Monday, September 01, 2008

SEZ.....oh, I thought you meant "Cess"!

Special Economic Zones have evoked as much turmoil, hatred and anxiety in India as the country's long standing evils of communal tension and caste division, in recent days. Heralded as a fix to India's infrastructure woes by providing world-class, tax free enclaves for exporters of all kinds, the image that they evoke today are more of blood, misery and violence in such places as Nandigram, Singur or Goa rather than of prosperity and progress. As the hub-bub over a few lines in a 7th standard textbook, truant private professional colleges and so on settle down for a while, SEZs have become the latest whipping post in the world of Kerala politics which seems to steadily demand controversy and conflict.

In the past, SEZs have been accused of siphoning taxes off, wrecking labour security, land-grabbing and more. This Yahoo article summarises the argument up succinctly and more can be read here or here. (Rediff has a comprehensive collection of SEZ articles, good for a recap!) The opposition has been diverse, from the CPM to the Trinamool Congress, from environmentalists to shop-keepers, and spread all across the country. While vested interests may explain the interests of some of the more political entities, there is a genuine concern how these new-fangled areas would impact the socio-economic fabric of our nation. SEZs have their vocal supporters too, big business (led by Mukesh, Anil, Ratan & co) being the most obvious one. The Commerce Ministry has been a consistent supporter as have been many citizen groups. And if numbers tell the story, SEZs have performed well according to the latest reports.

So where does Kerala stand in all of this? As per the official website , Kerala has about 25 SEZs in various stages of approval, most of which are in the IT/ITES sector. These are spread across both the public and private sectors, and mostly in Trivandrum or Cochin. The operational ones are mostly part of Technopark or KINFRA in Trivandrum, together with the Infopark in Cochin. Even as the debate around SEZs raged in the rest of India, Kerala was slow to wake up to it. Maybe because the massive development promised by them was still inconceiveable to the average Keralite.

In a politically sensitive, land-starved State, there were always bound to be debates around land acquisition, labour laws and overall returns. A few months ago, the Govt. (rather the office of the CM, who also holds the IT portfolio) decided to ensure that some sort of control was brought over SEZs by asking developers to give a minority equity stake to the Govt. and to use 70% of the area in the SEZ for production facilities. Possibly prompted by the utter failure of the developers of the so-called "Smart" City in Cochin to move a muscle even two years after the signing of the agreement with the Govt, the latter is now hoping that a not-insignificant stake (upto 26%) will prevent the developers of future SEZs sleeping on the job.

The latest bout of animated debate was prompted by a debate within the State Cabinet about granting approval to a few SEZs awaiting a No-Objections-Certificate from the State. Possibly the debate was over the nature of safeguards to be adopted for SEZs. The CPM State Committee then cleared the issue and that seemed the end of that. Unfortunately thereafter, the CPI, RSP, BJP and pretty much every other bunch of worthies with a symbol jumped on the bandwagon and nearly broke its axles by demanding a public debate on SEZs. The fact that most of them had no clue what they were talking about didn't seem to worry anyone. The result, worryingly familiar in Kerala, is that the issue is in deadlock and as usual development has become the first victim.

So, what's the reality behind the rhetoric? Since SEZs in Kerala are almost exclusively focused on
the IT/ITES sector, it would be prudent to focus on them. Other kinds of SEZs like multiproduct or multiservice SEZs need more land and are usually more complex, especially in terms of the basic infrastructure needed. Except for special cases like the ports at Vizhinjam or Cochin, it is unlikely that large industrial SEZs will come up in Kerala in the short-term. Cutting to the case what are the evils SEZs are accused of and what are the facts in each case?

In the case of SEZs - v - Various, heard by the Honorable Reader Judge,

Accusation # 1: Land Grabbing - SEZs are viewed as a view to grab scarce land under the pretense of job creation. Simple formula, come with a fantafabulous scheme to the Government - X million sq.ft of space and X * 10,000 jobs, ask for land, get it and then build a bunch of flats on it with a small business park as an afterthought! Sounds similar to a project or two which created much ado in years past. Also, developers get land at values much below the market rate.

Rebuttal: Most private SEZ developers in Kerala have acquired land on their own. Now whether that is the shadowy but often referred to "land mafia" at work is beyond the scope of what we are talking about. SEZ projects account for only a fraction of the land acquired by major firms. And since it is acquired in private, one must assume it is done at market rates. In the case of projects like Technocity, the Govt. is procuring the land. I use the word "procure" here, not "acquire" since the land is not being acquired through the muscle of the Land Acquisition Act but through negotiated purchase. This ensures that the land is taken at or near the market rate and not at the pittance provided for by a forced acquisition. Considering that the Govt. is acquiring only 450-odd acres for Technocity, compared to the 3000-odd acres KINFRA had acquired for various still-born industrial parks in the past, the former is not startling. And even when some land has to be taken over, the benefits may outweigh the costs in typical democratic fashion. 450 acres of land at Technocity may yield over 100,000 jobs and 10,000 Crores of IT exports. Sounds like a good deal? With the provisions of the policy proposed by the CM - equity stake based control and a 70% processing area - it can be ensure that the acquired land is put to good use.

As for the cost of the land, public sector projects take over the land at prices relative to the prevailing prices at the time of the acquisition. In the case of Technocity, KSITIL is paying upto Rs 70,000 per cent which is very fair when the land price in the area at the time of the project announcement was less than Rs 50,000. Today, the land is much more valuable but only so because of the project for which the land is being taken. My friend, BVN, had an interesting question - why should the project affected individuals - earlier called simply the displaced people - have to be satisfied with a relatively small compensation while their neighbours outside the project area later get much higher prices for their land once the project is operational? That perplexed me for a while, but my reply was that the folk getting displaced are getting more than what they would ever have got without the project and also that this disparity can be compensated for, in part at least, by giving them a stake in the project. This is the successful model followed by the Magarpatta City SEZ in Pune.

