SUMMARY
The Indian government's strategy to promote industrialization and foreign investment by encouraging the establishment of Chinese-style capitalist enclaves called Special Economic Zones (SEZs) has been running into rough weather. Protest against Special Economic Zones and the federal government policy on their establishment have been wide and varied. A number of protests turned violent, leading to loss of human life and reported human rights being violated. This is turn forced the federal government that lays the policy framework and the state governments, that sanction and facilitate the establishment of the SEZs, to review and reframe the SEZ policy. The federal government continues to be keen on the promotion of SEZs as an important instrument in India’s policy to attract increased investment from the Indian as well as international players. More SEZ projects are being approved despite nationwide protests and new and better policies on land acquisition and rehabilitation of displaced landowners have been charted. Protests against the Special Economic Zones have become increasingly widespread and organized and even acquired political overtones. Enterprises and governments looking at these SEZs as potential investment avenues, therefore, need to factor in the potential political, security and socio-economic risks inherent in these SEZs.
INTRODUCTION/HISTORICAL OVERVIEW
A Special Economic Zone (SEZ) is a government designated geographical area that has economic laws that are, in some respects, more liberal than a country's typical economic laws. Special Economic Zones are meant to increase investment, especially foreign direct investment, encourage industrialization, and to promote exports. One of the earliest and the most famous Special Economic Zones were founded by the government of the People's Republic of China under Deng Xiaoping in the early 1980s. The most successful Special Economic Zone in China, Shenzhen, has developed from a small village into a city with a population over 10 million within 20 years and significant foreign investment, especially from the United States and Europe.
India's experiment with special zones started in the year 1965 with the setting of Asia's first Export Processing Zone (EPZ) at Kandla in the western state of Gujarat. Prior to the notification of Special Economic Zones Act, 2005, India had nineteen federal government-recognized SEZs located across the country out of which eight were in operation.
In April 2000, the Government of India for the first time announced the introduction of a formal Special Economic Zones policy in the country. In the year 2005, the federal government, comprising a coalition led by the Congress Party supported by the leftist Communist Party of India, announced The Special Economic Zones Act, 2005, a revised policy framework on the establishment of special economic zones. As of July 2007, more than 500 SEZs have been proposed. The approval and establishment of such a large number of SEZs have raised wide ranging issues, including World Bank questioning the sustainability of such a large number of SEZs. The issues span the socio-political and economic spectrum and have even led to an exacerbation of certain existing security concerns in the country.
NATIONAL POLICY AND GOVERNMENTAL STANCE
India did not have a coherent policy on the establishment and running of Special Economic Zones till April 2000.
The SEZ policy was first introduced in India in April 2000, as a part of the Export-Import (“EXIM”) policy of India. The policy was established considering the need to enhance foreign investment and promote exports. The policy allowed export units to be set up in SEZs for manufacture of goods and rendering of services. The designated duty free enclave is treated as foreign territory only for trade operations and duties and tariffs. No licence is required for import. Manufacturing, trading or service activities are allowed. All the import/export operations of the SEZ units are on self-certification basis. The units in the Zone are required to be a net foreign exchange earner but they would not be subjected to any pre-determined value addition or minimum export performance requirements. Sales in the Domestic Tariff Area by SEZ units are subject to payment of full Custom Duty as per import policy in force. Offshore banking units are allowed to be set up in the SEZs. The policy provides for setting up of SEZ's in the public, private, joint sector or by State Governments. Pursuant to the SEZ policy of April 2000, the Government converted the existing Export Processing Zones located at Kandla and Surat (Gujarat), Cochin (Kerala), Santa Cruz (Mumbai-Maharashtra), Falta (West Bengal), Madras (Tamil Nadu), Visakhapatnam (Andhra Pradesh) and Noida (Uttar Pradesh) into a Special Economic Zones. In addition, 3 new Special Economic Zones were approved for establishment at Indore (Madhya Pradesh), Manikanchan – Salt Lake (Kolkata) and Jaipur (Rajasthan); these have already commenced operations.
On June 23, 2005, the Government of India enacted the SEZ Act. The SEZ Act and the SEZ Rules, 2006 were subsequently notified on February 10, 2006. The SEZ Act, considered by some economic analysts to be one of the finest pieces of legislation that may well represent the future of the industrial development strategy in India, aims to encourage public-private partnership to develop world-class infrastructure and attract private investment (domestic and foreign), boosting economic growth, exports and employment.
The Ministry of Commerce and Industry lays down the regulations that govern the setting up and administering of the SEZs. Though the federal government decides policy matters on SEZs, the state governments play a significant lead role in the development of SEZs in their respective states by stipulating the conditions to be adhered to by an SEZ and granting the necessary approvals. The policy framework for SEZs has been enacted in the SEZ Act and the supporting procedures are laid down in SEZ Rules.
