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Liberalisation,
its advocates argue, is a flattening device. By breaking
down barriers and abandoning State policies that privilege
the few, it ensures that the market rewards the fittest
and the best, whether large or small. This perspective
is wrong because the State never withers or disappears,
but merely changes the rules of the game. And since
the game under a neoliberal order is defined as one
in which the private sector must lead economic development,
growth ''success'' is predicated on protecting and enhancing
private profit. New forms of State intervention are
inevitably used to realise this goal.
The policy to establish Special Economic Zones (SEZs)
is a recent example of this tendency. Legislated into
effect only a year back, the policy is already proving
controversial because of its partial success. Partial
because few (new) SEZs have been in operation for long
enough to be evaluated for export success. On the other
hand, the government has received a large number of
applications to establish such zones and reports indicate
that permission to develop more than 180 SEZs involving
thousands of acres of land across the country has been
granted. Thus far the success of the scheme has to do
with its ability to attract the interest of real estate
developers and the ability of the State to use its power
of eminent domain to mobilise the land need to ensure
this limited success.
There are two questions that arise in this context.
Why is there such an interest among private developers,
including property developers, to rush into the area
of SEZ development? And, what are the prospects that
this would make India a major exporter with a global
footprint of the kind that China (whose example ostensibly
inspires this policy) has?
The interest of developers of the SEZs is easily explained.
So long as they have the support of the State with its
power of eminent domain, they would be able to obtain
access to large tracts of land at prices that are likely
to be cheap relative to their post-development values
and possibly also relative to prevailing market prices.
In addition, in lieu of their activity contributing
to an expected export effort they are provided huge
tax concessions. When computing their total income for
tax purposes, developers are allowed a deduction of
an amount equal to one hundred per cent of the profits
and gains derived from SEZ development for any ten consecutive
assessment years during the fifteen years after the
notification of the zone concerned. These benefits come
on top of duty free import/domestic procurement of goods
for development, operation and maintenance of the SEZ,
exemption from Service Tax /Central Sales Tax and exemption
from Service Tax. Further, the income of infrastructure
capital funds/companies and individuals investing in
these SEZs are exempt from Income Tax, facilitating
the mobilisation of capital for the development.
The issue that remains is whether the developer would
be in a position to earn an adequate income from the
activity to capitalise on the tax concessions. This
would depend on the set of activities that the developer
can engage in for commercial gain and the attractiveness
of the SEZs as potential sites for units that would
serve as the clientele for the developer. The activities,
of course, are multifarious. Provision of built up sites
and space with township infrastructure for approved
SEZ units on a commercial basis, provision and maintenance
of services like water supply, security, restaurants
and recreation centres on commercial lines, the right
to generate, transmit and distribute power, and so on.
Thus, so long as the developer can find the clientele,
huge untaxed profits are guaranteed. But would producers
and service providers rush to the SEZs just like developers
are moving in to create them? We must recall that the
SEZs policy is an extension of the earlier policies
with respect to free trade zones (FTZs that have now
been converted into SEZs) and 100 per cent export oriented
units (100% EOUs). Under the latter, even units set
up in the domestic tariff area (DTA) specifically for
export were to be provided benefits like duty free access
to capital goods and inputs for export production and
a direct tax holiday on profits earned from exports
to the extent of 100 per cent of profits for the first
five years and 50 per cent of profits for a further
five years. The logic of the 100% EOU policy was that
units unwilling to locate in FTZs but achieving the
export targets and accompanying conditions associated
with FTZ units should not be deprived of the benefits
offered to the latter. Now, in a turn of policy, the
SEZs policy seems to once again favour clustering of
exporting units provided special benefits in an earmarked
space. This would obviously mean, if everything else
remains the same, that unless starved of land and infrastructural
facilities elsewhere in the country, there would be
no rush of exporting units to the SEZs. In a large country
like India, this is unlikely to be a motivation.
