January 04, 2007

SEZ Policy : Making the best of a bad situation

The SEZ policy is a prime example of the crony-capitalism that hides behind the pseudo-socialistic facade that hangs over India. However it is not something that can be wished away. How can we make the make best use of it.

But before that, a quick analysis of the genesis of the current mess.

Special Economic Zones were dreamt up by the Indian bureaucracy as a way to emulate China's success story and had two design points.

(a) India's notoriously rigid, inflexible and anti-market labour laws will be relaxed so that the nation could compete with China's manufacturing muscle.
(b) Tax exemptions will be allowed to make India's companies more competitive.

However, bureacrats propose and politicians dispose and so the first casualty of the policy was the labour laws. Faced with the implacable ire of the miniscule, but politically significant organised labour lobby ... the idea of relaxing the labour laws was summarily thrown out of the first available window.

That is when the SEZ policy should have been given a quick burial but that was not to be. The tax exemption clauses were highlighted as the main advantages.

Now, tax exemptions, in the long run, can never be the basis of a sustainable business model but given the success of the Indian software industry, it was touted as a panacea of all evils. In a sense, that was OK ... because a rupee paid as TAX is always used LESS PRODUCTIVELY by the government than the same rupee withheld from the government (preferably in a legal manner )and used anywhere else. So net-net, the tax exemptions can be seen as a generally progressive step to the extent that it keeps money in more productive hands.

But that is NOT why the SEZs are so hot property today .. for that we need to look at the crony-capitalism that is rampant in the real estate business.

India is a heavily populated country and 'good' land is always scarce. If you want to buy some land to build a house, a villa or a factory ... you will not get it very easily.

That is where the Laws of the Land can be used, if you can pay-off the lawmakers to work for you. For the law of the land says that Property Rights are NOT fundamental in India and land can be acquired ('extorted') for a public purpose.

And that is what the well-connected businessmen are doing. They convince the local politician that creating a SEZ is good. So please pass a law ( or order) that compells the owner -- who is generally a small farmer -- to part with this land for a small sum of money. This land, ostensibly acquired for a public purpose, is next declared as an SEZ and handed over to the businessman for a price ... and the politician makes a nice 'cut' on the side. The businessman can then resell this land for a huge price to others ... who are willing to pay a premium for getting SEZ land where he can carry out a tax-free business.

Nice scam, right ? And that is the game that is being played all over India. Who is benefitting from this ? Not the farmer ... he is being a paid low sum for his land. Not the actual end user, the export industry, since they are paying a huge premium for getting SEZ land. Then who ? First the SEZ developer and of course his willing accomplice the local politician.

Can we get out of this mess ? Jaytirth Rao, chairman of MPhasis has an elegant solution. Cut out the middleman ... and let industry talk directly to the farmer and negotiate to buy the land. The price that they will arrive at through the price-discovery mechanism will reflect the market reality ... and that is fair for both.

Will this happen ? Extremely unlikely .. the vested interests involved are too powerful.

So how do we make the best of a bad situation.

Consider the case of the Left front and their quagmire in West Bengal. After the bloody nose they got in Singur .. they are headed for a far more bloody body blow in Nandipur where the Salim SEZ is asking for 14000 acres. In this they are in a bind as much as the rest of the politicians in India and they dont have a choice. They cannot abandon the SEZ route and lose face. So they will force them to join the "anti-people" bandwagon. And once they are on this band wagon, they will have to accept other "anti-people" policies like Pension Reform, FDI, Foreign Universities, Privatisation ... and other worthwhile things that they have been opposing for decades.

Karat, Yechury and Company are already talking soft on FDI and it is a matter of weeks (hopefully) that they will be as "reformists" as the other politicians in the country ..

And when that happens ... India will take off. That is what we are all hoping for.

Thanks, but no thanks to our flawed SEZ policy.

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