Tuesday, February 13, 2007

The Great Indian SEZ Saga

The much awaited and much delayed take-off of the new generation of SEZs has run into another road-block - farmers protests. Is there any cause for optimism in this?

Over 3000 SEZs have been setup in different countries in the world (including in India where the first was set up in Kandla 14 years before China), and the SEZs in each country were different - had subtly different objectives - and achieved different levels of success. While in Mauritius their biggest achievement was employment generation (they provide 24% of the total employment within them) in South Korea they helped establish a services industry in an already fairly industrialized nation. Even the US built SEZs, mainly to uplift urban poor.

It would be fair to say however that out of the 3000 SEZs in operation around the world today, none have been as impacting as the 5 SEZs in China which will go down in history as the foundation on which the Chinese manufacturing behemoth was built. And since India has been building and operating SEZs from well before China, it is generally assumed that these 5 SEZs today are the inspiration behind the new SEZ policy in India. In that context, it would be interesting to note some differences.

For China back in the early 1970's the SEZs were essentially an experiment in capitalism and modernization in an otherwise communist and backward country. For India the rationale is similar to an extent. India is a notoriously difficult place to set up a business (by world standards). From land rights to bureaucratic labyrinths they all contribute to uncertainty in setting up a business in India. If the SEZs address that pain point, then that will be a big plus for India in the ease-of-doing-business ratings. And while SEZ Act 2005 does not go all the way in implementing labor reforms (which got dropped from the original draft), the individual states still have the mandate on that. It will take just one state to show the guts on that front and trigger a domino effect. So there is only reason for optimism there.

Secondly comes the question of size. Consider this: "The top three SEZs in China cover 326 square kilometers in Shenzhen, 132 square kilometers in Xiamen and 122 square kilometers in Zhuhai, compared with 119 square kilometers for RIL's project near Mumbai and 98 square kilometers for the Haryana SEZ." While the RIL projects are the biggest, a majority of the remainder of the proposed 200 SEZs in India are relatively minuscule in size. Critics contend that the main advantage of an SEZ is scale-related.

Point granted - but while we are not looking at a Shenzhen, we are looking at sizes that compete with the rest: for a start. No one is pretending that the current frenzy in setting up SEZs is going to be a one-wave-wonder. We will definitely have wave 2 and wave 3 and maybe more. And the developers of this wave of SEZ building will learn from this round (and so will the governments) and should surely do better in the next waves. So if we let a thousand SEZs bloom then the successful ones will be role models for the next wave. Also as it should be clear, this is where the Indian SEZ model distinctly differs from the Chinese model - and who knows? This model might actually work better. We are letting in all types of SEZs in all different sizes - isnt that the strength of a truly open market?

But the problem that has now put the SEZ program in limbo is related to neither of these. It is related to land acquisition. There are a bunch of criticisms claiming anything from the loss of arable land will affect food output to the jobs actually created will be less than those lost, which range largely from baseless to worst case scenarios. But the real problem, and the one that forced the govt to step in relates to rehabilitating the dispossessed. This is where we differ from China.

China contrary to public opinion does take pain to rehabilitate dispossessed people - but when it cannot, it does not let that stop it. India does not have that luxury - which is a good thing. It is very important to ensure that the people losing land and livelihoods are taken care of, and do not head into destitution. This makes even more sense from an economic perspective.

Essentially, when you are creating value at the scale at which the SEZs are promising, there is surely enough to go around to share with the poor people in the area. Call it CSR at the micro-level if you will, but at the macro-level you are just building up your market, and your hinterland (plus keeping the political peace). So while it may or may not benefit the SEZ developers in the short-run, it is good for the economy as a whole. This is something like the route SemIndia is taking for its fab city project - adopting villages that get affected - effectively rehabilitating them. On the other hand is the route that Reliance is taking for its MahaMumbai SEZ - they are simply buying the land directly from the farmers by paying hefty premiums. While this might seem fair on the face of it, the average poor villager does usually display the financial intelligence to manage economic windfalls of this nature and ends up splurging it away. (To put things into perspective, Reliance has a much bigger project than SemIndia in terms of land and dispossessed families.)

The Reliance approach is just a more advanced form of the approach that most of the governments took leading to the current miasma of farmers' protests. Effective rehabilitation should involve a more holistic solution that leads to the farmers getting established with new livelihoods. Though a challenge this is also an opportunity for the govt to lift some of its citizens from a mere near-subsistence level to living and working in a clean environment with all basic amenities.

More effective rehabilitation of the displaced farmers is a win-win solution for all parties concerned - the politicians get a satisfied electorate, the farmers get a new and better life with much increased economic prospects, and the companies themselves get CSR bragging rights in the short-term, and contribute to building up markets for themselves in the longer term.

In short the govt deciding to re-think the land acquisition procedures is good. This is not to say that I expect the govt will decide to toe my near-utopian line, but something is wrong and whatever they decide I do hope that wrong will be righted a little.

Update (February 20, 2007): HP and CA drop IT SEZ plans in Bangalore and Hyderabad respectively owing to a change in norms. List of approved projects drops to 235.