Friday, July 27, 2007

Special Economic Zones in India

This past two days I have been in Delhi at a conference promoted by academics and policy makers to talk about Special Economic Zones (SEZ) in India. The idea seems to be the brain child of someone who is really retarded. We have already failed with programs such as EPZ (Export Processing Zones) in India, and to think about adding another layer of bureaucracy to an already existing one is maddening to say the least. None the less I was part of a team that attended this conference. On Day 1 the only three clear speakers were two academics and a Chartered Accountant. The latter had a good presentation about the ground rules of the act. Looks like I have missed a lot while being away from India. One of the key issues that are in the media currently with the SEZ is that of Agricultural land being converted away from agricultural purposes. This is again such a bunch of nonsense. The expert from the Commerce Ministry at the very beginning of his presentation provided statistics that showed that of all the land that was going to be acquired for this scheme, approximately 1% would be agricultural. I do not understand what the brouhaha is about.

Let us for example assume that the idea of SEZs is great and that it is going to be an immense success for India. Now let us also assume that a lot of the land acquired is agricultural land. What is the problem with that? We have been a food surplus nation for several decades, and assuming the land would be more productive with industrial units, what is wrong with using such land for industrial purposes? Shouldn’t we be moving towards productivity and growth rather than the other way around? One of the reasons behind it I think is how the land tax structure works in India. If you own agricultural land then you do not pay tax on it or something like that. In addition you get a humongous amount of subsidies from fertilizers to electricity. So there is a strong incentive from land owners to hold out and protest anything that will take away their future income streams. However, I am not sure it is the land owning agricultural community that is much concerned. After all they will make a lot of money by selling this land to developers.

There is a huge anti-growth and anti-industrialization lobby which I think is promoting this idea under the guise of loss of agricultural land. What is sad is that the media has played up the idea so much that some intellectuals also believe this to be true. With all this brouhaha, a small story in the Times of India Delhi edition was almost missed (Hattip Parth). This is the story of a small village about 50 Kms South of Delhi. Apparently, developers have been buying up land here and obviously land prices have gone up to dizzying heights within a short period of time. The result, the villagers sold their land, made a ton of money, (which they are currently spending building garish three story houses, buying Mercedes cars and fashionable clothing) the developers got the land they need and new malls are coming up in this region to serve the villagers whose demand for consumption goods especially designer brand clothes, has suddenly shot up. No one seems to be complaining that agricultural land was being diverted away in this case. Agriculture had long ceased to be lucrative in this small village. Likewise there are several pockets of land which are simply inviable for agriculture and the land owners could use some good money.

Something similar happened with land acquisition for the National Highways Project. For a change the land owners were offered market prices or higher, and that quelled all dissent for the project. The righteous indignation land owners feel when their land is taken away from them is understandable. This is the result of offering prices that are totally uncompetitive and below the market value. Giver sellers the market price and why would they care. Now the market price would be based not only on the current economic scenario of the region but the expected future streams of income. If, as was being suggested by several people from the government, prices of land would fly through the roof once development begins after acquisition, and this is common knowledge which is why they demand just compensation, land prices will reflect that. Developers who do not want a hold out situation will have to make offers appropriately.

The power of vested interests was very obvious yesterday at the conference where the lot was that of real estate developers and government officials who apparently have huge rents to gain from this project. There were very few academics and other practitioners in the group. It was pretty depressing to me to hear speaker after speaker try to talk in the same platitudes and not say anything substantially important. They kept highlighting the success of China’s SEZ and that being the reason for the large size of the planned SEZs in India. Traditionally the EPZs have been really small units. This time they want to do it big. What is big in this project is just the rents and nothing else and that is stark. I believe each person who attended the conference paid up to Rs.50,000 (~$1300) to be there.

It was obvious that the law itself was flawed and a number of real concerns on the ground have not even been thought about by the Commerce ministry. Everyone is just caught up in the whole melee and excitement of these projects. One legal practitioner even spelt out two separate statements from the act and pointed out that they were in conflict with each other and asked the Commerce ministry guy if they had any answers. The latter clearly had no clue about this contradiction and evaded the question.

The only two speakers who made sense in the morning sessions were my Professors who in many clear terms stated that we did not really SEZs for the kind of development they were looking at. They mentioned that the kind of reforms required was clearly outside of the topic of SEZs and that was the need of the hour. Even with the idea of SEZs unless the macro economic problems of land reforms and property rights were sorted out and some of the draconian laws and regulations were removed even with the SEZs we would only face more problems than solutions. This however, was received not too well by the crowd of bureaucrats and rent-seekers.

The afternoon session started off interestingly enough with a simple description of the procedure of the legislation of SEZ and how an individual or developer could jump on the bandwagon. This was followed by something like a panel discussion with government officials, individuals who are running SEZs right now and my poor Professor who was completely ignored for the better half of the hour that he was on the dais. Again the questions from the audience were most depressing and related to things such as size and operational aspects rather than the actual viability of such a scheme.

One of the experts on stage kept insisting that none of the consultants they approached initially felt that such a project was viable and that they had to spend a humongous amount of money to fly to Washington DC to talk to a consultant to even agree to work out a model, and even then they had to pay half the money upfront to persuade him to even think about the project. Now, correct me if I am dense, but if highly trained professionals feel they cannot provide something to this scheme what makes career bureaucrats believe that their project is even remotely intelligent? They had used hard earned tax payers’ money to make these trips to DC and even pay this consultant upfront. What a waste. And this expert kept telling this story as if it was a great achievement. I couldn’t help wondering if we are just a country of morons and idiots.

On the whole it was a depressing day for me. I thought it would be an interesting day with lots of academic debates; and it turned out to be a complete sham in the end. There were about 300-400 participants. At $1300 a person, you do the math at the mammoth waste the whole day was. Not just in terms of money but also in terms of time. That was just day one. Thank heavens I did not plan to stay the second day.


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Josef said...

Triya, this is really fascinating insight! the other article on shipping industry is also great! thanks for both! Look forward to reading your papers!

Josef M.

B. Varughese said...

I totally agree with you. I am totally against land acquisition and government involvement in business.

We should however make an SEZ that is strictly governed by Libertarian ideals.

We can setup a zone that's 3000 square km (roughly the size of Tokyo) and just say, this piece of land is solely governed by Libertarian policy.

It would be a Hong Kong for Indians. And perhaps all of India will see this and adopt the same policies!

I'm going to try to be a contractor in India, and try to be an activist for this.

you can contact me @