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SEZs boon or bane

An SEZ or Special Economic Zone is a geographically demarcated area which is treated as a foreign territory for the purposes of taxation, labour laws etc. The main objective of a government to set up an SEZ is to encourage domestic, foreign entrepreneurs to set up industries in these zones. The new industries, it is hoped, would generate additional employment and promote economic growth. By offering tax exemptions and freedom from application of various stringent labour laws, the governments woo huge investments in these areas.

On paper this seems to be a good idea and the Chinese experience has only validated it. In the 1980s, the Chinese set up a few SEZs (6 or so) along their coast to promote export oriented growth. They were able to successfully attract huge foreign investments in these zones. Thus China became the pillar of many manufacturing industries like electronic parts, automobiles and spare parts etc. Compared to the Chinese, the Indians took time in this regard. It was only in the late 1990s and early 2000s that the government decided to promote SEZs as an instrument of economic growth.

Since then, it has been a rough ride for the governments promoting SEZs. There were frequent conflicts between various stakeholders like the farmers whose land was to be acquired to set up the SEZs and the industry owners. It has also been alleged that the SEZs were not successful in promoting the kind of economic growth that the government had hoped for. Nevertheless, SEZs did offer a few benefits to the Indian society. They increased the productive capacity of the country by providing quality employment to the millions of educated youth in this country. Thus SEZs are both a boon and a bane.

Lets first discuss the drawbacks of the concept of SEZ and then focus on how to correct these drawbacks so as to ensure that SEZs play a fruitful role in the overall economic growth of our country. The main drawbacks are


1. The SEZ act offers a whole host of tax breaks to the companies that are ready to invest in them. Typically, a company doesn't have to pay income tax on their profits for the first 5 years and then pay 50% for the next 2 years. This could further be extended to 3 or more years. In case of the IT industry, there are instances where in the companies do not have to pay tax for 10 years or so. It is popularly knows as tax holiday. Further, the developers building the SEZ are exempt from taxes on cement, steel they buy and the machinery they might import.


These tax breaks harm the fiscal position of our country and are disproportionate to the export earnings that the companies generate. The moot point here being whats the advantage of offering tax breaks when in most cases, these SEZs contribute to only about 5% of India's total exports. The Small and Medium Enterprises (SMEs) in the Domestic Tariff Area (The area outside the SEZ which is not applicable for any special treatment) earn up 35% of India's export earnings. By creating uneven environment for them to compete, we are only trying to kill the goose that lays the golden eggs.

2. There have been frequent conflicts between the farmers whose land was to be acquired to set up the SEZ and the government, Industry. It has been alleged that government procures the land from the farmers at a price below the prevailing market rates. Some wonder why the government procures the land in the first place. It should be left to the farmers and the industry to decide the price etc. Moreover, there has been criticism that some of the most fertile lands have been diverted to set up SEZs. At a time, when India isn't completely food secure and millions of its people are suffering from hunger and malnutrition, it is not advisable to convert fertile farm land into SEZs. Finally, the farmers who have lost the land lose their livelihood and have to relocate to other areas. Thus they become refugees in their own country. Monetary compensation cannot alone guarantee livelihood to the farmers who lose their land. It is just not the farmers who own the land that are effected. Tenant cultivators and sharecroppers also lose their livelihood.

3. There has been criticism that not all the land demarcated for an SEZ is used to produce goods and services. Only about 25% is used to set up factories etc. The remaining land has been used by the developers to develop real estate and make money out of it. Also, there is no obligation on the companies to export a certain percentage of their output to earn foreign exchange for the country.

4. The SEZ act allows the government to deny labour benefits for the people working in the SEZ. For instance, the the government may decide that for a particular SEZ, the Minimum Wages Act may not apply. This is a gross violation of the directive principles of state policy enshrined in our constitution. For example, article 42 of the constitution urges the government to make provision for just and humane conditions of work. It has been alleged that labour commissioners have been stripped of their rights to inspect SEZs and ensure that humane and safe conditions prevail there.

Thus the current policy of SEZs has seen many drawbacks and it has the potential to raise many social conflicts that India could ill afford if it were to emerge as a first rate economic power by 2020. The following remedies are being proposed to overcome the hurdles stated above.

1. Only the industries within the SEZ must be entitled to tax breaks and that too for a limited period like 5 years with no provision for extension. The SEZ developers should not be entitled to any benefits. There should be a rationalisation of tax between SEZs and Domestic tariff Areas to ensure that the industries in DTAs are not at an advantage. It has been observed that SEZs have not been very successful in adding new investments. There have been cases where in the investments have moved from DTAs to SEZs to avail tax benefits.

2. The farmers must be entitled to compensation at prevailing market prices. The government needs to come up with a base market price for each location and industry would have to pay a price more than the base price while acquiring land. The farmers must be entitled to equity shares in the companies and at least one member of their family must be provided wage employment in the SEZ. The effected must also be entitled to a percentage of small contracts emanating from the companies. If there is a large scale displacement then the government must ensure that the whole community is properly rehabilitated.

Fertile land should never be diverted to setting up SEZs. Saline land and land suffering from various abiotic stresses should be used to set up an SEZ. If acquiring fertile land is inevitable then only rain fed and single crop lands must be diverted. Farms that produce multiple crops within an year and which have good irrigation facilities must never be diverted.

3. There should be a regulation that at least 50% of the land acquired must be used a a processing area. The rest could be used to set up schools , buildings, houses for the employees working within the SEZ. Moreover, companies must be obliged to export at least 60% to 70% of their output so as to meet the main objective of an SEZ - export oriented growth.

4. Labour laws must be applicable within SEZs also. The labour commissioners must have the right to freely inspect the SEZs and report any gross violations with respect to conditions of work. There is simply no justification in providing exemption from labour laws.

To conclude we can say that government policy with respect to SEZs must ensure a fair deal to all the stakeholders - entrepreneurs, SEZ developers, farmers and workers. India must pursue industrialization with a human face. Both the industry and agriculture must advance in a mutually reinforcing manner. SEZs must not be treated as foreign enclaves where in entrepreneurs have unlimited freedom to exploit the labour and maximise profits.

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