Subversive enclaves

A DEMONSTRATION in front of the State Assembly in Bhubaneswar on behalf of the people living in the Posco project area. - ASHOKE CHAKRABARTY

The SEZ policy encourages the creation of enclaves where national laws will mean little.

EVERYTHING about the Special Economic Zones (SEZs) sprouting across the country is special. Entities in these enclaves will pay little by way of taxes, enjoy access to state subsidies of various sorts, and be immune from the rules that normally govern the running of businesses. Indeed, the particularly special aspect of the SEZs in the pipeline - about 300 at the last count - is that they are "phoren" enclaves in what for everybody else is India.

The "approvals", given on a first-come-first-served basis, have only fuelled the frenzy of SEZ developers. The Board of Approvals (BoA) has already given approvals for nearly 200 SEZs. Another 100 are likely to be given permission soon. While cynics would regard the Congress' recent attempts to retool the SEZ policy as an attempt at obfuscation, there are no indications that the government is making any attempt to correct the most controversial aspects of the policy.

Three aspects of the policy controversy are significant. The first relates to issues of land for the SEZs. The second aspect - probably the most significant - relates to the financial losses caused by forgone taxes, which arguably is the fulcrum on which the policy is to spin. The third crucial aspect, largely ignored in most critiques, relates to the implications for industrial organisation, particularly those that relate to the working class.

It does not take great intelligence to recognise that when the state uses its clout to provide land to private interests, a land scam is bound to emerge. The point is that when the state intervenes in order to further private interest, it raises the possibilities for payoffs by those who obviously benefit from such intervention.

Indeed, this is the reason why allegations of "land grabbing" have erupted in various parts of the country, which forced the Congress to attempt a reworked scheme for the SEZs. The threat of a scam is so obvious that Sumit Sarkar, the eminent historian, described it as "the biggest land grab movement in the history of modern India".

It is obvious that the Congress, in the days since the conclave of its Chief Ministers in September, has been concentrating its attention on the land issue. In particular, it has tried to allay fears that prime agricultural land is in danger of being diverted to the SEZs. It has also been responding to criticism by stating that adequate compensation will be paid to farmers whose land is acquired for establishing SEZs.

It is indeed striking that most sections of the political class have focussed on the land issue while ignoring other substantive issues. To understand why this may be so, it may be useful to step back six years in time. In April 2000, inspired by the "success stories" of the Chinese SEZs, Murasoli Maran, then Union Minister for Commerce in the National Democratic Alliance (NDA) government, announced a policy for the formation of SEZs in India. Indeed, the 2000 policy statement set the ground for the "consensus" among most of the non-Left political parties on the issue. The fact that two successive coalition governments have remained committed to the policy perhaps explains why most of the non-Left political Opposition is training its guns almost exclusively on the land issue.

The BJP, which piloted the SEZ policy in 2000, has called for a "balanced approach" to "rectify" the mistakes in the SEZ policy. Indications are that a recently formed party panel, which will submit its report to party president Rajnath Singh, will mainly highlight the plight of farmers affected by the policy. Another proposal, apparently under consideration, is that the Investment Commission, currently headed by Ratan Tata, be given the authority to scrutinise the proposals for establishing SEZs.

This is not to say that land is not an issue. Commentators have, for instance, pointed to the fact that most of the SEZs are not in the vast hinterland but close to the larger urban agglomerations such as Mumbai and Delhi.

Moreover, anecdotal evidence suggests that land prices have fallen sharply in the country's suicide belts. It is obvious that the issue is much more than paying distraught peasants "market prices" for their land. Indeed, the perverse logic of the situation is such that this is a good time to buy good land cheap from peasants. The point is that even if peasants are paid a fair price for their land, and even if the government ensures that good agricultural land is not diverted to SEZs, there will still be several serious unresolved issues.

It would appear that those focussing exclusively on the land issue, wittingly or otherwise, ignore the grave financial losses that are in store. These are obvious giveaways by the state, which amount to hidden and obvious subsidies for those who develop and operate from these enclaves.

The so-called spat between two Cabinet colleagues, Union Minister of Commerce Kamal Nath and Finance Minister P. Chidambaram, has engaged the attention of the media. Initial media reports suggested that the Finance Ministry was worried that there would be losses amounting to Rs.100,000 crores between now and 2009-10 on account of lost revenues. The Ministry estimated that Rs.57,000 crores would be on account of losses on the direct taxes front and the remainder would be on account of the customs and excise concessions offered to units operating from these enclaves.

