SEZ policy review comes at right time

EXIM MATTERS

The government's decision to put on hold further approvals of Special Economic Zones (SEZs) and comprehensively review the SEZ policy has come not a day soon. The decision will help cool tempers and enable an objective re-appraisal without too many immediate pressures.

It is the land acquisition issue that has prompted a review of the SEZ policy.

It would, however, be a mistake to only focus on the issue of compensation to farmers or the rehabilitation of displaced people. The issues of too many SEZs, the minimum processing area requirement and captive SEZs of corporate houses also need to be addressed.

The SEZ policy was inspired by the success of the Chinese SEZ programme, under which a few large SEZs were created. It was also a response to the repeated complaints of exporters about poor infrastructure, high-interest rates, the inspector raj, multiplicity of taxes and so on.

Some of these issues have indeed been well addressed through the SEZ Act 2005 and SEZ Rules 2006. However, serious questions about the unintended consequences of policy dispensations, especially liberal tax breaks to too many developers and units, and whether all SEZs contribute to better infrastructure remain unanswered.

Unlike in China, where the government created a few large SEZs, India has opted for a number of smaller SEZs, to be created by the private sector.

The commerce minister has justified the policy of a smaller minimum area requirement for the establishment of SEZs by pointing out the different pattern of land use in India.

Smaller SEZs, however, rarely contribute to the building of infrastructure, with most of them created to take advantage of tax breaks. The situation calls for a maximum processing area restriction of, say, 50 per cent, rather than a minimum processing area requirement, so that at least 50 per cent area in every SEZ goes towards infrastructure creation.

The policy that causes maximum distortion is allowing corporate houses to establish captive SEZs, which can divert investment from domestic tariff areas to SEZs.

Many such captive SEZs use their total area for manufacturing-related activities only, and do not create any infrastructure that can be used by anyone else. Such SEZs only accommodate the expansion plans of big businesses.

In order to deflect attention from this point, some corporate houses have called their SEZs sector-specific, though the intention remains clear.

Out of the 237 SEZ approvals granted, few are for multi-product SEZs. The promoters of such SEZs are builders like DLF and big corporate houses like Reliance.

Such large business houses can create new townships with all attendant infrastructure facilities and the townships can help cover a serious deficiency in the availability of world-class urban infrastructure. They need tax-breaks to create world class facilities.

However, it is precisely such large multi-product SEZs that might suffer as a result of the protests against land acquisition. The SEZ policy review should help rather than hinder the creation of large multi-product SEZs.

Large multi-product SEZs require large tracts of land, and since negotiations with individual farmers might be difficult for promoters, the involvement of state governments is necessary to facilitate the process of land acquisition.

The review of the SEZ policy should aim at greater involvement of state governments for land acquisition through a better compensation package for displaced persons.

tncr@sify.com