Articles : March 2007

Special economic zones (SEZs) have raised a huge controversy in the country. Alas, one would miss the wood for the trees, if one doesn’t look at the political economy and the challenges it will continue to raise in our distorted discourse. According to critics, SEZs would create a pro-business industrial environment in the country which may not be very good for fostering economic democracy. While SEZs are indeed pro-business, such a (pro-business economic) policy is not new in India. The country has vigorously pursued a pro-business policy, and this has already seen a significant reduction in poverty. In an article in this newspaper on December 14, 2006 (‘Broad benefits of special economic zones’), I argued that the real question is not whether we can afford to have SEZs, but whether we can afford not to.

Before getting into any analyses of the political economy, let me examine two important questions and that will help understand the present situation. First, will large-scale formation of SEZs in India lead to special enclave-led growth? Second, is such enclave-led growth good or bad for our economy and people?

There are no easy answers to these questions, which will depend on local factors, among many other things. At best, one can do some case studies to draw some lessons, but generalisations are not possible. An answer to the first question can be found by looking at the performance and impact of existing export processing zones (which are similar to SEZs) in India. The first export processing zone in India was developed in Kandla, Gujarat, in the mid-1960s, and along with many others, the multiplier effects have been great.

To find an answer to both questions, let’s look at the Unctad’s 2004 LDC Report with the theme of ‘Linking International Trade with Poverty Reduction’ and draw lessons from various case studies cited there. The report has suggested five post-liberal development strategies for poor countries. The first of them is called “balanced growth based on agricultural productivity growth and export-accelerated industrialisation”. Unctad advocates that for sustained growth and substantial poverty reduction to occur under this strategy, six domestic conditions have to be put in place. Without going into the details of these conditions, one can see that there is a remarkable similarity with them in contemporary India, which is still predominantly agrarian. It has a small industrial sector. India has surplus labour in rural areas owing to large labour supply in relation to the available land.

Looking at these conditions, it appears that the central and various state governments have taken the right decision to encourage the setting up of SEZs and this policy is consistent with the National Foreign Trade Policy of India, 2004-09. Let me highlight three most important conditions in the Indian context. The first condition is that agricultural productivity must rise at a rate sufficient for the production and marketing of food to be able to feed the entire population. This requires continuous technological progress in agriculture, and institutional and organisational changes, including land reforms.

Second, the growth rate of industrial labour force must be faster than the growth rate of the total labour force. Over the last couple of decades, industrial employment in India remained stagnant and in order to change this situation, we need both large-scale capital accumulation and a labour bias in innovation. The policy of developing a large number of SEZs meets both these conditions.

Third, a right balance must be struck in inter-sectoral labour markets. The number of new employment opportunities created in industry must be in step with the number of persons released from agriculture.

If the above is true, then why there is this huge controversy over this new wave of SEZs in India? The first reason for this controversy is that a large number of actors look at this situation as a milch cow to seek rents. Second, besides technological advancement, Indian agriculture badly needs some drastic institutional and organisational changes, which are not happening because the agriculture lobby is politically very strong and has a vested interest in its lack of progress. Indian agriculture is currently faced with many vices, which include absentee landlordism and subsistence farming coupled with land fragmentation. Third, small landholders (including landless farmers and agricultural workers) do not see any alternative employment available to them—for want of skills and also due to the overall industrial environment in the country in terms of employment generation.

Given this political economy, what is the way out of the present impasse? The Union and state governments should take a series of specific policy measures to increase agricultural productivity and manufacturing employment simultaneously. But results from such measures will take a longer time to take effect, I estimate. The fact is that huge political will is required for India to become a developed country (not poor, if at the same time not exactly rich) by 2020. Given the nature of our democratic set-up, this will be a risk, but there will be huge returns too—in economic terms as well as politically.

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