DEVELOPMENT
Special Economic Zones: Socio-economic Implications
:- Naresh Kumar sharma
A large number of special economic zones (SEZs) have come into existence in the last two-three years. Many of them occupy hundreds of acres of land each and often the land is acquired by the government from unwilling farmers. The SEZs are extremely attractive to exporters, industrialists and entrepreneurs because of differential application of laws and favourable tax concessions. There is a possibility of an avalanche of SEZs to appear in the country in the future, Consequently, it is important to analyse the economic and social implications of such a large number of SEZs appearing on the scene. Among these, particularly important are the implications for food security, political stability of the country and the functioning of the democratic institutions. In this context, a conference which was held in the Indian Institute of Advanced Study, Shimla, with the collaboration of Indian Academy of Social Sciences, Allahabad on “Special Economic Zones: Economic and Social Perspective”, during 18-20 September 2008, conceptualized around three main themes: 1) SEZs and economic development; 2) SEZs and distributive implications; 3) SEZs and the legal issues. The conference covered issues such as: land acquisition for SEZs under eminent domain power; principles for determining compensation for acquisition of land; rehabilitation policy; compatibility of the policy of land acquisition for SEZs with the core values of the Indian Constitution; impact of displacement on the way of life of the displaced people; the relative sizes of decrease of employment because of displacement of the people (and activities) on the one hand, and increase in employment because of establishment of SEZs on the other; the questions of governance posed by SEZs; and incompatibility of SEZs with democracy both at the local and at a broader level. These were based on economic theory; results of empirical research including case studies; and studies analyzing the people’s responses, in particular, agitations on the land question with respect to SEZs. The wider issues relating to the desirability or otherwise of the modern or western kind of development for India were also discussed.
In the remaining part of this article, we take a look at the main issues that emerged regarding SEZs. Due to constraints of space, this article is not able to discuss all the articles presented at the conference.
Objectives of SEZs
The kinds of special provisions and concessions now given legal sanction through enactment of the Special Economic Zones Act, 2005 (Act 28 of 2005) were earlier justified for export promotion. The preamble to the SEZ Act, 2005 says that this is
a) n Act to provide for the establishment, development and management of the Special Economic Zones for the promotion of exports and for matters connected therewith or incident thereto.
The objectives of the Act and hence its promise and rationale are captured in the Guidelines provided in Section 5 of the Act.
1) The Central Government, while notifying any area as a Special Economic Zone or an additional area to be included in the Special Economic Zone and discharging its functions under this Act, shall be guided by the following, namely:
a) generation of additional economic activity; b) promotion of exports of goods and services; c) promotion of investment from domestic and foreign sources; d) creation of employment opportunities; e) development of infrastructure facilities; and f) maintenance of sovereignty and integrity of India, the security of the State and friendly relations with foreign States.
It is obvious that the SEZs are being justified not in terms of exports expansion alone, but as an engine of growth and employment generation. Emphasis is laid on infrastructure. Thus, Alok Sheel in his study on some debatable issues of SEZ asserts that a policy encouraging investment in infrastructure and modern manufacturing (crucial for economic development) needs to be supported, yet, he warns that, “use of tax incentives as a proxy for tweaking the policy environment is fraught with long-term hazards”.
Though the first export processing zone (EPZ) was established in India 40 years ago-these were slow to multiply the hectic, almost feverish, expansion of SEZs has started taking place only after passing of the SEZ Act, 2005 and framing of the SEZ Rules, 2006. Sheel points out that 95% of investment, over 60% of employment and dramatic spurt in exports in SEZs have taken place only after February 2006.
Partha Mukhopadhyay shows that most of SEZs, post-2005, are tiny and are connected with information technology and information technology-enabled services. They dominate in numbers, but occupy a small share in the area under SEZs, and yet, provide bulk of employment in SEZs. These SEZs are generally close to already existing urban centres the greatest concentration of SEZs is along three to four select corridors near Delhi, Mumbai, Hyderabad, etc. Special economic zones have not helped spread industrial or service sector activities to the remote areas or rural hinterlands.
Sivaramakrishnan, reflecting on enclave approach inherent in SEZ policy says, “factories and office buildings can be gated with control access and exit but communities cannot be”. India created numerous new (industrial) towns which were beset with this problem, unresolved to date, yet SEZs go back to the same concept of a privately built and managed company township!
