economic and political challenges.Meaning of SEZs? The Special Economic Zones (SEZs) are well developed enclaves of industrial infrastructure with plots, built up space, power, water supply, transport, housing etc. Besides industrial facilities, the SEZs provides social infrastructure including schools, hospitals, roads, hotels and the like. The SEZs are specifically delineated areas wherein units may be set up for specified purpose of manufacturing or trading or rendering services or providing warehousing facility for exports.In terms of the Section 2(i) of the said SEZ Act 2005, the Domestic Tariff Area (DTA) is defined to mean the whole of India (including its territorial waters and continental shelf) but not including the areas of SEZs. Furthermore, section 53 of the said SEZ Act provides that the SEZ shall be deemed to be a territory outside the Customs territory of India. The legal implication is that the SEZs are treated as the foreign territory for the purpose of trade operations, duties and tariffs.In other words, goods and services go ing into the SEZ (from the DTA) are treated as exports and goods and services coming from SEZ into the DTA are treated as imports. Therefore, domestic laws do not generally apply to the SEZs and the units therein. In short, SEZs will be considered sovereign territories of MNCs setting up shops there and ordinary Indians will require passports to enter these enclaves. Historical Background & SEZ Act: The SEZ Act was enacted only recently, in 2005, but the origin of the SEZ scheme can be traced to as far back as 1965 when the Kandla Free Trade Zone (FTZ) was started.Thus there were Export Processing Zones (EPZs) in the country well before the new legislation was enacted, but these were few in number (only eight, operated by Central Government) and did not have a major impact on exports or investment. This led to a comprehensive review of the policy framework for existing EPZs/FTZs In 1999, which included a study of many SEZs world-over. The finding of the study was that there was scop e for significant improvement in export performance through policy changes relating to DTA access, export obligation, etc. The concept of SEZ was given to India by late Shri.Murasoli Maran, former Union Commerce Minister. During his China visit he had a occasion to visit some of the SEZs in coastal regions of China. He observed the contribution that these SEZs have made to the Chinese exports and was deeply impressed by the progress achieved by SEZs and their overall impact on the economy. Back at home, he introduced the concept of SEZs in the EXIM policy-2000. He was very much interested in creating some SEZs in India and develop them on the lines of SEZs in China. He wanted to use the concept of SEZs to achieve a speedy economic growth in India.As a result, the Special Economic Zones Act was passed by Parliament in May, 2005 which received Presidential assent on the 23rd of June, 2005. After extensive consultations, the SEZ Act, 2005, supported by SEZ Rules, came into effect on 10 th February,2006, providing for drastic simplification of procedure and for single window clearance on matters relating to Central as well as State governments. Objectives of SEZs: The SEZs are primarily viewed as elements of the Government’s export promotion strategy but that is not entirely correct. They are expected to benefit the economy in multiple ways, as spelt out in Section 5 of the said SEZ Act.Herein it is provided that the following factors should be considered by the Board of Approvals in Approving proposals to establish SEZs: (1) Generation of additional activity (2) Promotion of exports of goods and services; (3) Promotion of investments from domestic and foreign sources; (4) Creation of employment opportunities; (5) Development of infrastructure facilities; It is expected that this will trigger a large flow of foreign and domestic investment in SEZs in infrastructure and productive capacity, leading to generation of additional economic activity and creation of employment opportunities.Here it is important to mention that in case of India, the key element for the success of SEZs are political will and commitment, removal of bureaucratic hassles, labor reforms, better fiscal incentives and continual review and monitoring of the functioning of SEZs and adoption and application of correctives. Criteria for Approvals: 1) SEZ size not to be less than 1000 hectares, recently it is scaled down to 5000 hectares & further to 1000 hectares (2) Sector specific SEZ can be set up in lesser area 3) Local Laws, Rules / Regulations applicable to SEZ & Units there in (4) Units to be approved under the SEZ scheme, by the Unit Approval Committee headed By the Development Commissioner. (5) The minimum processing area limit has been fixed at a Uniform level, at 50% of the total land acquired, for multi product and sector-specific SEZs Scheme to Develop / Operate / Maintain SEZ: The SEZs can be developed and managed either jointly or separately by the Central Government, State Government, or Any Person (including a Private orPublic Limited Company, Partnership or Proprietorship), for manufacture of goods; or for rendering services; or for both; or as a free trade and warehousing Zone. Incentives for Developers of SEZs : Developers and SEZ units shall be entitled to the following exemptions and concessions: 1) Exemption from customs duty on goods imported into the SEZ by the Developers or SEZ Unit to carry on the authorized operations; 2) Exemption from customs duty on goods exported from the SEZ by the Developer or SEZ Unit to any place outside India; ) Exemption from excise duty on goods brought from Domestic Tariff Area (â€Å"DTA†) to the SEZ by the Developers or SEZ unit to carry on the authorized operations, 4) 100% Income Tax exemption on export income for SEZ units in the first 5 years and 50% for the next 5 years. 