SEZs : One Step Forward and Two Steps Backward

Recent press reports indicate that the Singapore government is unhappy with the sort of uncertainty that wrapped the future of SEZs in India. In a letter written to the Prime Minister and the Minister of External Affairs, the Singapore High Commission reported to have written that “after going to such lengths to woo investments from the country, the Indian Government should not have allowed such uncertainty to seep in.” A similar concern was expressed by Robert Soros of Soros Fund Management, which is currently looking for a suitable place for establishing a multi-product SEZ.

There is nothing new in such reports: we are known to announce a new policy with all fanfare today and drag it into an unending debate, politicking—all ending up in utter chaos the next day. Indeed, it is this very nature of our reforms—one step forward and two steps backward—that created uncertainty in the minds of prospective investors, which ultimately failed the nation in building the much-needed infrastructure, except perhaps in telecom through private-public partnership. 

How else can one explain the current state of utter chaos that engulfed SEZs, which are conceived as “islands of excellence” to make world-class infrastructure available to its occupants at globally competitive prices? They are assumed to attract global as well as domestic investments to set up manufacturing and services bases to compete successfully in the global market. There is indeed nothing new about them, for they are essentially based on the successful role played in transforming the Chinese economy by attracting unprecedented inflow of FDI into that country and, in turn, creating massive employment opportunities for the local populace. There is, however, a slight difference between Chinese and Indian SEZs: In China, it is the government that built world-class infrastructure in the world-size SEZs, while in India it is expected that the private sector would develop world-class infrastructure and attract global players to establish their manufacturing bases. This very model will take more time than what China took to reap full benefits from these “islands of excellence” and as though it is not sufficient enough, the present imbroglio over land acquisition.

The proposed 237 SEZs would entail an investment of Rs. 2,50,000 cr with a potential to create 30 lakh jobs. But their establishment calls for roughly 34,500 ha of land. Since these are to be established by private participants, state governments started wooing the investors with all concessions such as making a contiguous piece of land available by acquiring it from farmers. This resulted in the displacement of farmers, who obviously took to the streets protesting against forceful acquisition of their land.

Perhaps, moved by the plight of displaced farmers, the Prime Minister in his Independence Day address to the nation on August 15, 2006 said: “While we are moving fast to develop every region of our country, we have to take pains to see that this does not adversely affect those who are displaced …Our government will soon put in place a comprehensive rehabilitation policy so that displacement does not lead to impoverishment, and those who lose their land benefit from subsequent economic development.” However, nothing substantial has so far been done. The result is: “uncertainty”. It is no good, for any further delay would only divert global investments to other countries.

To overcome these hurdles, rehabilitation package must be drawn quickly and must be executed with a human face at every stage of its implementation. As agricultural land is known to generate cash flows to a farmer in perpetuity, any attempt at rehabilitating him should invariably bear this fact in mind. This necessitates that the rehabilitation package must ideally guarantee perpetual income to the farmers. This can be achieved in two ways: one, rehabilitate them with alternate arable land with necessary technical and financial assistance to develop it; or alternatively, pay market price to the acquired land and also make them shareholders in the proposed SEZs so that the perpetuity of their income is assured. Since cash generation in the newly established SEZs would take time, farmers may initially be issued convertible debentures, with a notified date of their conversion into shares. The stakeholding can be worked out based on the cash flows foregone from the land less the risk-free returns from the sale proceeds of the land. Here, it is also essential to factor the impact of future technological advances that can improve the productivity of farms.

As the Prime Minister wished for, if the displaced farmers are to “benefit from subsequent economic development” over their lands, governments must initiate steps to “re-skill” the displaced farmers so that they can get employed in the proposed industrial units in SEZs. Secondly, farmers must be taught how to make a living away from agriculture. All this could be achieved through public-private partnership.

To achieve double-digit growth, we need to establish SEZs without further loss of time, for it alone ensures industrial sector participation in the growth process. Their establishment demands additional land. And land should not be acquired from farmers forcefully. This dilemma needs to be solved with a human face. And it needs to be addressed immediately.

(March, 2007)