In its basic form, a Special Economic Zone (SEZ) is simply a cluster that brings together different industrial or other producing units. Whereas the idea that creating spaces with good infrastructure facilities and simplified procedures assists industrialisation is not new, the current SEZ idea goes beyond this by assuming that providing infrastructure is not enough. There have to be tax breaks, highly subsidised land and little or no compulsory worker protection to encourage private investment. And this strategy is increasingly presented as one of the chief instruments by which a country can achieve rapid industrialisation through exports.

In India, the SEZs Act 2005 came into force in February 2006, and has already generated much controversy across the country. Concerns have been expressed about the aggregate social and economic costs of SEZs, which make the net benefits uncertain. There are three major areas of concern: the fiscal costs; workers rights and net employment generation; and land transfer, dispossession and displacement.

The issue of land acquisition for SEZs has become the most controversial and raised the greatest political response in India. Of course, this is an important issue. However, it can be argued that some changes in land-use pattern are inevitable in any process of economic development, however democratic, and are even desirable in the long run, as long as food security issues are adequately taken into account. Therefore, the areas of policy concern relate more to the process of land transfer and the nature of compensation and rehabilitation of displaced persons, rather than to whether there should be a change in land use per se.

It is absolutely necessary to ensure that those who are affected by the changing land-use which include not just those with land property titles but all those who had a source of livelihood from that land are adequately compensated and rehabilitated. Since land-use is certainly going to change rapidly and not just for the development of SEZs this is one of the central policy questions of our times. In the specific case of land appropriation for SEZs, the question of ownership and control is also critical. In India, the current rules require only 25 per cent of the land be used for industrial processing purposes, allowing the remaining land to be used for any other purpose. This means that real estate developers can engage in major land grab in the guise of SEZs. Clearly, the rules must be changed to prevent or at least reduce this possibility.

One response to the issue of land grabbing has been to argue that the state should actually stay out of this altogether. After all, it is the power of eminent domain of the state that allows land to be taken over for national development purposes. However, leaving land use to market forces or to private developers to engage in transactions with individual landholders is likely to be even worse. It means that there is no chance of compensation for all the other stakeholders, who will be adversely affected, such as the tenants and the agricultural labourers on that land. And it allows for the possibility of large purchasers using pressure tactics or other methods to acquire land, in effect making offers that cannot be refused. In situations of unequal power, it also means that small land holders are less likely to receive the true value of the land. Therefore, the government must be involved in this process, but in a way that ensures that all those who stand to lose through the land acquisition are properly compensated.

Since the SEZ Act was promulgated, five states Andhra Pradesh, Maharashtra, Gujarat, Karnataka and Tamil Nadu have dominated in getting approvals for and actually setting up SEZs, in terms of both the numbers and the area involved. Andhra Pradesh and Maharashtra, in particular, have given away very large tracts of land for individual SEZs, though there has been a lack of public attention on the land transfer in these states. Also, the compensation given for such acquisition in these states has been well below that offered in some other states such as West Bengal where there has been much greater and more vocal opposition to even very small tracts of land being acquired.

A critical issue is whether the SEZs actually generate more employment than would otherwise have come about, and on terms that are acceptable and desirable. A major problem with SEZs in many countries is that they propose to relax or even do away with many laws relating to labour protection, for the purpose of attracting investment into these zones. The current Indian law does provide for the same legal structure of labour protection within the SEZs as in the rest of the economy but, of course, it is necessary to ensure that these are implemented. And, in any case, new employment in the SEZs is unlikely to come anywhere close to solving the employment problem in the country, and certainly will be insufficient to absorb the hundreds of millions, who remain stuck in low-productivity agriculture.

But the greatest problem with the SEZ Act in its current form is the huge fiscal losses that will occur because of the tax incentives and hidden subsidies being provided to SEZ developers and producers within the zone. The offer of tax holidays in the SEZs goes beyond the generous providing 100 per cent exemption from income tax on profits for the first five years of production and 50 per cent for the next five years. Even land developers are to be given tax breaks.

These amount to appalling losses in terms of the foregone revenue. The finance ministry has estimated that if the total investment in the SEZs is about Rs 3,60,000 crores, which is the government`s own goal, the revenue loss to the state exchequer will be more than Rs 1,74,000 crores!

To give up such a huge amount of government resources is a major crime, given the needs of Indian society today and in future. But once again, what is at stake is more than the revenue losses, enormous as they are. Providing such massive tax giveaways encourages investors to shift their production from other locations to SEZs, in order to benefit from the tax holiday. This means NO net benefit to the economy from additional investment since it is simply moving from other areas.

It is not even clear how much such concessions actually matter in attracting investment. There is very little conclusive evidence in support of the idea that fiscal concessions are particularly helpful in ensuring more investment, despite the threats routinely issued by corporates in this regard. Many backward developing countries have failed to attract much investment into designated zones despite offering major fiscal and other sops, because the other `enabling conditions` such as infrastructure and socio-political stability have not been sufficiently attractive. Conversely, some of the economies that have attracted the greatest amount of productive foreign investment are those which continue to impose quite a lot of regulation and control upon foreign companies, but have buoyant domestic economies such as China and the Taiwan province of China.

Given all these caveats, it becomes clear that there are many problems with ensuring that the SEZs meet their promise of generating benefits and increasing better quality employment for the people over time. Clearly, this cannot be the only strategy for industrialization. Even within a broader strategy, the specific features of this policy need a systematic re-examination.