5) Exemption from service tax on taxable service provided to a Developer or unit to carry on the authorized op erations in a SEZ 6) 100% of the profits of the developer arising from the business of developing an SEZ, shall be deducted from taxable income ) The developers of SEZ are not required to pay Minimum Alternate Tax. Challenges before Developing Economies, A Case Study of China: The SEZs policy is a part of the policy of â€Å"Growth at any Cost†, with the cost falling on the marginalized section of the rural population. Thus, those who gain and those who lose will be different sections of the population. This simply means that the SEZs are not Pareto-optimal over a situation where SEZs are absent. Therefore, this policy can lead to various socio-economic and political challenges.China is a shining example of a country which has developed through its SEZs. But this image of success of Chinese SEZs is both incomplete and incorrect. They have by no means been an unqualified success, and they have brought about severe economic and social problems. We have taken the case of SEZs in China and analyzed the effects on arable land, water, environment, health, income equality, poverty, etc. Some of the most striking effects of SEZs in China are as following: 1) during the period of 1996-2005, SEZs in China, have caused diversion of more than 21% of arable land to non-agricultural usage.Per capita land holding now stands at a meager 0. 094 hectares. This is when China has to feed 22% of the world’s population on only 7% of land, and every year, an additional 10 million people have to be fed. As more arable land is taken over for urbanization and industrialisation, issues related to changes in land use have become a major source of dispute between the public and the government. 2) In just thirteen years, between 1992 and 2005,about 20 million farmers were laid off agriculture due to land acquisition for SEZs.Protests against land acquisition and deprivation have become a common feature of rural life in China. Social instability in China has become an issue of concern. In 2004, the government has admitted to 74,000 riots in the countryside. 3) Whereas a few years ago, excessive and arbitrary taxation was the peasants’ foremost complaint, resentment over the loss of farmland, corruption, worsening pollution and arbitrary eviction by property developers are the main reasons for farmers’ unrest now. 4) China set up its first SEZ, Shenzhen in 1979.After growing at a rate of around 28% for the last 25 years, Shenzhen is now paying a huge cost in terms of environmental destruction, soaring crime rate and exploitation of its working class, mainly migrants 5) In 2006, the United Nations Environment Programme designated Shenzhen as a â€Å"Global Environment Hotspot†, meaning a region that had suffered rapid environmental destruction. 6) According to Howard French, the New York Times Bureau chief, most of the year, the Shenzhen sky is thick with choking smoke, while the crime rate is almost nine- fold higher than Shanghai.The working class earns US$ 80 every month in the sweatshops and the turnover rate is 10% – many turn to prostitution after being laid off. Further, real-estate dealers have stockpiled houses which have caused prices to spiral and have created a new generation of people, French calls them as, â€Å"Mortgage Slaves† in an article in the International Herald Tribune on 17th December,2006. 7) The mindless pursuit of growth following the model of high input, high consumption and low output has seriously impacted the environment.In 2004, China consumed 4. 3 times as much coal and electricity as the United States and 11. 5 times as much as Japan to generate each US$1 worth of GNP, according to the The Taipei Times, some 20% of the population lives in severely polluted areas and 70% of the rivers and lakes are in a grim shape. 8) Around 60% of companies that have set up units in the country violate emission rules. According to the World Bank, environmental problems are the cause of some 3,00,000 people dying each year.The Chinese government has admitted that pollution costs the country a staggering $200 billion a year – about 10 % of its GDP. 9) While export-driven policy for economic growth has helped China touch record growth figures, the income gap is widening and rapidly approaching the levels of some Latin American countries. Going by a recent report by the Chinese Academy of Social Sciences, China Gini coefficient – a measure of income distribution where zero means perfect equality and one is maximum inequality – touched 0. 96 in the year 2006. In comparison, income inequality figures are 0. 33 in India, 0. 41 in the US and 0. 54 in Brazil. Further, the rural-urban income divide is staggering – annual income of city dwellers in China is around US$1,000 which is more than three times that of their rural counterparts. 10) In certain areas such as asset distribution or years of schooling China’s levels of inequality ar e lower (i. e. , more favourable ) than India. However, when one looks at it at the aggregate level, the picture is different.The levels of inequality in China have been rising through the last three decades, whether between rural and urban, within them, or on an aggregate basis. According to Zhu Ling, between 1978 and 1995, the Gini coefficient of rural income increased from 0. 21 to 0. 34 and that of the urban from 0. 16 to 0. 28. 