Broad benefits of special economic zones

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: The commerce and finance ministries, as has been reported extensively in the news media, are currently at loggerheads over the way the current concept of special economic zones (SEZs) is to be handled in India. There is no quarrel on their need; while the finance ministry feels that tax rebates will result in huge losses from direct and indirect taxes, the commerce & industry ministry is arguing that short-term loses will be compensated for by vast overall gains in the long run.

Both ministries are using data to make their respective points. According to an estimate prepared by the finance ministry, the country will have to forego about Rs 100,000 crore, no small sum by any yardstick, on account of SEZ-granted tax rebates by the year 2009-10. While this figure can be challenged, according to an estimate by the commerce ministry, one million new direct jobs will be created on account of SEZs in the next five years. And, depending on the nature of an industry, every new direct job will create five to ten jobs through indirect employment. Imagine the gains generated by this huge increase in the consumer base, and the broader potential impact of SEZs begins to make itself clear.

Another contentious issue is the size of SEZs. Those who usually castigate China are looking towards that country to argue that Indian SEZs will be economically unviable. The argument is that Indian SEZs will be much smaller in size compared to Chinese SEZs, and hence the Chinese success story cannot be replicated here. This is a shallow argument. Politically, to begin with, it is far more difficult in India than China to acquire large tracts of land for such a purpose. This is a straightforward fact of democracy. Secondly, Chinese SEZs are mostly concentrated in a particular region of that country and, indeed, this is a big factor contributing to increasing inequality there. On the other hand, the present policy of the commerce ministry is to spread the formation of SEZs to all parts of India, which is likely to foster relatively balanced growth and development.

Land acquisition is another big issue, and one that tends to make news and attract popular attention for a variety of reasons. The commerce ministry has rightly decided that as far as possible, agricultural land (including wasteland which could be converted to agricultural land) should not be acquired for this purpose. While this may be good in theory, in practice many Indian states do not have sufficient free land. In India, wastelands constitute 17.6% of total cultivable land, and in high population-density states like West Bengal, this figure is less than 1%. Can industry be built in the air?

The food security argument is not a valid one. With the use of new technologies (particularly dry-land farming), food production can be increased rapidly on the same land. According to an estimate, even if 100,000 hectares of cultivable land in the state of West Bengal is taken away for industrial purposes, there will be no threat to the food security of that state. This does not, however, give governments the right to bully landowners and cultivators. They must get adequate compensation, and indiscriminate acquisition of land for SEZs should be stopped immediately.

Ideally speaking, state industrial development corporations should buy land directly from owners and sell them to industrial houses through the use of a competitive bidding process.

This will safeguard owners’ interest and industrialists can acquire land at lower transaction cost.

The commerce ministry has also taken a significant decision with regard to land use policy in SEZs. It is good that at least 50% of land will be used for industrial purposes, while 25% each will be used for infrastructure and other uses (such as housing). This will ensure better use of land; otherwise, the real estate mafia will be out to make a quick buck, a qualm that inspires an entirely different set of objections to India’s SEZs.

Other than the food security argument, it is being argued that a large number of agricultural jobs will be lost on account of acquiring agricultural land for SEZs. This is not true and figures will testify to that. According to the latest survey of agricultural workers, an agricultural worker gets an average 71 days’ employment a year. Compare this with the rate of unemployment in our country – it is very low, as the poor cannot afford to remain unemployed for a long period of time. A majority of agricultural workers in our country make a living by doing odd jobs. With a bit of skill development, they can easily be absorbed in productive employment in SEZs and ancillary industries. There will presumably be upward pressure on agricultural wages, as demand for agricultural labour will fall less than the fall in supply of such labour.

In short, the development challenge that India is facing today is two-pronged. On the one hand, how do we make our agriculture more productive so that we maintain our food security? On the other hand, how do we increase the manufacturing base to absorb a large army of unemployed and underemployed labour in industry?

India is an aspiring nation of young people, and unless these challenges are addressed with appropriate policies, the country is at serious risk of social and economic Balkanisation. The commerce ministry has taken the right decision by allowing a large number of SEZs, as they can address a significant part of these problems in a direct manner.