SEZs and rational expectations

Financial Express, September 11, 2007

By Pradeep S Mehta

The debate on the losses or gains in revenue due to the special economic zone (SEZ) policy is tantamount to missing the wood for the trees. In any event, the debate on numbers is by itself subject to assumption-based opinions across a spectrum of economists, who may not always agree. Besides, it is too early to generate data to enable anyone to speak with conviction. Let us not fall into the trap of numbers, but look at the larger picture. The fact remains that nobody has ever questioned the merits of SEZs or its economic potential. And there is a broad political consensus in the country that the SEZ policy is here to stay for good.

CUTS, too, has done a study recently for the ministry of commerce, but we did not toe their line blindly. We undertook an extensive field survey to see what is happening on the ground. Fourteen SEZs across the country were visited to look into the larger impact (both upstream and downstream) of the functioning of SEZs. We found that SEZs, in addition to export and investment growth, have had a very profound impact on the surroundings, signalling a positive trend, and a significant change in the mindset of the local people.

The new generation SEZs, such as at Chennai, Sriperumbudur, Hassan, Bangalore, Manikanchan etcetera, have created a tremendous local area impact in terms of direct employment, formal and informal activities, consumption pattern and social life in and around SEZs. They are creating jobs for a large number of semi-skilled workers. Wage rates are rising and are higher in SEZs than those outside.

The HSL SEZ at Hassan, Karnataka, has recruited mostly women who have graduated from one of the 80 odd schools in the district. It has, so far, employed approximately 1,700 women from nearby villages. Prior to the establishment of the gems & jewellery SEZ in Manikanchan, artisans used to migrate to Gujarat and its neighbouring states in search of employment, but now with the establishment of the Manikanchan SEZ, they are going back to West Bengal. One has to visit these SEZs to see the energy and vibrancy in the productive environment.

Turning to the question of land acquisition, which has, alas, been skewed by the debate on the Nandigram and Singur episodes, one can strongly argue that land has to be acquired for setting up industries, and land-use change does happen. Recently, in an interview to The Telegraph, Kolkata, the Nobel Laureate Amartya Sen emphatically said, “Prohibiting the use of agricultural land for industries is ultimately self-defeating”.

Land acquisition is a state subject in India. Unfortunately, the liberalisation process in the country has not been matched by reform in the rent-seeking patwari system of the states. Girish Sanghi, MP and industrialist, argued at a CUTS’ parliamentarians meeting at New Delhi on May 3, 2007, that once the SEZ application is approved by the Board of Approval, on the basis of a State Government recommendation, there should be no need for any administrative/legal requirements for land conversion.

According to the commerce department, only 0.000012% of India’s cultivable land will be used for establishing SEZs. Following the land-acquisition related controversies, an eGoM has decided that state governments would not buy land for private entrepreneurs and that only barren/wastelands or single croplands would be acquired for SEZs by them directly. There is now a consensus across political parties and CSO/NGOs, against the acquisition of agricultural land by private SEZ developers even at market prices. On the crucial issue of rehabilitation of landowners, another government policy is in the making to ensure that the dispossessed are suitably compensated.

Demolishing the romantic argument of farmers in love with their land, Sharad Joshi, MP, observed at a May 2007 meeting that in today’s changed circumstances, they are ready to sell it for their own betterment. If given the option to sell their land (obviously at ruling market prices), which amounts to voluntary retirement from farming, and gain employment in industrial activities, they will opt for it. This has been corroborated by many, including CUTS staff via personal interviews with farmers.

One innovative model to deal with rehabilitation came up in the case of the JSW Steel plant in Salboni, West Bengal, where farmers were compensated with cash, shares in the company taking over the land and also an assured job to each family. Even if the land-owning company fails, the landowner gets the market price for his land.

In conclusion, the imperatives of SEZs in the present context are clear, but some caveats should be recognised. There may be a potential threat of land being diverted to the real estate business, as opined by Rahul Bajaj, MP and business tycoon. At the same meeting, he said that the larger non-processing area will attract developers for the development of shopping malls, recreational facilities and even golf courses. These are some of the concerns which need to be tackled head on before the country can realise the benefits of the SEZ policy.

The author is Secretary General, CUTS International, a leading research, advocacy and networking group and can be reached at

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