Economics - The Dumb Debate over SEZs

September 27, 2006

The Congress (I) Conclave in the salubrious environs of Nainital in Uttaranchal ended a couple of days ago. In between pious pronouncements about the welfare of farmers and minorities (all designed to win the U.P. assembly elections early next year), was an astounding statement by Ms. Sonia Gandhi regarding Special Economic Zones (SEZs).

The current coalition government after many stops and starts had approved the large-scale development of SEZs. This was a wise decision approved by the entire UPA alliance, except of course, the Communists, who oppose any initiative that promises progress and prosperity.

Now Ms. Gandhi says that the interests of farmers should not be harmed by the construction of SEZs. What are SEZs? SEZs are large tracts of land that are turned into hubs of manufacturing or service led activity. They fall outside the scope of the government’s tax and licensing structure, which make them nimble and efficient. They are primarily set up to encourage export-oriented manufacturing and services led growth, boost rural employment and enhance the country’s GDP and international competitiveness. All of these are very laudable objectives.

However, as usual, in India , there are fears that there will be unscrupulous land-grabbing of agricultural land, without adequate compensation to local farmers. Instead of setting up a transparent, accountable mechanism that ensures that farmers are adequately compensated for any land bought from them for SEZ development, the government’s policy now is to go slow on SEZs. This is like throwing the baby out with the bathwater.

The need for SEZs is undisputed. India already has too many farmers. Agriculture provides a livelihood to 60% of the country’s population or about 600 million people. However, agriculture contributes only 25% to India ’s GDP. A majority of these 600 million people are marginal, subsistence farmers who would gladly move to other professions, if they were given half a chance. They constitute India ’s rural poor, and are farmers out of compulsion, not choice. This is especially true in North India . Well-managed SEZs will provide the rural poor millions of jobs in manufacturing and service industries, and make a severe dent in India ’s high poverty rate. It would also reduce the migration of the rural poor into cities, in search of jobs. Here is a golden opportunity to employ India ’s rural poor and make them competitive in the global marketplace.

There are other innovative ways in which SEZs can contribute. Instead of paying taxes to inefficient and corrupt state and central governments, companies within SEZs can be asked to build schools and hospitals within the zones they operate in. This would ensure efficient usage of tax revenues without the interference of bureaucrats, and provide India ’s crumbling rural education infrastructure a boost. This would be a great way to educate rural children and also ensure that they have other career options apart from cultivating small plots of farmland.

It does not require a rocket scientist or a doctoral degree in Economics from an Ivy League school to figure this out. All it needs is clear, transparent policies, a well developed game plan, and a few responsible people who will drive this SEZ initiative.

So, do SEZs work? Just look at China – they set up SEZs in the mid 1980s to achieve a quantum leap in their economic growth, and look at where they are today. Hope and pray that at least some of our leaders will help in making this happen in India.