Manufacturing,Technology and Exports
Aradhana Aggarwal finds that the SEZs helped India in exporting certain new products. However, these could not induce technology-based dynamism. Though appreciative of possibilities opened up by SEZs, she finds that the “overall impact… can at best be termed ‘moderate’’’. Since, the concurrent changes in terms of exports or technology or employment in the rest of economy were not part of the study, it is a moot point whether the net effect of SEZs on the economy as a whole would be even moderately positive.
In the light of early fascination with China’s “success” in this regard, it was shown that this kind of policy has led to a whole host of adverse and unintended consequences (Shrivastava) in terms of increased inequalities across the income classes, worsening geographical imbalances and social security system, and adverse impact on agriculture. Given a very different political system, China was, however, able to isolate its SEZs from the rest of economy, and could even exercise control over the kind of economic activities it wished to encourage in the SEZs. As China is no more regarded as a role model, penetrating studies of SEZs in China and other economies will yield valuable insights.
Land and Natural Resources
The most widely discussed issue in the conference was that of land acquisition for SEZs- mostly from farmers. Studies from the yield, where agitations have taken place/are going on and studies of so-called “model SEZ policy” in terms of amicable transfer of land were presented in the conference (papers by Patankar, Sunil, Panda and Asher). The setting up of SEZs has often been opposed by the farmers whose land is being acquired as also by the local people. It was claimed that the farmers are neither adequately compensated nor properly rehabilitated. It was argued that the nature of the SEZ model of industrialization destroys more jobs than it creates. Similar past projects have been the sagas of unfulfilled promises of compensation, rehabilitation and jobs (Kumar). A number of the displaced persons have been reduced to street begging in cities, and at best, only a few have got low skill, low grade jobs, such as that of a chowkidar.
Patankar presented his study of struggle of people in Alibag (Raigad district, Maharashtra) over the last two years. He argues that the scale of planned power projects substantially exceeds the energy needs of the entire state of Maharashtra in the near future, and further that these projects will spell an ecological disaster. The paper proposes an alternative energy strategy, which does not involve the mega projects as hitherto planned for the Konkan region.
Asher, in her field study from Gujarat, narrated four case stories, and examined the so-called successful Gujarat model of SEZ. Problems related to acquisition of land for SEZs are found to be not very different (some of the largest SEZs are in Gujarat, the state accounting for the largest land area under SEZs). The image of “peaceful” establishment of SEZs has been possible due to the silence of the political class across the board, including the opposition. Some of the adversely affected communities are nomadic tribes without formal ownership of land, though dependent on land resources for their livelihoods. They are not even aware of the uncertain future in store for them. In a startling case story, she reveals that a private company, as if exercising the power of eminent domain, actually issued a “land acquisition notice” to a panchayat.
The SEZ policy is seen as a part of a large objective of grabbing control of natural resources. The issue of water resources was seen to be of particular importance. From which sources would huge water needs of many SEZs be met? It is feared that water will become more and more a marketed commodity, with diminishing control of ordinary people over it. Water being vital for human survival, water wars are likely to result. Land grab and water grab could seriously jeopardise food security. Some representative of the people resisting the proposed land acquisition for SEZ in Una district in Himachal Pradesh came to the conference and presented the relevant facts and their case against the proposed SEZ.
Incentives and Macroeconomic Implications
A strange phenomenon is being witnessed in India in recent times. Instead of the firms competing with each other , as suggested in economic theory, the states are competing with each other in a sort of rush to the bottom by promising cheap land, tax incentives and other facilities to attract companies to set up SEZs. The prospects of revenue loss are alarming. It is going to severely constrain the state governments in their expenditure, especially on public programmes, and adversely affect the poor in particular (Kumar)- in the light of the Fiscal Responsibility and Budget Management (FRBM) Act. The incentives given to SEZs could adversely impact the rest of the economy, and the net investment likely to remain low. Low employment intensity in the capital-intensive activities in SEZs implies an adverse impact on the aggregate employment.
