Despite intense opposition and public debate over Special Economic Zones (SEZs) policy, the Board of Approvals (BoA) cleared 31 proposals including the South Korean Posco’s proposal for a Rs. 55,000 crore (USD 12 billion) steel project. With this set, the total SEZs approved by the BoA is at 181.
The Ministry of Commerce and Industry, supported by the Industry, is projecting SEZ as the panacea for employment, industrialization, and rapid growth. The Ministry of Finance (MoF), supported by the {Reserve Bank of India (RBI)} and the International Monetary Fund, question this policy saying that it will cause serious deficits in revenue. The RBI has instructed commercial banks to treat SEZs as real-estate projects for assessing and financing purposes. While the RBI praised the SEZ policy, it also cautioned on the lack of adequate definition and warned against trivializing this policy for petty industry gains.
Political parties in opposition and communist allies have deprecated the debate arguing that this ill-defined policy is a real-estate scam. Aimed at scoring political points, the United Progressive Alliance Chairperson Sonia Gandhi says that the Government should not divest farmers of their land in order to assist industry. Prime Minister Manmohan Singh seemed to support the MoF position but is reasonably vague prompting the Commerce and Industry Minister Kamal Nath to clarity from Singh.
The political storm has caused the BoA to clarify that SEZs may be set up only on barren land, single cropland, and wastelands. The Posco project is the largest so far and the Government has granted it 1601 hectares sparking widespread protests and accusations of irregularities. There is fear that Posco will use the subsidized land and access to iron ore to export most of it out of India and create only low end employment. Chief Ministers of three states with large ore deposits, with support from Federal Minister for Steel Ram Vilas Paswan, have already written to Singh asking that he ban the export of ore. In response, Singh has called for a review of ore export policy.
The SEZ debate has to go back to the basics. The concept of an SEZ is that it will contain industries and manufacturing units allied to and related to some special area will be co-located in one area so they can benefit from multiple benefits. These will include avoidance of cascading taxation, reducing paper work, access to captive markets, increasing economies of scale, integrated infrastructure development, specialized infrastructure development, etc. China has overloaded this concept in an exemplary fashion to derive industrialization benefits.
India ’s policy on SEZ is at best confused. Instead of asking for large scale investments that houses large-scale supply chain and vertical process integration, it has positioned the policy as a tax avoidance mechanism. Hence, even proposals that do not bring operational, scaling, and employment benefits are routinely approved and therefore inviting criticism of nepotism, allowing profiteering, etc.
For Indian industry to be competitive, the Government’s presence and interference has to be minimal. However, this does not mean that the Government should actively encourage profiteering of some industries who know how to work the system.
