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Zombie zones?

There is need for greater clarity on India's special economic zones.

October 1, 2006

The future of India's special economic zones (SEZs) remains unclear following differences within the government, lack of orientation and the Reserve Bank of India's reservations on the economic impact of such zones.

The initial rush for SEZs has come down after the government lifted the cap on the number of SEZs to be developed. The SEZs are touted as tax-free havens to be developed by the private sector with the government contribution in terms of land. However, the land part has attracted many frivolous players into the game, who see SEZs as real estate play.

Clarity is still to emerge on the type of land to be allotted for SEZ development. To begin with, the government had no clue about whether the land to be developed should be barren land or farm land. It was only after Congress president Sonia Gandhi's remark that prime agricultural land should not be allotted for SEZ development that commerce minister Kamal Nath put it in words. 

In any case, it is the state government which allots the land for SEZ development to the private sector. So, the Centre can easily wash its hands off the land angle, passing buck to the state capitals. There is already a view that SEZs are becoming an elaborate land scam. 

Even before Sonia Gandhi's comment about SEZ development, there has been dissent within the government. Finance minister P Chidambaram was the first to voice concerns of tax flight to special economic zones. Since SEZ are tax-free for a specific period, the ministry fears that corporates will shift existing operations to the SEZs to avail of tax benefits. However, the commerce ministry is of the view that SEZ are meant for exports; and since export profits are not taxed, there is no question of any tax evasion through the SEZ route.

Kamal Nath has been campaigning for SEZ development through various fora, but his charisma has not been enough to sway the Reserve Bank, which recently said that SEZ is nothing but real estate. Since banks will be required to provide for SEZ loans the same way as loans to commercial real estate, the RBI move is expected to be a disincentive for banks to lend SEZs and hence slow down SEZ finance and development. Stung by the Reserve Bank views on SEZs, Kamal Nath has now taken the issue to the Prime Minister, seeking his intervention. 

Not surprisingly, banks are not willing to open the purse strings for SEZ finance. At a recent meeting in Mumbai, ICICI Bank MD & CEO KV Kamath said that banks will wait for policy clarity before taking a stand on SEZ lending. Later, many other bankers are reported to have echoed his view. This does not augur well for the development finance part of special economic zones.

Half-way through the SEZ clearance muddle, the government changed norms for SEZ development - setting minimum capital to start an SEZ, how much processing and non-processing areas can be set apart, how much facilities for single-product and multi-product SEZ, how many hospitals and beds, how many apartments etc. However, this micromanagement of SEZs goes against the grain of SEZs as private sector havens to breed and promote entrepreneurship.

Mukesh Ambani-owned Reliance Industries has planned a mega SEZ in Maharashtra at Rewas, which is off the Mumbai creek. To reach Rewas from Mumbai city now will take about 4 hours through the existing land route. This won’t make the Reliance SEZ attractive. However, Reliance hopes that by the time the SEZ is built up, the Mumbai Trans-Harbour Link will be a reality, connecting the island city to the mainland with a sea bridge. The future of the Reliance SEZ depends on this vital link. The sea link will reduce travel time from Mumbai to Rewas to just half an hour.

Already, there are protests brewing against SEZ development among people who stand to lose their land. Fisherfolk of Alibag are already worked up over their land reportedly being marked out for airport development; news of the Reliance SEZ in the neighbourhood has added fuel to the fire. It has been alleged that the SEZ is slated to come up in ecologically-sensitive areas and will violate Coastal Regulation Zone rules.

The Subhash Chandra-owned Essel Group has also been interested in developing an SEZ off Gorai in Mumbai. The planned entertainment SEZ has also drawn protests from people of the locality, who say that land used by fishermen is being hijacked for SEZ development. News reports say that the state government has already cleared land for the SEZ, without taking the ecological aspects into account.

It now appears that the SEZ Act was framed without giving thought to most of the subsidiary issues. Though cabinet ministers have toed the Sonia line on no-farmland-for-SEZs, this is still to be put on paper. The Act does little to check rampant real estate development and land-grabbing under State auspices. There is also no consensus, even within the government, on the tax implications of SEZs in India. The RBI concern that this will lead to distorted development has also not been addressed. It is time the government takes a holistic look at these SEZ aspects in their entirety, before the Board of Approval for SEZs sits down to clear even more applications.


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