How have the states with or without SEZs fared? Rohit Prasad provides some preliminary answers. A statistical comparison of these two types of states on several economic parameters shows that “the main difference between SEZ states and non-SEZ states is the scale of operation of SEZ states”. The SEZ states show significantly higher total production, state domestic product (SDP), as well as higher levels of agricultural and industrial production. But these differences disappeared when it was analysed in per capita terms. The only variable which distinguishes them apart is the share of export income as a percentage of respective SDP. He also finds that there is no significant impact of SEZs either in boosting infrastructure, manufacturing and agriculture, or, in fostering balanced regional development or in giving a boost to low skill employment.
Theoretical Analysis
Theoretically, the problem of SEZs could be argued at two levels- one at purely logical level, and two, at the level of dominant economic theory. It is shown that SEZ policy fails to pass the muster in either criterion (Naresh Kumar Sharma). Logically, we end up in a contradiction: the SEZs either boost economic activity or they do not. If they do not, there is no case for SEZs. And even if they do boost economic activity, still there is no case for SEZs why a policy beneficial for an enclave would not do greater good when applied to the entire economy.
Economic theory does suggest that profitability at every level of production is improved, if costs are uniformly reduced. Assuming there are no drastic changes in demand, it can be shown that production would increase. However, this theoretical result applies to an SEZ taken by itself, ie, under the assumption that nothing else changed in the world. However, at least two qualifications must be considered on theoretical grounds. One, there are distributional consequences. Even if there is an increase in the overall production, it does not imply that there is an increase in the production across the board. Everyone may not gain to the same extent, some may even lose. Two, the overall performance can be judged by considering only the net effect on production, exports, income creation, etc, for the economy as a whole. With differential economic environments inside and outside the SEZs, productions inside the SEZs and in the rest of the economy both are affected. Net change in production for the whole of economy is difficult to predict a priori. Theory suggests that distortionary tax/incentive structures generally reduce overall out-put. There is yet another issue to be considered on theoretical grounds alone. With differential economic environment created in the same larger economy, there are obvious gains to be made from moving into the preferred zone, the SEZ. These gains, theory suggests, will be wiped out for producers through rent-seeking behaviour of the developers.
(to be continued...)
(Author is a faculty at the Deptt. of Economics, University of Hyderabad)
:- Naresh Kumar sharma
A large number of special economic zones (SEZs) have come into existence in the last two-three years. Many of them occupy hundreds of acres of land each and often the land is acquired by the government from unwilling farmers. The SEZs are extremely attractive to exporters, industrialists and entrepreneurs because of differential application of laws and favourable tax concessions. There is a possibility of an avalanche of SEZs to appear in the country in the future, Consequently, it is important to analyse the economic and social implications of such a large number of SEZs appearing on the scene. Among these, particularly important are the implications for food security, political stability of the country and the functioning of the democratic institutions. In this context, a conference which was held in the Indian Institute of Advanced Study, Shimla, with the collaboration of Indian Academy of Social Sciences, Allahabad on “Special Economic Zones: Economic and Social Perspective”, during 18-20 September 2008, conceptualized around three main themes: 1) SEZs and economic development; 2) SEZs and distributive implications; 3) SEZs and the legal issues. The conference covered issues such as: land acquisition for SEZs under eminent domain power; principles for determining compensation for acquisition of land; rehabilitation policy; compatibility of the policy of land acquisition for SEZs with the core values of the Indian Constitution; impact of displacement on the way of life of the displaced people; the relative sizes of decrease of employment because of displacement of the people (and activities) on the one hand, and increase in employment because of establishment of SEZs on the other; the questions of governance posed by SEZs; and incompatibility of SEZs with democracy both at the local and at a broader level. These were based on economic theory; results of empirical research including case studies; and studies analyzing the people’s responses, in particular, agitations on the land question with respect to SEZs. The wider issues relating to the desirability or otherwise of the modern or western kind of development for India were also discussed.
In the remaining part of this article, we take a look at the main issues that emerged regarding SEZs. Due to constraints of space, this article is not able to discuss all the articles presented at the conference.
Objectives of SEZs
The kinds of special provisions and concessions now given legal sanction through enactment of the Special Economic Zones Act, 2005 (Act 28 of 2005) were earlier justified for export promotion. The preamble to the SEZ Act, 2005 says that this is
a) n Act to provide for the establishment, development and management of the Special Economic Zones for the promotion of exports and for matters connected therewith or incident thereto.
