CAG report on SEZs: Lessons from the SEZ fiasco

The lack of vision in policy implementation, weak commitment, and lack of spirit of experimentation have jeopardised India’s efforts to industrialise through SEZs…

The CAG report ‘Performance of Special Economic Zones (SEZs)’ tabled in Parliament on November 28, 2014, hit the newspapers’ headlines around the country. “Land acquired for SEZs sold off, put to other uses”; “R83,000 crore revenue lost on SEZs in 6 years”; “SEZs have failed to deliver”; “SEZ developers mortgaged government land to raise loans”; “SEZs plundered” … It is unfortunate that the report is being used to once again whip anti-SEZ rhetoric. It’s time we discuss the findings of the report from a broader perspective and assess why most social/development initiatives of the government in India fail to deliver. This is more important now than ever as the government has announced several ambitious projects of late.

A major finding of the report is that the actual gains from SEZs are far short of the projected gains in terms of all quantitative indicators of performance, namely employment (ranging from 65.95% to 96.58%); investment (23.98% to 74.92%); land use in processing area SEZ (31% to 93%); overall operational land (38%); exports (46.16% to 93.81%); and net foreign exchange earnings (39% to 109%). The ministry of commerce attributes it to the global crisis and scrapping of the MAT and DDT benefits. However, the matter of the fact is that the SEZ initiative could never take off in the country. The SEZ Act 2005 was passed with high expectations but soon came under heavy criticism. Anti-SEZ sentiments assumed unprecedented magnitude, supported by violent protests. A massive intellectual boost for the agitation against SEZs came from the media, activists and academia. The government responded by diluting the policy and its support to SEZ investors. It looked a house divided with a bitter turf war between different ministries in the public view. The central bank dismissed them as real estate propositions. The lack of cooperation from state governments also added to the woes of investors. Investors’ confidence was completely shaken, discouraging them from investing in SEZs. The prospects of SEZ success, thus, dimmed in the initial stages itself. The real estate developers who had an edge over the “real production agents” in acquiring land managed to get SEZs approved, little realising the fact that the latter were not based on the real estate principle of “build, transfer and exit” and that they needed to be managed as a company. Soon their euphoria also died down and they started seeking de-notifications. However, the onus of the lacklustre performance of SEZs cannot entirely be put on actors external to the policy. There are several gaps in the policy, and inefficiencies in its implementation (consistent with most government social/developmental initiatives) which, as the report finds, have cost the exchequer valuable revenue and reduced the effectiveness of the policy.

Two important lessons may be drawn from this fiasco. One, any major social/developmental initiative of such dimension must be initiated on a pilot/experimental basis and expanded gradually based upon the learnings from its experimental outcomes. Policy-making should not be understood as a single once-for-all exercise. It is a series of cycles with each cycle improving the policy, leading to a higher level of achievement.

Evaluation and monitoring are two important components of this cycle, which feed into it. These components need to be institutionalised by embedding them in the policy design itself. The CAG report does highlight the need for such mechanisms with an emphasis on monitoring and controls largely from the perspective of preventing irregularities. In contrast, the objectives of evaluation and monitoring should be learning and evidence-based policy-making. Constant revisions in the rules based on the M&E learnings to remove ambiguities, a well-structured penalty system with both civil and criminal penalties, a fast appeal and dispute settlement mechanism and capacity building programmes for implementing the policy are some tools that can be used to address implementation inefficiencies.

Another important lesson that emerges from the findings of the report is that the policies should be initiated with proper understanding of the conditions necessary for their success. The factors underlying the success of SEZs, for instance, can be grouped into two categories: international and domestic. International conditions define opportunities and constraints for SEZs while domestic factors constitute the investment climate in which SEZs operate. They offer “differential investment climate” with relaxed regulatory regime, and attractive incentives and facilities which make them special vis-a-vis domestic economy. Considering that there has been a proliferation of SEZs around the world, they need to be special also, in comparison with SEZs in other countries. In addition, the broader institutional framework within which they are situated (regional investment climate and national macroeconomic policies) also play a crucial role in their success. Finally, SEZs involve a wide range of activities that spread over various ministerial domains and different layers of government. Coordination at all these levels is crucial for their success. While judging the attractiveness of SEZs within this framework, one finds that, in India, SEZs have little “special” about them.

They don’t offer any relaxation whatsoever from the regulatory regime. On the contrary, SEZ units face far more restrictive environment than those in the domestic economy. They have nothing special even in terms of the basic facilities such as the single-window mechanism, high-class infrastructure, and attractive and certain fiscal incentive regime (the audit admits that working outside SEZs is more beneficial after the imposition of MAT and DDT); what to talk of other services. It is like launching SEZs with little “special” to offer and with so much ado.

The above lessons have important implications for India’s dreams of promoting manufacturing through Make in India, Smart Cities, NIMZ and Economic Corridors. The lack of vision in policy design and implementation, weak commitment, and lack of spirit of experimentation seriously jeopardised India’s efforts to industrialise through SEZs. Other initiatives may meet a similar fate.

By Aradhna AggarwalThe author is professor in Indian Studies, Copenhagen Business School, Denmark

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