By Jayati Ghosh
The Special Economic Zones Act 2005 came into force in February 2006, and has already generated much controversy across the country. Concerns have been expressed about the aggregate social and economic costs of SEZs, which make the net benefits uncertain. There are three major areas of concern: the fiscal costs; workers’ rights and net employment generation; and land transfer, dispossession and displacement.
The issue of land acquisition has become the most controversial and raised the greatest political response in India. Of course this is an important issue, but it can be argued that the areas of policy concern relate more to the process of land transfer and the nature of compensation and rehabilitation of displaced persons, rather than to whether there should be a change in land use per se. Some opponents of SEZ have argued that any transfer of agricultural land to non-agricultural purposes (whether it be for industry, real estate development or other activities) is invalid, and should not occur. However, this is clearly an extreme and unjustifiable position.
The process of development — even the most equitable, broad-based and democratic sort of development — will necessarily require that land use be shifted from agricultural to non-agricultural purposes as economies and societies become more diversified. This is not only inevitable but even desirable in the long run, as long as food security issues are adequately taken into account. However, it is absolutely necessary to ensure that those who are affected by changing land use — which includes not just those with land property titles but all those who had a source of livelihood from that land — are adequately compensated and rehabilitated. Since land use is certainly going to keep changing rapidly, and not necessarily only for SEZ development, this is one of the central policy questions of our times.
In the specific case of land appropriation for SEZs, the question of ownership and control is also critical. In India, the current rules require only 25 per cent of the land to be used for industrial processing purposes, allowing the remaining land to be used for any other purpose. This means that real estate developers can engage in major land grab in the guise of SEZs. Clearly, the rules must be changed to prevent or at least reduce this possibility.
One response to the issue of land grab has been to argue that the state should actually stay out of this altogether. After all, it is the power of eminent domain of the state that allows land to be taken over for national development purposes. However, leaving land use to market forces — or to private developers to engage in transactions with individual landholders — may be even worse. Firstly, it means that there is no chance of compensation of all the other stakeholders who have been adversely affected, such as tenants and agricultural labourers on that land. Secondly, it allows for the possibility of large purchasers using pressure tactics or other methods to acquire land, in effect making offers that can’t be refused. In situations of unequal power it also means that small land holders are less likely to receive the true value of the land. Therefore the government must be involved in this process, but in a way that ensures that all those who stand to lose through the land acquisition are properly compensated.
Given recent public concerns about land acquisition, it is worth examining how the SEZ Act has worked thus far in different states of the country. By early October 2007, 15,245 hectares of land had been notified under SEZs across the country, and 52,091 hectares had been approved. But only five states have dominated in getting approvals for and actually setting up SEZs. These states are Andhra Pradesh, Maharashtra, Gujarat, Karnataka and Tamil Nadu, which together account for 76 per cent of the number and 90 per cent of the area of notified SEZs. They also dominate in future expansion plans, accounting for 76 per cent of the area under approved SEZs.
Andhra Pradesh and Maharashtra clearly lead the pack in terms of notified and actually functioning SEZs, and have actually given away very large tracts of land for individual SEZs unlike most of the other states. In Andhra Pradesh, just two SEZs in Kakinada and Visakhapatnam account for around 6,500 hectares. In Maharashtra, the Navi Mumbai SEZ alone is spread over an area of around 5,000 hectares, including 1,850 hectares of regional park zone.
This is interesting to note, given the relative lack of national media attention to such land transfer in these states. It is also worth noting that the compensation given for such acquisition in these states has been well below that offered in some other states such as West Bengal, where there has been much greater and more vocal opposition to very small tracts of land being acquired. In West Bengal, thus far only two SEZs have been notified involving only 77.5 hectares of land. Even the total approvals are for 14 SEZs which will cover 366 hectares.
Another important question is whether SEZs actually generate more employment than would otherwise have come about, and whether the terms of this new employment are acceptable and desirable. A major problem with SEZs in many countries is that they propose to relax or even do away with many laws relating to labour protection and even crime, for the purpose of attracting investment into these zones. The current Indian law does however provide for the same legal structure of labour protection within SEZs as in the rest of the economy, but of course it is necessary to ensure that these are implemented.
But the greatest problem with the SEZ Act in its current form is the huge fiscal losses that will occur because of the tax incentives and hidden subsidies being provided to SEZ developers and producers within the zone. The tax holidays in the SEZs provide 100 per cent exemption from income tax on profits for the first five years of production and 50 per cent for the next five years. Even land developers are to be given tax breaks.
These amount to appalling losses in terms of foregone revenue — the finance ministry has estimated that if total investment in SEZs is around Rs 360,000 crores, the revenue loss to the state exchequer would be more than Rs 174,000 crores.
To give up such a huge amount of government resources is of course a major crime given the needs of Indian society today and in future. But what is at stake is more than the revenue losses, enormous as they are. Providing such massive tax giveaways encourages investors to shift their production from other locations to SEZs, in order to benefit from the tax holiday. This means no net benefit to the economy from additional investment, since it is simply moving from other areas.
So there is clearly much that is wrong with the SEZ Act in its current form, which is why it should be opposed.