The department of commerce recently reiterated its position that special economic zones (SEZs) are a success. The projected benefits, based on the commitments made by developers in their applications, supposedly offset the various costs of land acquisition and the notional loss of future tax revenues. But while the costs are real, are the promises equally credible?
The official website www.sezindia.nic.in provides data on 154 notified SEZs that propose to occupy 20,388ha, i.e., about 204 sq. km. Data for other notified SEZs are not yet available. Also, while the name, location, area and type of SEZ are available for all, data on other items mandated in the SEZ application are not available for all 154 SEZs. As shown in Chart 1, data on foreign direct investments are available only for 15 SEZs, on proposed investment by units for only 47 SEZs and even employment data, the raison d’être of SEZs, are provided only for 110 SEZs. Were other SEZs approved even though they did not provide the mandated information?
Based on this data, provided by the ministry itself, what can be said about the nature and credibility of the benefits from SEZs?
SEZs: False Promises? (Graphic)
Chart 2 looks at the share of SEZs by sector and state. It groups SEZs in four categories, viz. (i) Existing export strengths, i.e., apparel, textiles, gems and jewellery, footwear and pharmaceuticals (ii) IT/IT-enabled services (ITeS), which includes information technology (IT), ITeS and electronic hardware, which is a small proportion of this category (iii) Multi-product SEZs and (iv) Others. Chart 2 also shows the share of Andhra Pradesh and Gujarat and of five states, i.e., Karnataka, Maharashtra and Tamil Nadu (TN) in addition to these two, all of which have comparatively well developed industrial bases, in SEZs.
It is clear that the IT/ITeS sector dominates with 99, i.e., 64%, of 154 SEZs, though they occupy only 14% of the area. Eight multi-product SEZs dominate in size, occupying 58% of the area. As for proposed investment by developers, of a projected total of more than Rs100,000 crore, apparently over five years, 46% is in IT/ITeS, another 4% is in existing strengths and 25% in multi-product SEZs, amounting to 75% and of the remaining 25%, port and power account for 17%. Of the Rs166,785 crore of proposed investment by units, just 9% is in IT/ITeS, another 4% is in existing strengths and 78% in multi-product SEZs, of which half is in just one 10 sq. km. SEZ in Kakinada, Andhra.
Despite the oft-stated focus on manufacturing, employment is even more skewed towards IT/ITeS. Of the proposed direct employment of 2.14 million, IT/ITeS is 61% and another 15% is in existing strengths with a further 21% in multi-product SEZs, amounting to 97%. Similarly, of the proposed indirect employment of 2.94 million, 68% is generated by IT/ITeS, another 12% is in existing strengths and 17% in multi-product SEZs, again amounting to 97%.
The geographical picture is similarly concentrated with 76% of the SEZs by number and 92% by area in five states. Of this, 67% of the area is in Andhra and Gujarat. A full 83% of the proposed investment by developers is in five states with 62% in just Andhra and Gujarat. In the case of investments by units, 92.4% is in these two states.
Further, 40% of the proposed direct employment is in Andhra alone, of which two-thirds is from IT/ITeS SEZs. While the five states appear to account for a relatively small 76% of the proposed indirect employment, this share jumps to 92% if one replaces TN by Punjab, for reasons that will become clear soon. Even within these few states, SEZs are concentrated in a few districts. Chart 3 shows the share of SEZs across 20 districts, which account for 71% of SEZs by number, 82% by area, 88% by number of direct jobs and 89% of the indirect jobs generated. Within them, the top five districts in each category account for 43% of the number, 53% of the area, 57% of the direct jobs and 79% of the indirect jobs generated.
As is evident, these districts include all the major cities except Kolkata and many emerging metros, e.g., Ranga Reddy is the district around Hyderabad. This trend is confirmed by Chart 4, which shows that 124 and 148 of 154 SEZs are in districts that have an urban population and literacy level, respectively, that is higher the national average, while only 35 SEZs are in districts with a higher-than-average population of scheduled castes.
Regardless of this fact, the urban aspects of the SEZs have been ignored with near-criminal neglect of urban planning issues in the legislative and administrative framework for SEZs. So, if the SEZs were to succeed, they will degenerate into the same kind of urban mess that we see in our cities today, for the same reason—lack of governance. Given their location, the urban outgrowth from the existing cities and that from the SEZs will merge to form a large chaotic unplanned morass that will enclose the SEZ. The recent controversy in Goa, which challenges the state’s right to determine land use, needs to be seen in this light too.