The SEZs Rules that came into effect on February 2006 provided for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments. This includes simplified compliance procedures and documentation with an emphasis on self-certification; single window clearance for setting up of an SEZ, setting up a unit in SEZs and clearance on matters relating to federal as well as state governments; no requirement for providing bank guarantees; contract manufacturing for foreign principals with option to obtain sub-contracting permission at the initial approval stage; and Import-Export of all items through personal baggage. The minimum size of the Special Economic Zone shall not be less than 1000 hectares. Minimum area requirement shall, however, not be applicable to product specific and port/airport based SEZ.
Administrative Set Up For SEZs:
SEZs is governed by a three tier administrative set up
a) The Board of Approval is the apex body in the Department,
b) The Unit Approval Committee at the Zonal level dealing with approval of units in the SEZs and other related issues, and
c) Each Zone is headed by a Development Commissioner, who also heads the Unit Approval Committee.
Approval Mechanism of SEZs
Any proposal for setting up of SEZ in the Private/Joint/State Sector is routed through the concerned State government who in turn forwards the same to the Department of Commerce with its recommendations for consideration of the Board of Approval. On the other hand, any proposals for setting up of units in the SEZ are approved at the Zonal level by the Approval Committee consisting of Development Commissioner, Customs Authorities and representatives of State Government.
Since the introduction of the SEZ Act in February 2006, the federal government has made two amendments to the act, one on August 10, 2006 and the other on March 16, 2006. The amendments fine tuned some basic provisions of the Act while maintaining the basic framework laid down on February 10, 2006.
While the formal policy governing the establishment and operation of SEZs has been relatively consistent, with tactical changes, it is the on-ground implementation of the policy and proposals that has had some serious economic, socio-political and security ramifications.
Setting up of a total of 341 special economic zones has been approved as on July 10, 2007, out of which 130 have been notified. The largest number of 40 SEZs have been notified in the southern Indian state of Andhra Pradesh. As per Ministry of Commerce & Industry, SEZs are projected to have exports of approximately $16 billion in the year ending March 31, 2008. The exports for the year ending March 31, 2009 are projected to cross the $25 billion as more newly notified zones become operational.
CONSISTENCY IN NATIONAL POLICY
Prime Minister Manmohan Singh has taken a personal interest in the framing of the new policy on Special Economic Zones. Economists and business analysts point that the SEZ policy is arguably the second biggest achievement of the present government, the most important one being the agreement with the United States on civilian nuclear energy co-operation.
However, policy division on the establishment of the Special Economic Zones have been widespread. Congress party chief Sonia Gandhi has on multiple occasions pointed out that the establishment of the Special Economic Zones should not jeopardize agricultural prospects.
The Finance Ministry has raised doubts about the financial wisdom of the policy exposing divisions in the government over the issue. Prime Minister Singh has also faced opposition from the central bank over tax incentives to be provided to industries in these enclaves. Finance Minister P Chidambaram has voiced his reservation saying that special economic zones will encourage tax-paying businesses to move to the tax-free zones - and will result in a huge loss of income for the Indian state. His ministry estimates that India will lose around $40 billion as taxes forgone by 2011. This tax revenue is something India desperately needs if it is to plug its budget deficit.
But India's Commerce Minister Kamal Nath says that India will make $5 billion from the special economic zones - and more importantly encourage foreign investors to come to India's shores and set up manufacturing units in the enclaves.
RESISTANCE TO SPECIAL ECONOMIC ZONES
The most vehement opposition to the SEZ policy has come from the Communist Party of India (CPI) and CPI-M (Communist Party of India-Marxist), left political parties that support the present federal government.
The two parties, it may be recalled, have adopted a clear anti-US stance on a number of issues, including economic co-operation. CPI (M) recently protested against the visit of the USS Nimitz to the southern Indian port city of Chennai. The protests were widely covered by Indian and U.S. media and exposed divisions in the federal government over serious policy matters, especially those concerning the United States.\
The fountainhead of protests against the setting up of Special Economic Zones has been West Bengal. The protests against Special Economic Zones have primarily revolved around resistance to confiscation of agricultural land by the state governments for the establishment of the Special Economic Zones. The state governments had been acquiring land to be given to the promoters and developers of the Special Economic Zones under the Land Acquisition Act of 1894 which says that the government can acquire agricultural land if required, often at very low rates.
After, widespread protests in West Bengal, Haryana, Maharashtra and Orissa, a temporary ban was imposed in January 2007 after farmers and land-owners said they were not being adequately compensated for the land.
In April 2007, the Indian government announced a new plan whereby the promoters of the Special Economic Zones would have to acquire land directly from the owners. An upper limit of 5000 hectares was also set as against the earlier limit of 25,000 hectares. Analysts point out that this step would delay the process of land acquisition and increase the cost of acquisition, thereby rendering the establishment of some SEZs economically and practically unviable.
