Special Economic Zones – A Boon and a Bane

When we think of a Special Economic Zone, the words that come to our minds would be economic activity, productivity, efficiency, investment etc. We are not mistaken in believing that Special Economic Zones or SEZs, are areas in a country that are subject to unique economic regulations that differ from other areas of the country. These regulations are designed to boost economic activity in these regions. The industries in SEZs receive tax incentives and the opportunity to pay lower tariffs.

The objectives of the Special Economic Zones Act, 2005 are (a) generation of additional economic activity; (b) promotion of exports of goods and services; (c) promotion of investment from domestic and foreign sources; (d) creation of employment opportunities; (e) development of infrastructure facilities; and (f) maintenance of sovereignty and integrity of India, the security of the state and friendly relations with foreign states. From these stated objectives, it is clear that the government does not explicitly justify SEZs as tools of export promotion but as engines of growth and employment generation. Emphasis is laid on infrastructure.

It is true that these SEZs have helped boost economic activity in India in the last decade but that has come at a great expense. There is much talk about the benefits and the positives of SEZs in usual discourse but there are very few opinions which look at these as prodigal children of the government who yet have much to learn. Let us look at some downsides of Special Economic Zones in order to form a holistic opinion about the issue.

The first question that pops up when we read about tax incentives and lower tariffs is “Who finances this liberalism?” The answer is, it is us, the tax payers.

When states compete for these industries in terms of cheaper land and greater tax cuts, the costs shoot up, depleting the government’s revenue further.  SEZs have helped India in exporting certain new products but were unable to induce technology-based dynamism, reducing the overall impact to being just moderate. Moreover, in the absence of land ceiling and land holding restrictions, agricultural land is increasingly being acquired without offering a fair compensation to the farmers. This also leads to a decrease in the agricultural produce of the country. There is also the problem of over production. For example, it is argued that the scale of planned power projects exceeds the energy needs of the entire state of Maharashtra in the near future. This is a recipe for an ecological disaster.

Another area of concern is that the capital-intensive activities in SEZs have low employment intensities. This, coupled with the reduction in small scale industries due to competitive pressures of the low cost industries in the SEZs has led to a fall in employment opportunities even though outputs and profits show an upward trend. It is also argued that these industries may lead to the widening of the rich-poor gap giving rise to social dissatisfaction. It is likely to lead to the shrinking of economic space for the ordinary people by making their production more unremunerative. The rise in capitalist tendencies may lead to the creation of monopoly power and in the face of lax labour laws, this almost always leads to the exploitation of the dwindling employees.

A major argument made by environmentalists is that these large industries may release chemicals in the water thereby polluting it. The sound of huge machinery used in the SEZs will lead to sound pollution and create environmental imbalance. Moreover, with no rules about constructions of roads, open spaces etc, the way in which these construction activities take place, may lead to added pollution. This may lead to severe health consequences for populations residing in and around these special areas.

It is fairly simple to understand that a lot of solutions lie in the problem itself. For example the problem of reduced agricultural land and rehabilitation of farmers can be solved by acquiring non- agricultural land. Moreover, compensation for land acquired must not be less than the subjective valuation of the land by the landholder. Land acquisition and land holding must have a ceiling and SEZs must be developed at least 10 to 15 km away from cities and villages to mitigate the health hazards caused by pollution.

Hence, while Special Economic Zones definitely help in increasing output and exports, they must be built with caution. The least we need is a thorough study of these phenomena and a vigorous debate. These tasks are becoming urgent as a large number of SEZs are being approved, notified and set up.

– Contributed by Vinny

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