The Commerce Ministry responded to this by arguing that the buoyant revenues, resulting from greater economic activity in these enclaves would more than compensate the losses. Based on its own assumptions, the Ministry projected that the government's tax collections would increase by Rs.137,000 crores.

The ingenious efforts of the Commerce Ministry to counter the Finance Ministry were however premised on serious flaws. First, the Commerce Ministry's calculations, unlike the Finance Ministry's, included software exports. It is well known that Information Technology (IT) and Information Technology-Enabled Services (ITES) companies are gravitating towards the SEZs because the current tax-free regime governing this sector will lapse in 2009-10. In effect, these companies intend moving into the SEZs merely to prolong their tax breaks.

Moreover, since the sector is growing at 30 per cent per annum fresh investments would have come in the normal course. Besides, the Finance Ministry has argued, the expansion of this sector - now within the SEZs - would have happened anyway. The Commerce Ministry's inclusion of the IT sector in its revenue estimates from SEZs is thus substantially inflated.

The fact that a substantial number of the new SEZs are devoted to the IT and ITES segments indicates that the Commerce Ministry's estimates are rather optimistic. Although precise and up-to-date data on the number and kind of units moving into the SEZs are still not available, there are indications that in numerical terms software companies are among the most significant occupiers of space in the SEZs. In fact, according to one recent (but now dated) report, SEZs meant for the software and pharmaceutical industries account for more than 50 per cent of all SEZs approved.

Moreover, the Commerce Ministry's calculations did not reckon the losses that would result from the tax breaks on profits made by SEZ developers. By not taking these into account, the Commerce Ministry exaggerated the gains and underestimated the losses that would result from the SEZ regime.

In effect, the Commerce Ministry's exaggerated projections of revenue gains arise from a simple flaw. It would appear that much of the investments that will come would have come, irrespective of the concessions. And, if these fresh investments in the SEZs come at the cost of substantial largesse because of lost or forgone taxes, then these are losses for the exchequer.

The recent approval of the South Korean steel giant Posco's SEZ in Orissa is the best example of such a case. The company, which already won an outrageously good deal from the government, is set to gain even more by locating its project in an exclusive SEZ. Initially Posco wanted land and captive mines, which would give it access to iron ore in the State, which is regarded to be among the best in the world. Now, its SEZ status enhances its profitability even more at the cost of government revenues. Why should companies that are already in profitable lines of businesses be given more concessions for simply housing themselves in an SEZ?

It is unlikely that the Finance Ministry, which is regarded to be the most powerful Ministry, would not have had an inkling of the magnitude of losses when the policy was notified earlier this year. Its outrage now appears to be more a diversionary tactic, mounted at a time when the policy has drawn flak. In any case, since the Cabinet is collectively responsible, it matters little, from a public interest standpoint, whether this or that Minister was in favour or against such a policy course.

It is still too early to predict whether industrial units would move to the SEZs simply to avail themselves of the concessions on offer. Running a successful business is much more than merely a matter of taking advantage of tax breaks. A car manufacturer, for instance, cannot simply move from an existing location to an SEZ in order to take advantage of the tax breaks on offer. Indeed, if the past is any guide, it is much more likely that existing manufacturers would demand "a level playing field" so that they can compete with units operating from SEZs. The demand for mainstreaming the policy regime that is now operational in select enclaves can have important consequences for not only those working in these enclaves but outside as well.

The labour legislation applicable in these enclaves is already a watered-down version of laws that apply to the rest of the country. Andhra Pradesh, regarded as a front-runner in the SEZ promotion business, has laid down rules that apply significantly more pressure on workers in the SEZs. The rules prohibit outsiders in unions, which will significantly affect workers' ability to resist victimisation by company managements.

Moreover, the SEZs enjoy the status of "public utility services"; this will significantly reduce the scope for collective bargaining. The provisions also enable the deployment of contract labour, without being hindered by relevant legislation.

The functions of Labour Commissioners, who have traditionally taken the first step in the conciliation process between labour and managements, are to be vested with the Development Commissioners of SEZs.

Essentially, the Commissioner, whose main function is to woo investors and keep them happy, is charged with the responsibility of adjudicating disputes between workers and their managements.

Industrial lobbies have been calling for the repeal of "draconian" and "outdated" labour laws. The SEZs, as islands where regular laws do not apply, would then prove to be "models" to be emulated on a countrywide scale. These subversive enclaves could thus play the role of catalysts in a neoliberal recipe.