Tuesday, October 23, 2007

Are Special Economic Zones (SEZ) Contributing to Rural Poverty Reduction?

There is plenty of talk about Special Economic Zones (SEZ) bringing about an industrial revolution in India. Introduced in the year 2005, SEZs are intended to generate new economic activity that lead to greater investment, exports and employment. Currently, India has over 800 industrial units operating in 10 or so functional SEZs, each on 50-300 acres of land. So far, investments in excess of $10 billion have been made in these zones, and new employment generated has been around 100,000 persons. Official projections call for total investments in excess of $75 billion and new employment of over 1.8 million persons by the end of 2009.

SEZs are being set up under different institutional structures – fully public, fully private or a combination. However, the most common arrangement is a public-private partnership, with government offering off-site infrastructure, fiscal incentives in the form of tax and import duty exemptions, soft loans and equity investment. Operators of SEZs include both domestic and foreign companies like Mahindra, Reliance Industries, Nokia and Motorola. Within each zone, a number of companies set up their operations in industries such as information technology, pharmaceuticals, biotechnology and textiles.

The main advantage for companies operating within an SEZ is that its operator is responsible for ensuring adequate modern infrastructure for efficient industrial activity. With fiscal incentives from the government, these companies are able to reduce their costs, both in initial investment and on-going operating costs. Companies are able to obtain sufficient land at attractive prices to set up their factories outside major metropolitan cities. Cheap labor is also readily available from nearby villages.

All these sound like a win-win situation for all parties. There is no doubt that these zones attract companies that would otherwise have set up their new operations elsewhere without the benefit of good infrastructure. It is also likely that fiscal incentives might induce larger investment. The argument in favor of offering such incentives is that the incremental investment and ensuing business activity generate benefits to the economy in excess of its costs.

The trouble lies in how the benefits from SEZs get distributed. Sure, companies stand to benefit the most from efficient infrastructure and lower taxes; incremental employment is created from greater investment and business activity. But it is not clear as to whether SEZs generate the kind of jobs that would benefit the rural population.

For example, it is reported that Infosys, a major IT company, has recently purchased 200 acres of rural land outside the city of Hosur, Tamil Nadu. Many land owners were only happy to sell their land at prices far above prevailing levels, turning them into very wealthy individuals in short order. Some of the land is fertile and the remaining barren, and those who were previously employed in agriculture now expect to be employed as industrial labor. It is unlikely that a technology firm can expect any new employee from the nearby villages for its well-paying jobs as computer programmers and specialists. Those jobs will be filled by those coming from the cities.

Poor people who comprise over 80 percent of the rural population hardly own any land beyond what is occupied by their huts/houses. Few landlords and urban investors own most of the available land that are not state property. They are the ones who are benefiting from the land purchase by SEZ operators. Even these landowners complain that they are forced to sell their land by government officials at far lower prices than what prevail in nearby cities. While arguments and protests go on, the rural poor look on hoping that their lives might somehow improve.

The impact of switching some of the rural activity into industrial production is not clear. Some economists make the point that the agricultural sector will suffer and rural lifestyle will change. May be India will be better off exporting industrial goods and services and importing agricultural products!

Rural India offers opportunities for many industries in food processing, herbal products, alternate fuels, cement and tile, lumber and pulp, meat, dairy and poultry. Investments in these can create large numbers of sustainable jobs. Unfortunately, SEZs seem to attract mostly high technology companies that cannot offer well-paying jobs to the rural population. For the foreseeable future, the rural population will not have the educational background to be trained for those jobs.

At the very least, we should expect that companies operating within SEZs do not exploit the rural population. In the name of cutting down on bureaucracy, SEZs are given considerable free hand. Hopefully these companies will employee rural workers at fair wages, and offer proper health and pension benefits. Worker safety is another major consideration, especially since the industrial environment is new to those who have previously been working in the agricultural fields. Environmental controls to prevent water and air pollution and soil contamination must be strictly implemented.

Countries like China and Brazil have established major industrial centers around their SEZs. While those centers have raised the level of employment and income for many people, the rural population is still not sufficiently benefited. Lack of adequate environmental controls has made many areas unfit for human habitation. We can only hope that India will not follow the example of those countries. Economic activity that assures adequate and fair participation of the rural sector and with concern for the environment is what will reduce poverty in India.

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1 comment:

Bhamy V. Shenoy said...

I agree with your conclusions. SEZ is not an efficient tool to promote India's development or to help the poor of India. We all believe that to promote industry and private enterprise we need better governance and less corruption oriented regulation. Instead of implementing these two conditions all over India, in the name of improving investment opportunities in some select areas SEZs are created using the successful Chinese model. But India is not China which all of us know. We need our own development model and SEZ is not good for India. As it is we have islands of prosperity surrounded by oceans of poverty which we should try to correct. Instead we are taking just the opposite strategy.