The expectation of a major rush of units to the SEZs
that warrants the large number of applications for setting
up such zones must therefore be related to some other
factors. In particular, it must be related to the likelihood
of better concessions being afforded to units set up
in SEZs relative to those located outside. What then
is the difference between the SEZs policy and the earlier
one relating to 100% EOUs? Principally, under the new
policy, the government has relaxed conditions required
for a unit to be considered an exporter needing special
concessions. Units qualified as being 100% EOUs under
the pre-existing policy needed to: (i) be net foreign
exchange earners, which earn more foreign exchange through
exports than then they spend on imports, technical fees,
royalties and repatriated profits; AND (ii) sell (after
paying applicable taxes) no more than goods valued at
50 per cent of the FOB value of their exports (10 per
cent gems and jewellery units). Thus, there were clear
limits (defined relative to export contribution) on
the extent to which even units that were net foreign
exchange earners could sell their wares in the domestic
tariff area, with the limits being higher in the case
of items with low domestic value added like gems and
jewellery.
The change in the new policy is that that there is no
limit, defined as a ratio to the FOB value of exports,
that applies on the sales by units in SEZs to the domestic
tariff are. The only requirement for qualifying as an
exporter is to ensure positive net foreign exchange
earnings. This should increase the flexibility of an
SEZ unit in terms of its sale to the domestic market,
subject to the customs duties applicable to the commodity
concerned. However, since imports from the Indian market
(DTA) are to be deducted from export revenues when calculating
the net foreign exchange earning of the unit concerned,
this increased flexibility is limited. Hence there is
no overwhelming reason to believe that units of a kind
that were not interested in operating as 100% EOUs under
the earlier policy would choose to locate in SEZs.
There would be a few areas where the policy is likely
to encourage production aimed at the domestic market
through units established in the SEZs. These are sectors
restricted to large firms, such as those producing items
reserved for the small scale sectors, which would be
able to undertake such production within the SEZs. Moreover,
with foreign firms allowed to set up units with no cap
on equity holding and with access to the full range
of concessions, they too may find production for the
Indian and regional market based in SEZs a desirable
option relative to export from abroad. The export success
of the SEZs would then depend on attracting substantially
export oriented units, including transnational firms
that choose to use these SEZs as sourcing hubs for exports
to the regional market. But, given past experience,
it is not clear that the mere creation of SEZs would
substantially change the trajectory of export growth
from India as happened in the case of China.
In sum, there is no definitive basis for the expectation
that a large number of units would be willing to set
up in the SEZs as to ensure adequate clients for the
developers. This has implications for the future direction
of the SEZ policy. If export zones fail to attract adequate
number of clients, what happens to the land acquired
by the developers through the State? There is reason
to believe that the State, to justify its actions would
have to relax its definition of net foreign exchange
earnings and regulations on land use to make the scheme
a ''success''. There have been other instances, such as
the migration from a fixed licence fee to a revenue-sharing
scheme in the telecom sector, which reflect adjustments
made to render liberalisation a success.
If that happens, the SEZs would become locations for
production for the domestic market with adverse implications
for existing domestic producers. The real gainers would
be the developers, who would make large tax free profits
partly at the expense of the State. Add on the fact
that the State is using its powers of eminent domain
to acquire land at relatively low prices for these developers
and there is additional profit being made by the developer
at the expense of the original owners of the concerned
property, with the explicit support of the State. In
sum, the whole scheme is one which paves the way for
private capital to make huge profits at the expense
of the small property owner and the State with limited
benefits in the form of foreign exchange revenues—a
process which is nothing short of a crude form of primitive
accumulation of capital.
Not surprisingly, the rush to set up SEZs has set off
opposition to the government indiscriminately using
its power of eminent domain to mobilise land for the
purpose; spawned criticism of the inadequate compensation
afforded to the original owners of the land in a situation
when it is being transferred to speculative, profit-making
developers; and raised concerns about the likely transfer
of cultivable or potentially cultivable land away from
agriculture to industry, with implications for the country’s
agricultural production capabilities.
All this is legitimised by neoliberal ideology which
privileges the ''notion'' of export over production for
the domestic market, favours private capital and benefits
it with ''public-private partnerships'', and honours profit-making
independent of how it is ensured: apologies for a policy
regime that while pretending to ''roll-back'' the State,
uses it to enrich big investors, including speculators.
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