Critics say this is destined to become the biggest land grab in post-colonial India, given the lack of transparency and rampant corruption in government.
Land alienation, the primary cause of the protests against SEZs, is also the root cause for the extreme Maoist insurgency called Naxalism, as corroborated in a media report by Jairam Ramesh, the federal minister for industries. Naxalism has been dubbed as the greatest security threat inside the country by various experts and also by Prime Minister Manmohan Singh.
The anti-SEZ protest reportedly serve as fresh grounds for recruitment of Naxalites. A large number of the approved and proposed SEZs are dangerously close to Naxalite-dominated areas and would, therefore, serve as soft targets for possible guerilla strikes. Naxalites, it may be recalled, had blasted a Coca Cola factory in Guntur in the southern Indian state of Andhra Pradesh in October 2001, claiming the act was a protest against ‘American Imperialism’. Andhra Pradesh, incidentally, is the state with the highest number of proposed SEZs.
Though most of the Special Economic Zones are promoted and developed by Indian companies or groups including Indian companies, the zones are likely to see a significant participation from foreign companies given their tax-free status. Some of the prominent names that have already indicated their intentions to set up units or participate directly in the establishment of SEZs are Nike, Dow Chemical Inc., Hewlett Packard and Flextronics.
Dow Chemical, a Fortune 500 chemical giant, has already been facing stiff protest and
opposition owing to its association with Union Carbide, the company that was involved in one of the worst industrial disasters that took place in Bhopal in the central Indian state of Madhya Pradesh.
SEZs have also been facing a protest from environmental groups who argue that the establishment of larger SEZs would mean destruction of groundwater recharge systems, contamination by release of industrial effluent and crisis of water for the neighbouring communities.
STATE GOVERNMENT’S POSITION
Towards the end of 2006, Buddhadeb Bhattacharjee, the chief minister of the eastern Indian state of West Bengal spent virtually all his political capital to help acquire farmland in Singur for the setting of a small car plant by Tata Motors, a flagship of the Tata Group. The protests against the acquisition of the land and the setting up of the plant reached a high pitch. Booker prize winning writer Arundhati Roy also joined in the protest that set the tone for the challenges to come in bringing into operations the Special Economic Zones approved and notified by the government.
West Bengal, it may be recalled, has had a communist dispensation for a record thirty years but follows Chinese style policy of encouraging foreign investment and capitalism. The state government and the ruling Communist Party of India (Marxist) are also known for their unequivocal anti-US stance. It may also be noted that the CPI(M) forms a key part of the Congress Party-led United Progressive Alliance that forms the federal government. The unsuccessful protest was followed by copy cat protests against another flagship industrial project of the chief minister. This time it was against the acquisition of land for the setting up of an SEZ for a chemical hub in Nandigram by Indonesia's Salim Group. The protests were given a political hue with opposition parties joining the dissenting farmers and soon took a violent turn with lives being lost and human rights being violated. Nandigram saw blatant "war" between cadres of the ruling left party and the dissenting farmers. The protests led to a widespread call for a reassessment of the land-acquisition policy and the rehabilitation of the displaced; the state government had to, consequently, go slow on the acquisition of land for the project.
Singur and Nandigram are tantalisingly close to Naxalbari, the birth place of the Naxalite movement. Naxalites, also known as Maoists, present 'greatest threat to India's internal stability and democratic culture' according to the Indian Prime Minister Dr. Manmohan Singh. Maoists are active in 14 out of the 28 states in the country today and run a proxy, parallel government in areas under their control.
SECURITY IMPLICATIONS
In general, companies have relied on the police to help them take possession of the allotted land rather than trying to engage the affected communities to address their concerns. At least 21 protestors have died in resulting clashes with police.
It is important to note that the opposition to SEZs is quite similar in character to anti-globalization and ‘anti-imperialist’ protests faced by multinationals like Monsanto and Cargill in the country and may add a significant risk premium to doing business in the areas designated.
IMPLICATIONS FOR INVESTMENT
The SEZ Act 2005 permits investments by domestic as well as foreign companies and government bodies or a combination of any. Foreign direct investment in SEZs has been put on an automatic approval route and this represents a significant shift in India's federal policy on SEZs. Since SEZs are deemed as foreign territory for the purposes of business, they represent an important opportunity for businesses looking to avoid the rather stiff tax rates and the industrial /labor laws. Analysts point out that that the SEZs aim to replicate in the manufacturing and services sectors the success that India has had with the Information Technology (IT) and IT-enabled services industries in recent years. It may be noted that under the laws, it's very clear that only new businesses can set up in special economic zones. As such, existing businesses cannot move their offices to take advantage of the tax-free zones.
Companies including the Indonesian Salem Group, Reliance, Tata, Arcelor Mittal and the Korean steel giant Posco are already under fire after state governments forcibly tried to acquire land for their projects.
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