11) With the Chinese economy opening up rapidly post – 1995 and also due to the massive concessions that China was forced to make in order to join the WTO, the trend continues and the aggregate Gini coefficient in 2006 was around 0. . Lessons India should learn from China: There are far reaching negative impacts of SEZ policy in India. It is normally advocated that India should learn from China. It is big failure there in China on the grounds of food shortages that may arise in future due to land acquisition, environmental problems etc. , therefor e India should consider the following while implementing the policy of Special Economic Zones – 1) Following China, India is replicating a similar model where vast tracts of a agricultural land are being acquired for creating SEZs and other industries.Therefore it will have the similar impact on the environment as in the case of China, as the dirty industries may enter in these zones. Further with drastic changes in labour laws favouring industry being considered, the plight of workers in these SEZs will be similar to those in China. Hence, such a model of development is environmentally unsustainable and socially undesirable. 2) It is now widely acknowledged that Chinese exports have also been boosted by its undervalued currency something which is turmed as an â€Å" effective subsidy†. This is a luxury that Indian exporters do not enjoy.Therefore, the argument for setting up SEZs to emulate China’s export-led growth is questionable. 3) Is export-driven growth t hrough SEZs desirable for India? There is no doubt export play a significant role in boosting GDP. However in the case of a country with a sizable domestic market, the choice lies with the producer to either export or supply to the domestic market. 4) According to Ila Patnaik of the National Institute for Public Finance and Policy, household consumption in India at 68% of the GDP is much higher than that of China at 38%, Europe at 58% and Japan at 55%.Given the high level of consumption of Indian households, it is quite possible that this rush to set up SEZs in India is fuelled not by the desire to export out of the country but by the possibility of exporting from SEZs into the Domestic Tariff Area (DTA). The SEZs act is also designed to facilitate this. Any unit within the SEZ can export to the DTA, after paying the prevailing duty, as long as it is a net foreign exchange earner for three years. It is therefore a win-win situation for these units. ) The soaps in a SEZ will reduce t he cost of capital while labour reforms will ensure trouble-free operations. Further, given the considerable international pressure to reduce industrial tariffs, SEZs will be able to export to the DTA at highly competitive prices. This does not augur well for units outside the SEZs who will now face unfair competition. As cheaper imports have already played havoc with the livelihoods of artisan sector of the economy, cheaper imports into DTA from SEZs will also adversely affect the domestic.No wonder many of them now want to migrate into SEZs. 6) In a country with 65% of the population depending on agriculture as a means of livelihood, industry ought to be complementary to agriculture. Though SEZs however, industry is being promoted at the cost of agriculture. This is the reason why Indian farmers all over the country are not willing to depart from their farm lands. It is witnessed on 21st Sept,2008, where 85% of the farmers from Raighad District have voted against the SEZs. ) Valua ble resources spent to create SEZs will be at the cost of building better infrastructure for the rest of the country, something that will affect both the domestic industry as well as agriculture. Challenges before Indian Economy: Given that India’s socio-cultural and economic scenario is altogether different from that of China’s, it is debatable whether SEZs prove to be a success here. In the words of, Sunil Rallan, MD of Matadee Eco Parks,† The Indian government’s SEZ policy is superior to China’s in terms of legislation but has failed in the implementation process. Thus while SEZs may be loudable idea it is doubtful whether it is the right policy for the basic problems of heterogenous country like India. Replicating the Chinese model, India may end up not only with insufficient SEZs but also with reintroduction of the era of famines, water crisis, riots, pollution, etc. , and many more socio economic and political problems. We have taken the case of existing SEZ units (and the units which are slated to be set up in days to come) and analyzed their socio-economic effects on the Indian economy. 1) Threat to Food Security:According to the website of the Commerce Ministry, totally about 41,700 hectares of land is to be taken for the formally approved and notified SEZs. Land acquired on such massive scale has posed a threat to the food security of the country. Already, India’s food security is in a precarious state and the country has to import food grains including wheat, pulses and oilseeds. In this scenario if our arable land is diverted to establishment of SEZs, it will create a major food security problem in the country.Studies in West Bengal have shown that loss of food grains production due to SEZs would be of the order of 1. 5 million tones. This can create a serious shortage of food grains in the coming years. 