Accusation # 2: Population Displacement - Many people will lose their homes and possibly livelihoods due to the SEZs. They will be left with nothing when others make millions at their expense.

Rebuttal: Yes, people will have to move when an SEZ is set up. Yes, a strong rehabilitation policy is needed. In the case of private SEZs, the voluntary sale of land to a developer implies that the seller is relocating on its own. In the case of public or joint-sector SEZs like Technocity or the Vizhinjam Port Zone, the Govt. already has a good policy in place which includes compensation in the form of cash and land, as well as support to build new houses. The displaced folk usually stay in the vicinity and reap the rewards of the project as it pumps money into the local economy. IT/ITES industries can creat 2 or 3 times as many indirect jobs as direct ones, and a majority of the former will be created in the surrounding areas.

Accusation # 3: SEZs are lawless places where people are enslaved - The regular labour laws are suspended within SEZs which means that it is far easier for employers to hire and fire labour. Paperwork is minimal and this is felt to expose employees to the tyrannies of the companies or at least of their HR managers.

Rebuttal: Firstly, there is nothing to suggest that labour laws will be diluted within SEZs, either in the Act itself (see the details here and here) or in practice. In fact, some States are lobbying to get the labour laws liberalised to make them more flexible and efficient, although all such moves have been rebuffed till date, as is evident from this article. In the case of IT/ITES SEZs, it is hard to imagine that reputed companies will change their policies within SEZs to wring their employees dry. I believe that they will continue the same practices as in their existing non-SEZ facilities. After all, SEZs are not opaque establishments like the concentration camps or gulags where anything could be got away with. However, in the interest of labour rights, the Government of Kerala can ask employers to sign an MoU on labour guidelines using the leverage it holds over the SEZ developers. This MoU can be a version of the general labour laws, with allowances for the way the IT/ITES industry normally has to function. And it should leave things like Union membership as options, not as mandatory policies to avoid alarming the investor community already jittery about Kerala's red visage.

Accusation # 4 - SEZs are net losses to the Government on account of loss in tax revenues. - One of the top attractions of an SEZ is that firms operating in it don't have to pay almost any tax for 10 years in the first block of 15 years of operation. So if the Govt. doesn't earn taxes, what is the benefit in all this anyways?

Rebuttal: Even if we don't consider the tax income after the 10-year tax break (1o years = 2 elections, far too long for the political mind to consider), SEZs do result in considerable new income. For example, the employees at an IT/ITES SEZ pay considerable income tax even if the companies don't. Technocity could potentially have 100,000 employees and generating Rs 10,000 Crores of exports. Of this, upto 35% could be salary costs, amounting to Rs 3500 Crores, of which an average 20% tax rate will yield Rs 700 Crores of tax income annually. Add to this the fact that a lot of the non-taxed income will spent locally, which will result not just in economic growth but significant income for the Govt. through VAT and what not. Some critics argue that companies will only shift existing units to SEZs and thus provide no incremental growth. That seems hard to believe in an economy growing at 8% a year and an IT/ITES sector growing at about 25% annually.

Accusation # 5 - SEZs will destroy local industry and trade - ?? (Raised by the Vyapari Vyavasayi Ekopana Samithi)

Rebuttal - Well, frankly what they mean is a mystery to me. Maybe they misspelt SEZ and thought it was some new "cess" on their trades? Other than that it is difficult to see how IT/ITES industries within a SEZ can wreck the local trade. In fact, the money flowing out of the SEZ as paychecks should boost the local economy as we said earlier. Maybe there would be some competition for semi-skilled and unskilled talent, which would force the Vyparis and Vyvasayis to pay their employees more. Or maybe, they heard everyone making a ruckus about SEZs and thought they would drop in their own well practiced two cents?

Accusation # 6: SEZs strain existing infrastructure - Technocity alone will have 12-15 million sq.ft. of space and employ between 100-150,000 people. Won't it wreck the urban infrastructure of Trivandrum, already under pressure from its rapid growth?

Rebuttal: SEZs promote growth and growth can be disruptive as we have seen in the case of Bangalore. However, SEZs like Technocity will be part of Integrated Developments which have their own social infrastructure - malls, hotels, hospitals, schools and residences and basic infrastructure - power, water and sewerage treatment. The vast numbers of people coming to work at such mammoth projects may need tens of thousands of residences which can be developed around them but the infrastructure will be mostly developed within the SEZ itself.
And what additional infrastructure is needed, should be developed speedily like it is being done in States like Gujarat. Opposing SEZs on the count of not being able to do that is like refusing the gift of a Ferrari because you are too lazy to build a garage for it!

In the end, Kerala cannot affort not to have SEZs. Neither can India. So, let's make the best of the situation by creating a careful and comprehensive policy framework to best utilise the amazing opportunities unleased by them!

As for the vocal opponents, let them dispute any of the points made here for all of them are based on fact and sense, which theirs are not. It seems obvious that not many of the said opposition has ever bothered to study the issue in any detail. I guess they all decided to jump aboard the next issue which happened to be passing by......

1 comment:


    The ETIL SEZ has nothing export oriented abt it, with just 13% of the space reserved for office space. Should the government forgo sales tax for construction material for this project?

    I guess the 70% cut off for office space/ commercial makes sense.


Thanks for your comment, I will take a look at it and put it up at the earliest.