February 26, 2007

life in financial markets: using SEZs to loot?

using SEZs to loot?

February 26 2007 (Monday)

Early this month, I contributed an input to a news article on Special Economic Zones (SEZs) in Outlook. It follows below.

Along with the write-up are four important data tables that one needs to look at to get a better understanding of the location, nature and size of the SEZs:

-- Statewise: SEZs notified as of December 2006 (after SEZ Act came into force in 2006),

-- Statewise: SEZs that have received formal approval as of October 2006,

-- Statewise: SEZs that have received in-principle approval as of October 2006, and

-- 10 largest SEZs in all three categories (as of October 2006).

SEZs first receive an in-principle approval, then a formal approval and then a final notification.

The SEZ Act 2005 came into force after the SEZ Rules 2006 were notified in February 2006.

Here is the write-up:

It all began in 1965 with the setting up of Asia's first export processing zone in 1965 in India in Kandla, Gujarat. It was followed by about five-six others. Then in 2000 the Export and Import (Exim) Policy allowed for a Special Economic Zone policy with an ostensible intention to speed up the growth in exports. Two years following this, a few states notified their independent SEZ policies which led to the creation of a handful of SEZs.

Legislating SEZ Act 2005. The whole thing got formalised when the Special Economic Zones Act 2005 was passed by both houses of the Parliament with just one day of debate. It became effective when the Special Economic Zones Rules 2006 were notified in February 2006. Prima facie the objectives were the same as previous SEZ notifications – promotion of clustered development (minimum 1000 hectares, i.e. 10 sq km of contigous uninterrupted area for multi-product units, minimum 100 hecatres i.e 1 sq km for one-product unit and minimum 10 hectares i.e. 100 square metre for certain specified categories of products) of export-oriented production of goods or provision of services.

Incentives provided. The carrot being dangled was the waiving of ALL taxes (excise, income, service, revenue, electricity etc etc) for a period of five years and 50% for the next five years. But it is not the only one. The enticements extend to independent control of the earmarked SEZ areas by the promoters and units operating in them. They are offered the right of independent generation of electricity, independent residential complexes for employees/workers and independent creation of infrastructure within the SEZ without having to comply with provisions of law that any industry or company outside SEZs would have to.

Concern on lack of regulatory oversight. One concern arising out of the whole SEZ Act and Rules is that while regulatory oversight is laid down under the Act and Rules is there is no move yet to bring confidence to the people that an enormous regulatory machinery is already in place which will implement effectively and without corruption the checks and balances in the SEZ legislations .

Empolyment generation claims. Employment is the biggest justification to grant such concession but no hard-hitting technical report is presented by the government that defines employment and the lack of it in the absence of such concessions like what the SEZ legislation aims to provide. Says an official of Pune-based National Centre for Advocacy Studies (NCAS): "Around two years ago the Commerce Minister said that they had done a study on the employment benefits but so far we haven't seen it being made public."

Groups like NCAS point towards the abysmal track record of employment generation in majority cases of industrial or development projects. Says Surekha Dalvi, a Mumbai-based lawyer representing some SEZ-affected villages: "You can generate employment in agri-based activities at a far low cost compared with the huge capital required to set up industrial units."

Another school of thought says that the SEZ policy will only encourage existing industrial units to shift to SEZ areas and new ventures will not be much. International Monetary Fund's chief economist, Raghuram Rajan, recently expressed his reservations to this effect.

Using the imperial Land Acquisition Act of 1894. The SEZ Act and Rules conveniently ignores the reality that the minimum area requirment of 10 sq km for a multi-product SEZ can not be met by most companies and even state governmental enterprises just like that. Such a large area can only be acquired by buying existing land that already belongs to individuals/entities or a state government, including fertile agricultural lands. And it is here where the biggest perceived injustice starts.

At the time of application under the SEZ Act the corporate or state government applicant has to only name the area where it wants to set up the SEZ. Ownership proof is not required at this stage. Only when the Board of Approval (set up under SEZ Act) gives an in-priniciple approval does the applicant entity have to provide the ownership details of the land in the proposed SEZ.

State governments are actively helping applicants by using the 1894 legislation of Land Acquistion Act, 1894 to forcibly buy the lands in the proposed SEZs. And all of this is happening in fertile lands in rural India. Take, for instance, this notice by a Maharashtra governmental authority in Raigad district in June 2006 that stated that under Section 4 of Land Acquisition Act, 1894, it intends to buy lands in 2-3 talukas of Raigad for Maha Mumbai SEZ in which Mukesh Ambani's Reliance is a partner.

The Land Acquisition Act, 1894, was introduced by the imperial British empire to enable it to take over vast areas of India as and when it thought it fit to expedited its imperial goals and objectives.

Under the Land Acquisition Act, 1894, the government is the ultimate owner of all lands and properties and can choose to take over any of it for an undefined 'public purpose'. All it has to do is offer compensation that it deems is enough. The SEZ controversy is primarily around this forced acquistion.

Firstly, farmers and landowners are pissed off that their lands will be the first ones targeted for SEZs (unlike that of urban dwellers and corporate areas which will almost never be touched) and they will have no choice but to give away. The Land Acquisition Act, 1894, gives them right to appeal to the high court against the price but this too can be severely compromised if local goons or sophisticated politcal agents are involved in the acquistion process. Moreover, they find it hard to digest that for no fault of theirs they have to take time out (and bear expenses) towards fighting in the high court for getting fair price just because the government applies draconian laws like the Land Acquisition Act, 1894.

Tax concession for exports. Existing exporters feel that it is not a level playing field in case they can not set up a unit in a SEZ and get the tax concession. Privately controlled SEZs will run without the Industrial Disputes Act being applicable to them so the claims of employment are being taken with huge doses of salt since the SEZ units can end up exploiting manpower to the hilt by paying them less wages.

Loss of revenue to exchequer. As per figures in commerce ministry's 2005-06 annual report, exports from SEZs, existing prior to SEZ Act 2005, were to the tune of Rs 18,309 crore. Compared to the total export turnover in the country of Rs 4,30,888 crore it works out to 4.2 per cent. The SEZ Act 2005 is likely to jack up this percentage in coming years. On a rough estimate of it touching 50-60 per cent the tax-exempt export turnover can touch around Rs 2,50,000 crore on which an estimated tax loss of 30-40 per cent would amount to aroun Rs 1,00,000 crore.

Other concerns. The land acquisition on a huge scale getting facilitated by the SEZ Act is also being looked upon a real estate scam. In an interview last year with Outlook Business (September 5, 2006), HDFC's chairman, Deepak Parekh, had wondered whether the SEZ policy was an economic policy or a real estate giveaway.

These concerns arise because some part of a SEZ area will be used for residential complexes, hotels, schools, shopping malls for the employees working in the productive areas of the SEZ area. These are a lucrative proposition for construction conglomerates like the DLFs, Ansals, Hiranandanis and Rahejas.

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