Put simply, the proposed SEZs are concentrated in sectors of our existing strengths, such as IT and ITeS, and located in districts that are already relatively urbanized and developed, even without taking into account SEZs near large metros that have yet to be notified.
But is even this limited promise credible? Are the commitments made by promoters of SEZs binding? Is there any enforcement mechanism? What will happen if the projections are not met? The answers to these questions are, as yet, unknown. Nor is it easy to hold people responsible for outcomes determined arguably by the vagaries of the market, even though real costs may have been incurred on the basis of such projections.
But surely, some test of reasonableness is not much to demand from the Board of Approval, composed of 17 officers of the Government of India and one nominee of the state government (a telling commentary on the role of state governments), and one IIM professor. In accepting these projections, is this body applying its mind? Unfortunately, it does not appear so.
Usually, comparable projects should have similar characteristics for parameters, within some acceptable range. Part of the appraisal process is designed to verify this. In the case of SEZ approval, however, this does not seem to be the case. Chart 5, which uses data from a subset of 87 SEZs only from the IT/ITeS sector, shows a wide range of variation in a few basic parameters across different SEZs.
The investment by the developer varies from less than Rs5 crore per hectare to Rs200 crore per hectare. The variation in employment projections is even more, from less than 100 direct employees per hectare to more than 5,000 per hectare, and less than 10 employees per crore of developer investment to more than 2,000. The ratio of indirect to direct employees ranges from less than one-tenth to more than 10 (indeed, one SEZ has a ratio of 600!).
Indeed, of the approximately two million indirect jobs to be created by the IT/ITeS SEZs, over half, i.e., 1.1 million jobs, come from just two SEZs! Sanghi SEZ near Hyderabad proposes to create 600,000 indirect but only 1,000 direct jobs on a 200ha SEZ. Similarly, almost the entire proposed indirect employment in Punjab and 17% of the total nationally comes from just one SEZ. Incredibly, Quark City in Mohali proposes to create half a million indirect jobs and directly employ 55,000 IT/ITeS workers on a 13.75ha plot. If we could replicate Quark’s proposed employment intensity across the approximately 20,000ha of SEZs that have so far been notified, we can create more than 500 million jobs!
This kind of variation for key parameters of interest in a relatively well understood sector such as IT/ITeS is difficult to explain as variations across business models and leads one to suspect non-application of mind at the approval stage.
This apparent mindlessness infects not just approval, but also the sense of priority in monitoring. Regardless of the statement by Kamal Nath in Parliament that “we no more talk of exports to earn foreign exchange… We kept the focus on how we would generate employment,” Form-I, which is supposed to monitor the activities of units in the SEZ, focuses almost entirely on checking “net foreign exchange” earned, devoting two pages to gathering the relevant details. Employment, on the other hand, merits one line, giving the number of men and women employed, with no information about wages, quality of employment, etc. Not only is the ministry willing to baldly accept averments that half a million jobs will be created from a 15ha zone, it does not appear particularly bothered about monitoring the promise either.
Thus, based on data from the ministry’s own website, it appears that the much-touted benefits of SEZs are overstatements, if not outright lies. The government’s appraisal process appears slipshod with no apparent standards that do not even insist on complete information being provided. It is on the basis of such figures that the promise of SEZs is being sold.
Worse, if SEZs were for real, they foreshadow a promised land where almost 90% of the jobs, most of them in IT/ITeS and not manufacturing, will be available in 20 relatively well-developed districts. The government is not prepared for this concentration and appears unwilling, if not unable. to manage it, with no evidence of the thinking that would be necessary, if the SEZs were to actually succeed and grow into cities.
The government’s behaviour thus far inspires little confidence in its ability to define priorities and regulate and manage the phenomenon called SEZs. It appears to believe it can abdicate governance and blindly outsource the task of development to the private sector. But remember that SEZs were a necessity that arose out of a failure of governance; the inability of government to provide a transparent and well-administered regulatory environment and efficient infrastructure services necessary for vibrant economic activity. Why should it be a surprise if such failure of governance is repeated in the slipshod and mindless manner in which SEZs are being regulated, their proposals approved and tall claims advanced on their behalf?
(Partha Mukhopadhyay is senior research fellow at the Centre for Policy Research, New Delhi. These are his personal views. A full version is published as The Promised Land of SEZs in the January 2008 issue of Seminar available at www.india-seminar.com. Comment at firstname.lastname@example.org)