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Removing the distortions

The basic reason why the policy on Special Economic Zones (SEZs) has turned into a major issue of public debate is that, with the SEZ Act of 2005, the zones have become more attractive as an instrument of privileged access to the huge domestic market of India rather than as a base for exports. For, units operating in the zones will be eligible to direct tax relief on the same basis that exporters in general export promotion zones (EPZs) (that have been around for decades), Export-Oriented Units, and software parks have been enjoying all along. It is only in the case of developers of the zones that new benefits are given, since they cannot claim tax benefits in terms of exports. The labour law regime for SEZs is no different in fundamentals from the one for the former EPZs. The state's power of eminent domain to acquire land, usually at below-market rates, or to force unwilling sellers to alienate their land has also been used for decades, especially in the case of large projects in the public sector. What has made the SEZs different is that they enjoy exemption from indirect taxes too as in the case of the EPZs and EoUs but without a commensurate export obligation. All that the units in the SEZs have to earn by way of export is a token surplus over their expenditure in foreign exchange. At the same time, they can access the domestic market by merely paying the import duty applicable to their product, not the other duties payable within the domestic tariff area (DTA) including the ones on capital goods imports. It is this possible tax advantage together with the far better infrastructure available in the SEZs that has led, on the one hand, to a scramble for setting up such zones and, on the other, to opposition to the policy from those not allowed to shift to the SEZs.

Thus export-led growth, which has been the avowed policy of governments for more than two decades, and especially after the 1991 foreign exchange crisis, has ended up as a growth strategy based on privileged access to the country's domestic market. It may well mark the beginning of a shift towards light manufacturing industry using semi-skilled and unskilled labour as in China, but the distortions could have been avoided if the differences in conditions between India and China had been taken into account. In China, a base of substantial development of human resources and reasonably egalitarian development was used in the era of economic reform to acquire manufacturing skills and technology by extending concessions to foreign capital. In India, which had a broadly diversified industrial base with entrepreneurship in the private sector preserved even in the era of Central planning, priority should have been given to human resource development and infrastructure. Foreign capital will help but it is not a substitute for the hard options in domestic policy. A serious re-examination of all issues involved is called for, so that any course correction can be applied to the SEZ policy regime sooner rather than later.

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