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Kanika Datta: OCD over SEZs

Kanika Datta  |  New Delhi 

Kanika Datta

Every government that has come to power since the late 1990s has looked, quite sincerely, for a way to clear the red tape that entangles businesses in India. Mostly, these regimes search for a single Big Bang solution that will someday, somehow enable the country to awake to a new dawn of economic prosperity. Since the 2000s, this desire has resulted in something akin to an obsessive compulsive disorder, or OCD, over special economic zones (SEZs) in all its variations - export processing zones; export-oriented units; industrial parks; and so on.

Given the renewed excitement over the prospect of Chinese companies investing in industrial parks in India following Commerce Minister Nirmala Sitharaman's visit to China, the current regime appears to have caught this syndrome from its predecessor. Indeed the idea was first floated by Manmohan Singh late last year. The logic was simple, given China's awe-inspiring record with its own special economic zones.

But Dr Singh's proposal was in the nature of a last hurrah, since the last government's attempts to develop SEZs via a 2005 Act has patently yielded less than satisfactory results. And that Act was essentially the United Progressive Alliance-I's attempt to improve on a scheme offered by its predecessor, the Atal Bihari Vajpayee-led National Democratic Alliance.

Till 2013, the 170-odd SEZs operational in India apparently generated direct employment for roughly 1,019,146 people and accounted for under a third of India's total exports, according to commerce ministry data. This is hardly the stuff of revolutionary change, given that SEZs were expected to have generated 1,743,530 additional jobs by 2009. In any case, there is ample evidence of growing disenchantment with SEZs. Till March last year, the Board of Approval had received 54 requests for denotification.

Analysts have offered many reasons for why the SEZ concept has not worked - tax imposts (such as the minimum alternate tax and the dividend distribution tax), stringent laws for organised labour, the economic meltdown, lack of skilled labour. Note that these reasons figure among the usual suspects when it comes to doing business in India in general.

So even as Raisina Hill displays a touching faith in the marvellous feats that the Chinese are expected to achieve via industrial parks, it is a fair bet that the initiative will go the way of similar proposals. The biggest reason has to do with an issue that has plagued Indian business since Mamata Banerjee so dramatically shot to power over a chemical export hub in Nandigram and the Tata Nano project in Singur: land.

The export miracle that made China the world's second largest economy is based mainly on just six economic zones strategically located along the coast so that manufacture and transport operated seamlessly. The largest of them, the famous Shenzhen, covers 49,300 hectares. That kind of scale, so vital to manufacturing success, is simply not replicable in India. Some SEZs in India are as tiny as 10 hectares. The largest proposed SEZ in India in Raigad district of Maharashtra was just 14,000 hectares, and it was eventually scrapped owing to problems with land acquisition.

True, the government is considering some sensible adjustments to the recently passed land acquisition laws to make them more business-friendly. But these are unlikely to change the position significantly in most states, which are the critical drivers of the success of SEZs. The real issue here is what Indians of a certain persuasion like to package as our "demographic dividend". It actually remains India's biggest problem and explains why SEZs in any form are unlikely to work. In a country with the world's highest population density, private companies continually struggle to acquire even medium-sized tracts of land for industrial projects. If the government struggles a little less, it is only because local land losers trust it to deliver compensation; they are less trusting of the private sector.

So why, despite the evidence to the contrary, does the SEZ concept continue to exercise its allure over policymakers across party lines? The reason is that it essentially offers investors the glittering mirage of a Non-India: a haven of fast-track approvals, tax breaks, flawless infrastructure and minimal labour laws - all the things the Chinese manage to achieve.

Like the multiple "single windows" that successive governments open to put Indian and foreign investment on the fast track - the Foreign Investment Promotion Board, special cells within the Prime Minister's Office - the manifold SEZ policies are a reflection of the collective failure of the Centre and the states. It is a lazy alternative to the durable institutional and cultural reform sorely needed at every level of governance to make the whole of India an SEZ.

First Published: Wed, July 02 2014. 21:44 IST