Posted by: John Elliott | May 1, 2007

Special Economic Zones are about people, not just development

It’s a good idea that has gone wrong and, so far, it has created more problems than it has solved. India’s latest attempt to introduce a network of China-style Special Economic Zones (SEZs) has led to a crisis over the use of rural land for industrial development, and government efforts to solve the problem have failed to stem the opposition.

In an attempt to boost industrial investment, India’s parliament passed legislation in February of last year that offered companies dramatically enhanced tax breaks to encourage them to develop zones. A flood of applications for over 400 zones followed, of which over 230 quickly received initial approval and over 60 were formally notified, though only a handful have successfully started.

Protests quickly built up, mainly over the use of rural agricultural land. In the state of West Bengal politically-backed opposition escalated to such an extent that 14 people were shot and killed by police during a demonstration in March. By that time, sensing loss of essential rural support in state-level elections, Sonia Gandhi – leader of India’s coalition government – had said agricultural land should not normally be used for SEZs – a difficult objective to fulfill – and the government had frozen all new SEZ approvals.

That pleased the protestors, but would-be investors objected to the delay, and persuaded the government to lift the freeze in early April. Concessions were proposed, including limiting the maximum land area allowed for each zone to 5,000 hectares (12,500 acres), and requiring that at least half of an SEZ should be used for manufacturing and other core activities.

This looked fairly impressive when it was announced, but there is still opposition from people who risk being displaced – illustrating that Gandhi’s Congress Party needs to devise policies that protect the poor while enabling India’s surging economy to continue to grow. As a first step, a new rehabilitation policy is being finalized this week which will probably cover people displaced by all major industrial projects, not just SEZs.

The lesson for investors is to be wary of plans that depend on state governments delivering sensitive land. The new SEZ rules say that the developer should do the land acquisition, but that is being criticized because it will make helpless rural people vulnerable to big business pressures.

Land transfer in India is never as easy as it looks, especially now that the gaps between India’s well off and the desperately poor are becoming rapidly wider. This means that changes of land use will become even more controversial, especially when those to be displaced believe that local politicians, officials and businessmen plan to make big personal profits at their expense.

The main issue is the plight of farmers and landless laborers, plus tribal people who live in remote areas, many of whom have had their land for generations. The authorities claim that they will be fully compensated, and the April announcement said an SEZ should provide one job for every family displaced.

But that scarcely begins to tackle the scale of the problem, especially for those who have never had proper legal ownership documents. The landless and those without ownership rights fear they will be shunted out and forgotten, while those with some paperwork fear they will be cheated by local officials and their henchman, as often happens in rural India.

As plans developed late last year, there was special concern about some large projects, including two mammoth schemes planned in Mumbai and Haryana (just outside Delhi) by Reliance Industries (RIL), controlled by Mukesh Ambani and one of India’s two biggest groups, where farmers are still protesting.

In West Bengal, the state government led by the Communist Party of India-Marxist (CPIM), ran into trouble with two projects. One was a 10,000-acre SEZ at Nandigram for Indonesia’s Salim group to build a chemicals complex, and the other was a Tata Motors factory at Singur (not in an SEZ) for a planned “one lakh ($2,300) car”.

Then West Bengal opposition politicians moved in. First, Mamata Banerjee, a former central government minister and leader of an anti-communist party called the Nationalist Trinamool Congress, realized she could use the growing dispute to rebuild her faltering career as a regional leader. Other opponents of the CPIM united to fight the Nandigram plans, culminating in the shooting.

The Tata dispute has now cooled down, and the project is going ahead, but Nandigram has been shelved. Protests have also built up over the use of rural land elsewhere. Steel projects planned for example by Posco of Korea and by Arcelor Mittal – the world’s biggest steel group, controlled by Lakshmi Mittal, a London-based, Indian-born entrepreneur – are facing serious delays.

Last year, the applications for SEZs were eagerly promoted by state governments and by Kamal Nath, the minister for commerce and industry, who unrealistically hoped that they would account for $5-6 billion of foreign direct investment by the end of this year. But the finance ministry was never happy because it felt that excessive tax concessions were being offered for little return. Other critics said there would be little additional investment because companies would switch factories planned for other areas into the tax havens.

Looking back, it is clear that Nath rushed out a headline grabbing policy that excited developers of all sorts – not just industrial and service sector companies. Neither he nor the companies took enough time to care about people who would be displaced.

The result is a classic example of how India’s democracy, usually touted as a key attraction for investors, can slow down policy development and investment plans.

As any company trying to do business in this ultimately rewarding but continually frustrating country quickly discovers, Indian democracy doesn’t just mean that decisions are taken by elected bodies from parliament downwards.

Everyone in vocal India wants a say, and those with political and financial muscle usually get more of a say than others. In this case, politicians sided with the poor who were getting a raw deal.

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