Who is afraid of SEZs?

It’s not just Sonia Gandhi who is worried about the development of Special Economic Zones (SEZs) in India and its immediate political fallout. The debate on SEZs is getting hotter and hotter with criticism coming in from various quarters, including the Finance Ministry and the Reserve Bank of India. Even Prime Minister Manmohan Singh recently asked the states, without mentioning SEZs, to go slow on offering sops to drive industrial development. “The jury is still out on whether these policies (incentives) really promote industrial growth” said the Prime Minister.

The ever-growing list of powerful people questioning the way SEZs are conceived and being developed in the country has turned the focus on the whole range of issues from the long-term social and economic consequences to revenue implications, uneven development and sacrifice of prime agricultural land to boost industrial growth. Although SEZs are expected to boost investments, industrialization and exports in a big way, the costs and benefits need to be weighed carefully.

Finance Minister has expressed concerns over the loss of tax revenue due to the sops offered to the SEZs. RBI has also cautioned the government on potential revenue loss saying that the incentives may be justified only if the SEZ units ensure forward & backward linkages with domestic economy – and this is a big ‘if’. Acting on its view, RBI has already announced guidelines to banks that will make it difficult for them to lend to the SEZs in a big way. Financing of SEZs will be treated like commercial real estate lending, attracting higher risk weight for the purpose of capital adequacy. This means banks will have to set aside a larger capital for such lendings as compared to other assets.

Another worry is that the mushrooming of SEZs would aggravate the widening inequality in India - both in terms of individual income levels and national infrastructure. The IMF Chief Economist Raghuram Rajan has warned: “Not only will [the SEZs] ... make the government forgo revenue it can ill afford to lose, they also offer firms an incentive to shift existing production to the new zones at substantial cost to society.” Given the way large corporates are rushing to grab the 'sweetheart' deals offered by the state governments, the ‘land grab’ in the name of SEZs is going to badly affect the livelihood of a large number of farmers. Swathes of prime agricultural lands will be converted into ‘islands of prosperity’ and the affected farmers will definitely not be in a position to transition to the jobs created in these ‘islands'.

The issue of “land grab” has turned out to be the most controversial aspect of the SEZs, also politically the most sensitive one and perhaps the last straw on the proverbial camel’s back. This is the issue that has caused sharp political divides and forced a re-look at the entire gamut of the planning and development of SEZs. The international experience with SEZs has shown that only large SEZs are likely to succeed and that for every successful SEZ ('Shenzen’ is the name that comes to mind immediately) there are numerous failures. Clearer guidelines are needed for land acquisition and compensation to farmers. The possibility of using barren and wasteland - of which we have plenty - for setting up of SEZs, rather than fertile agricultural land, should be explored.