The objectives of the Act and hence its promise and rationale are captured in the Guidelines provided in Section 5 of the Act.
1) The Central Government, while notifying any area as a Special Economic Zone or an additional area to be included in the Special Economic Zone and discharging its functions under this Act, shall be guided by the following, namely:
a) generation of additional economic activity; b) promotion of exports of goods and services; c) promotion of investment from domestic and foreign sources; d) creation of employment opportunities; e) development of infrastructure facilities; and f) maintenance of sovereignty and integrity of India, the security of the State and friendly relations with foreign States.
It is obvious that the SEZs are being justified not in terms of exports expansion alone, but as an engine of growth and employment generation. Emphasis is laid on infrastructure. Thus, Alok Sheel in his study on some debatable issues of SEZ asserts that a policy encouraging investment in infrastructure and modern manufacturing (crucial for economic development) needs to be supported, yet, he warns that, “use of tax incentives as a proxy for tweaking the policy environment is fraught with long-term hazards”.
Though the first export processing zone (EPZ) was established in India 40 years ago-these were slow to multiply the hectic, almost feverish, expansion of SEZs has started taking place only after passing of the SEZ Act, 2005 and framing of the SEZ Rules, 2006. Sheel points out that 95% of investment, over 60% of employment and dramatic spurt in exports in SEZs have taken place only after February 2006.
Partha Mukhopadhyay shows that most of SEZs, post-2005, are tiny and are connected with information technology and information technology-enabled services. They dominate in numbers, but occupy a small share in the area under SEZs, and yet, provide bulk of employment in SEZs. These SEZs are generally close to already existing urban centres the greatest concentration of SEZs is along three to four select corridors near Delhi, Mumbai, Hyderabad, etc. Special economic zones have not helped spread industrial or service sector activities to the remote areas or rural hinterlands.
Sivaramakrishnan, reflecting on enclave approach inherent in SEZ policy says, “factories and office buildings can be gated with control access and exit but communities cannot be”. India created numerous new (industrial) towns which were beset with this problem, unresolved to date, yet SEZs go back to the same concept of a privately built and managed company township!
Manufacturing,Technology and Exports
Aradhana Aggarwal finds that the SEZs helped India in exporting certain new products. However, these could not induce technology-based dynamism. Though appreciative of possibilities opened up by SEZs, she finds that the “overall impact… can at best be termed ‘moderate’’’. Since, the concurrent changes in terms of exports or technology or employment in the rest of economy were not part of the study, it is a moot point whether the net effect of SEZs on the economy as a whole would be even moderately positive.
In the light of early fascination with China’s “success” in this regard, it was shown that this kind of policy has led to a whole host of adverse and unintended consequences (Shrivastava) in terms of increased inequalities across the income classes, worsening geographical imbalances and social security system, and adverse impact on agriculture. Given a very different political system, China was, however, able to isolate its SEZs from the rest of economy, and could even exercise control over the kind of economic activities it wished to encourage in the SEZs. As China is no more regarded as a role model, penetrating studies of SEZs in China and other economies will yield valuable insights.
Land and Natural Resources
The most widely discussed issue in the conference was that of land acquisition for SEZs- mostly from farmers. Studies from the yield, where agitations have taken place/are going on and studies of so-called “model SEZ policy” in terms of amicable transfer of land were presented in the conference (papers by Patankar, Sunil, Panda and Asher). The setting up of SEZs has often been opposed by the farmers whose land is being acquired as also by the local people. It was claimed that the farmers are neither adequately compensated nor properly rehabilitated. It was argued that the nature of the SEZ model of industrialization destroys more jobs than it creates. Similar past projects have been the sagas of unfulfilled promises of compensation, rehabilitation and jobs (Kumar). A number of the displaced persons have been reduced to street begging in cities, and at best, only a few have got low skill, low grade jobs, such as that of a chowkidar.
Patankar presented his study of struggle of people in Alibag (Raigad district, Maharashtra) over the last two years. He argues that the scale of planned power projects substantially exceeds the energy needs of the entire state of Maharashtra in the near future, and further that these projects will spell an ecological disaster. The paper proposes an alternative energy strategy, which does not involve the mega projects as hitherto planned for the Konkan region.
