OCTOBER 09, 2006

By G H Pradyumna, Consultant

ONLY 'yesterday' the Special Economic Zone (SEZ) scheme was being bandied as the best thing that could have happened to the country since Independence. Captains of the industry and politicians were seen rubbing shoulders before full media glare, announcing new SEZ start-ups and gleefully listing out the possible benefits on account of the scheme. While the Ministry of Commerce was gung-ho about the great benefits of the scheme, the cheer-leaders of the trade were ecstatic in driving home the message that India was only a step away from repeating SEZ success story of China. In the last few months or so, however, SEZ seems to be in news for many wrong reasons with institutions such as the RBI and observers alike turning their heat on the scheme. SEZ, the buzzword of the business honchos yesterday, is today the Aunt Sally for many and rightly so for more than one reason.

The biggest mistake the Central Government in general and Commerce Ministry in particular committed from day one was to create an impression that with the onset of SEZs, something spectacular was going to happen in the country. As developers, industrial houses and governments announced SEZ tie-ups and ventures, watchers were perplexed as to how huge SEZ land requirement would be met. In their overzealous quest for brownie points, the mandarins of the Commerce Ministry paid little heed to the ecological concern expressed by many. Now, the government finds itself on a stick wicket on the land issue and is adopting a defensive posture. Commerce Minister Kamal Nath has had to make a near U-turn and advise the state governments not to get into land acquisition for private players. There are reports that farmers in Orissa, Haryana and Maharashtra are up in arms against indiscriminate land acquisition in their places. If the Haryana Government today is backtracking on its promise of handing over land to Reliance Industries, it is because the Chief Minister of the state has rightly gauged the resentment of farmers against the land acquisition. SEZ gladiators, who failed to take a holistic view in the matter, now find the land issue a real quagmire.

It is not as if the SEZ votaries were not put on notice. Environment groups as well as social activists have been crying at the top their voice that SEZs may possibly engender resource imbalance in a country where millions are still employed in unorganized sectors. Rahul Bajaj of the Bajaj group and Sitaram Yechury of the CPI (M), who take extreme positions on many other issues, warned that SEZs may result in a speculative real state bubble. But, warning such as these were lost in the SEZ cacophony.

The other blunder the Government committed was to announce unprecedented tax sops and freebies for the SEZ. The Commerce Minister's own cabinet colleague, Finance Minister P. Chidambaram has, on more than one occasion, expressed his misgivings that tax sops given to SEZ units, could cause revenue imbalance which the government could ill-afford. The RBI also threw its weight behind the FM and echoed his views that disorderly development of the SEZ could result in unjustified loss of tax revenue to the government. Now Planning Commission Vice-Chairman Montek Singh Ahluwalia has also voiced concerns about the way the Scheme is being implemented.

In its annual report for the year ended the RBI rightly cautioned that "There are concerns that SEZs could aggravate the uneven pattern of development by pulling out resources from less developed areas. Revenue implications of taxation benefits would also need to be factored. The revenue loss for the government may be justified only if the SEZ units ensure forward and backward linkages with domestic economy." Words of foreboding coming from the Finance Ministry and the central bank of the country seem to have little impact on the SEZ votaries so far.

The biggest negative factor of the SEZ scheme, however, is that it runs counter to the principles of equity and level-playing field in the sense that only big and influential players could garner freebies in the form of tax sops, preferential land allotment and better market leverage. Look at what lawyer and civil rights protagonist Prashant Bhushan reportedly said, "SEZ is a system of apartheid, the return of the old systems of zamindari. There will be preferred group of people/industrialists in these enclaves just because they happened to grab a piece of land approved as SEZ as opposed to those outside the SEZ". Sane words as these should not be allowed to be lost in the razzmatazz of SEZ glitz.

It has been the endeavour of successive governments since Independence to promote exports and achieve healthy balance of trade. Post-1991, there has been a discernible shift in the country's export-import policy - making it more facilitative. The present Foreign Trade Policy too contains a slew of schemes and promotional measures (including the SEZ) for different sectors aimed at providing fillip to the country's exports and carving a niche for Indian merchandise and service in the world trade. However, none of the other schemes ran into opposition as SEZ does today. One of the successful export related schemes is the 100% EOU and STPI scheme. The said scheme in place for more than 10 years only requires investment of just one crore rupees for any start-up. The scheme has stood by both minnows and monsters and provided level-playing field for an Indian start-up and a Microsoft alike. And the success of the EOUs and STPI is there to see for everybody. All that has happened with STPI is a silent revolution sans hype. On the other hand, the SEZ systems despite being bestowed a blue-eyed boy status from the inception, is all over the place even before the start.

However, it is not too late yet. The Government should try to look into reasons behind the groundswell of criticism and protest by diverse groups ranging from environmentalists, farmers, economist and statesmen. The least the Government can do at this juncture is to address the sensitive issues of sustainable development and look into the viability of the scheme in the long run and restructure the system to avoid pitfalls. Duty sops may have drawn many a player to the SEZ in drove. But, one should also be mindful of the fact the same players would not flinch from flying away once the sheen of the tax sops wears out. Therefore, a reassessment whether exemptions will have the desirable benefits or not should not be ruled out. Above all, creating a level playing field to ensure the survival of all without detriment to the national interest is the need of the hour.

(The views expressed are personal of the author)