2) Threat to Water Security: The SEZs are going to be set up by acquiring huge tracts of land. When the l and is acquired on such massive scale, the water requirement for such SEZs would be huge and would have very large impact on water access for the surrounding area. The SEZs at such locations will also have impact on irrigation and agricultural development.Available information about the water needs and sources of water for various SEZs should ring alarm bell. For example, the massive water demand, at least 8 million liters per day, for The Mahamumbai SEZ is to be met by the Hetwane and Morba dams in Pen and Khalapur tehsils in Raigarh districts. In a situation where, farmers had to struggle to get irrigation water due to them from these dams, the huge water requirement for Mahamumbai SEZ would definitely lead to the water crisis. Forum of Manglore has quoted that the Manglore SEZ’s water requirement is at a hoping 136 million liters a day.When Manglore city is facing the water crisis without the SEZ, one can imagine what will be the case when SEZ comes up. 3) Displacement and loss of livelihoods in SEZs: Estimate show that close to 114,000 farming households (each house hold on an average comprising five members) and an additional 82,000 farm worker families are dependent upon these farms for their livelihoods will be displaced. In other Words, at least one million people who primarily depend upon agriculture for their survival will face eviction.Experts calculate that the total loss of income to the Farming and farm workers family will be at least Rs. 212 crore a year. This does not include other income (for instance artisans) due to the demise of local rural economies. The government promise humane displacement followed by relief and rehabilitation. However historical records does not offer any room for hope on this count an estimated 40 million people(of which nearly 40% area Adivasis and 25% Dalits) have lost their land since 1950 on account of displacement due to large development projects.At least 75% of them still await rehabilitation. Almost 80% of the agricultural population owns only about 17% of the total agricultural land, making them near landless farmers. Farmer’s families and communities depend on a piece of land (for work, grazing) than those who simply own it. 4) SEZ are actually land grab by the real estate mafia and the corporate sector: What are SEZ likely to become in few years time? According to a clause in the SEZ Act (section 5(2) as much as 75% of the area under large SEZs above 1000 hectares) can be used for non-industrial purpose.What will the remainder of the land used for? This lacuna in the law is likely to become a loophole for massive accumulation of Land by private players including the real estate mafia, developers and property dealers for the purpose of real estate speculation. This explains why so many of them have been buying land for SEZs. In fact it may well be the case that the rationale for the above clause in the SEZ Act is the uncertainty surrounding the Economic attractiveness of SEZs. If adequate productive investment is not forthcoming, the SEZ developer can at least cash in on the land value.Conglomerates like Reliance already own upwards of 100,00acre of land in the countrywide. 5) Loss of natural habitat, flora and fauna Massive land acquisition for the establishment of SEZs has led to the destruction Of natural habitat, flora and fauna due to deforestation. For example due to the Mundra SEZ in Kutch in Gujrat about 3000 hectares of area covered by Mangroves is being destroyed. . 6) More suicides, More crimes†¦ It is again no. coincidence that all most all the SEZs are being built only on the fringes of cities – like satellites all over again.A rough study based upon the â€Å"in principle† approved SEZs in Maharashtra shows that around 67% of the land for SEZs is within 100 km. of Mumbai. If the cities pf Pune and Nagpur are also considered, then a figure of 85% of land for SEZs is arrived at, and if Nashik and Aurangabad are also th rown then about 98% of the land for SEZs in within 100 km of these five cities. Thus there will be no real development. the rural areas will be further devastated. Farmers will commit more suicides larger slums with even more squalor will be created.There will be more crime, more communual riots, more atrocities against Dalits and more attacks and exploitation of women as always happens in the condition of squalor. 7) Ruthless Depeasantisation : However the SEZs are not the only instruments for grabbing the lands of the peasantry, millions of acres of land are taken by national and international big business for construction of Greenfield projects, private airports, tourist resorts, health tourism, smart cities, entertainment parks, building of private township for the super rich including vast areas for golf courses and luxury hotels.To provide infrastructure for super profits of local and multinational big business the state is acquiring millions of acres of fertile land to build industrial zones, golden corridors express ways including the much flaunted golden quadrangle express highways systems. This is the glaring phenomenon of contemporary global enclosures of forcible depeasantisation ruthlessly divesting the producers from their means of production, cultural moorings and commons.Adding salt to the injury the neo-liberal state is resorting to the most predatory inhuman primitive accumulation of forcing the farmers and adivasi’s out of their land when the entire peasantry is reeling under acute agrarian crisis where more than 2 lakh farmers have committed suicide in the past decade under the neo-liberal economic regime. Conclusion:There is much more to learn as well as unlearn from the Chinese experience. Until this is done, millions of poor across the country will be made to pay an even higher price than the Chinese did for following this flowed approach. India should thus work towards reforming its domestic economic rather than supplementing it with an SEZ model. It should not blindly follow China in this regard.