Asher, in her field study from Gujarat, narrated four case stories, and examined the so-called successful Gujarat model of SEZ. Problems related to acquisition of land for SEZs are found to be not very different (some of the largest SEZs are in Gujarat, the state accounting for the largest land area under SEZs). The image of “peaceful” establishment of SEZs has been possible due to the silence of the political class across the board, including the opposition. Some of the adversely affected communities are nomadic tribes without formal ownership of land, though dependent on land resources for their livelihoods. They are not even aware of the uncertain future in store for them. In a startling case story, she reveals that a private company, as if exercising the power of eminent domain, actually issued a “land acquisition notice” to a panchayat.
The SEZ policy is seen as a part of a large objective of grabbing control of natural resources. The issue of water resources was seen to be of particular importance. From which sources would huge water needs of many SEZs be met? It is feared that water will become more and more a marketed commodity, with diminishing control of ordinary people over it. Water being vital for human survival, water wars are likely to result. Land grab and water grab could seriously jeopardise food security. Some representative of the people resisting the proposed land acquisition for SEZ in Una district in Himachal Pradesh came to the conference and presented the relevant facts and their case against the proposed SEZ.
Incentives and Macroeconomic Implications
A strange phenomenon is being witnessed in India in recent times. Instead of the firms competing with each other , as suggested in economic theory, the states are competing with each other in a sort of rush to the bottom by promising cheap land, tax incentives and other facilities to attract companies to set up SEZs. The prospects of revenue loss are alarming. It is going to severely constrain the state governments in their expenditure, especially on public programmes, and adversely affect the poor in particular (Kumar)- in the light of the Fiscal Responsibility and Budget Management (FRBM) Act. The incentives given to SEZs could adversely impact the rest of the economy, and the net investment likely to remain low. Low employment intensity in the capital-intensive activities in SEZs implies an adverse impact on the aggregate employment.
How have the states with or without SEZs fared? Rohit Prasad provides some preliminary answers. A statistical comparison of these two types of states on several economic parameters shows that “the main difference between SEZ states and non-SEZ states is the scale of operation of SEZ states”. The SEZ states show significantly higher total production, state domestic product (SDP), as well as higher levels of agricultural and industrial production. But these differences disappeared when it was analysed in per capita terms. The only variable which distinguishes them apart is the share of export income as a percentage of respective SDP. He also finds that there is no significant impact of SEZs either in boosting infrastructure, manufacturing and agriculture, or, in fostering balanced regional development or in giving a boost to low skill employment.
Theoretical Analysis
Theoretically, the problem of SEZs could be argued at two levels- one at purely logical level, and two, at the level of dominant economic theory. It is shown that SEZ policy fails to pass the muster in either criterion (Naresh Kumar Sharma). Logically, we end up in a contradiction: the SEZs either boost economic activity or they do not. If they do not, there is no case for SEZs. And even if they do boost economic activity, still there is no case for SEZs why a policy beneficial for an enclave would not do greater good when applied to the entire economy.
Economic theory does suggest that profitability at every level of production is improved, if costs are uniformly reduced. Assuming there are no drastic changes in demand, it can be shown that production would increase. However, this theoretical result applies to an SEZ taken by itself, ie, under the assumption that nothing else changed in the world. However, at least two qualifications must be considered on theoretical grounds. One, there are distributional consequences. Even if there is an increase in the overall production, it does not imply that there is an increase in the production across the board. Everyone may not gain to the same extent, some may even lose. Two, the overall performance can be judged by considering only the net effect on production, exports, income creation, etc, for the economy as a whole. With differential economic environments inside and outside the SEZs, productions inside the SEZs and in the rest of the economy both are affected. Net change in production for the whole of economy is difficult to predict a priori. Theory suggests that distortionary tax/incentive structures generally reduce overall out-put. There is yet another issue to be considered on theoretical grounds alone. With differential economic environment created in the same larger economy, there are obvious gains to be made from moving into the preferred zone, the SEZ. These gains, theory suggests, will be wiped out for producers through rent-seeking behaviour of the developers.
(to be continued...)
(Author is a faculty at the Deptt. of Economics, University of Hyderabad)
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