The government’s policy on special economic zones (SEZs) has come under fire many a time this decade. It’s again back in the media spotlight, with the Supreme Court’s refusal last week to grant Mukesh Ambani’s Maha Mumbai SEZ more time to acquire land. Botched land acquisition is a central problem, but that’s not the only one: There’s a good case to be made that the government isn’t achieving what it set out to do.
When India started on the SEZ track earlier this decade, it meant to imitate China. There, SEZs—free-trade areas with a liberalized environment that help form business clusters focusing on particular activities—have provoked the envy of the world. But instead of getting manufacturing clusters, India seems to be getting real-estate developers masquerading as SEZs.
Illustration: Jayachandran / Mint
First, too many SEZs have been granted approval. With 568 proposals okayed since 2005, India has lost a lot of potential tax revenue, which the government claims is offset by higher employment. If that’s the case, then it’s doing poorly: Since 2006, SEZs have seen investment worth Rs77,058 crore, but have employed only an extra 214,499 persons—that’s Rs35 lakh for every person hired.
Second, as Partha Mukhopadhyay at the Centre for Policy Research in New Delhi has argued, most of the jobs seem to be generated in only five states—that too in districts already well industrialized or urbanized.
Third, the size and nature of SEZs also raise questions. Mukhopadhyay has shown that as of 2008, 94% of SEZs are less than 3 sq. km in size, most of them in the information technology (IT) sector.
These are, then, not manufacturing clusters. They don’t hire the low-skilled workers who need to be integrated into the labour force, and they don’t build new centres for commerce. If anything, they capitalize—like the Maha Mumbai SEZ—on existing urban centres that will only serve to worsen urban imbalances.
All this lends credibility to the theory that SEZ developers are looking to make a fast buck with real estate. After all, the SEZ Act 2005 only requires 35% of a zone to be devoted to productive activity. For the rest, residential buildings, hotels and office space are attractive diversions from producing goods. The Reserve Bank of India has generally treated SEZs as real estate ventures, not allowing them access to certain foreign credit.
If not for all the controversy SEZs have sparked, the government should at least review its policy for all the unintended effects generated.
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