As with so many policies, India was the first to create a special economic zone, in 1965 in Kandla. They were then called export promotion zones. This was just after the end of the second plan that laid the foundations for a command and control economy that lasted till 1991. And it was just before Indira Gandhi broke the Congress, using the façade of socialism. She interpreted socialism to mean widespread state ownership and control of the means of production, and self-sufficiency. This meant an attitude that was against international trade-imports and exports. Import duties were high and inflexible, and became very important for tax revenues. The restrictions on imports and their licensing procedures were very severe and industries lost much time and money in arranging imports. Central and local indirect taxes were high. Infrastructure was poor and exports were difficult to achieve. At the same time, the country needed foreign exchange for essential imports like food, oil, materials and machinery, and some exports were essential. The EPZs were a means to stimulate exports and to insulate them from the internal restrictions that applied to all other economic activity.

Export promotion zones would limit the controls and clearances that were otherwise required for exports. The EPZ/SEZ would have world-class infrastructure and a stable fiscal regime. However, the government was unable to provide these or reduce red tape significantly. Restrictive labour laws, especially on working hours, wages, hiring and firing created constraints that export units could not bear, and these remained. In China, they did not apply to the SEZs.

In China, the SEZs were key to China’s industrial and exportgrowth. They led to rapid rise in two types of exports. One was of value-added goods, principally owing to labour inputs. Complex parts were made in Japan or another country and labour in China put the parts together to make sophisticated manufactured products like television sets, computers and so on. The other exports helped by SEZs in China were of labour intensive manufactures like toys, leather goods and garments.

Very large enterprises developed, employing tens of thousands of people. In these, China soon became dominant in the world markets. India remained far behind and the largest enterprise making labour-intensive products was much smaller than any in China. Such exports also added significantly to employment in manufacturing in China.

The EPZs in India never took off and contributed little to exports-growth, unlike in China. On top of the restrictive labour laws were the continuing bureaucratic procedures and delays that prevented speedy action by export units.

Since 1991, the Indian scene has changed dramatically. The peak duty on most products is now at 25 per cent. Direct tax rates are much reduced. Sales tax rates are becoming uniform between states, enabling easier movement of goods. VAT is replacing sales taxes and with fewer rates, so that transactions become simpler. The tax exemptions (on income tax and indirect taxes) available on export products can now be had in registered export units and export parks. There is no need for location in a SEZ to enjoy these benefits.

What the EPZ/SEZ could have offered India was exemption from the restrictive labour laws that have held back the entry of organized industry into labour-intensive manufacturing. Even the new SEZ policy does not provide for this exemption. Manufacturing will continue to be subject to the same restrictions in SEZs as out of them. We cannot expect to have large manufacturing units producing garments, toys and so on in India. They are common in SEZs in China, Bangladesh and Sri Lanka.

The SEZ policy in India now offers benefits to developers as well as the export units located in each SEZ. These include duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units; 100 per cent income tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50 per cent for next 5 years, and 50 per cent of the ploughed back export profit for the next 5 years; exemption from minimum alternate tax under section 115JB of the Income Tax Act; external commercial borrowing by SEZ units up to US $500 million in a year without any maturity restriction through recognized banking channels; exemption from Central Sales Tax, Service Tax and from state sales tax and other levies as extended by the respective state governments.

Many fears have been raised about SEZs. There have been agitations in Rajasthan, West Bengal, Orissa and other states. They are of various kinds. One anxiety is that SEZs may not result in much new activity but merely relocate existing units from tax-paying locations into non-tax-paying SEZs. A major fear is caused by large land acquisitions and displacement of farmers. Relief and rehabilitation of displaced farmers and peasants in the case of hydro-electric and other projects over the years, all over India, have been poorly executed. In most cases, the relief package has either been stolen wholly or in part by the bureaucracy. Also, oustees are not used to handling large sums of money and squander it. There are no avenues for their gainful employment in the area. There is justified fear that the agriculturist will lose land and get little of lasting value in return. Similarly when SEZs are privately developed, there is little confidence that the private firm, bureaucracy and local authorities will give any benefits to the ousted farmers. These fears are aggravated by agitators in civil society who are ideologically opposed to opening the economy to global influences.

There is uncertainty as to whether the country will at all gain by the SEZs. There are conflicting estimates of the tax losses and revenue gains to government. Tax losses to the Central government according to finance ministry estimates are that 70 SEZs (against 230 approved) will lose the government Rs 1,02,621 crore between 2006 and 2010 on an export turnover of Rs 7,98,267 crore. These losses will be on direct taxes Rs 53,740 crore, customs Rs 29,700 crore, excise Rs 10,368 crore, and service tax Rs 8,813 crore.

The government has been unable to publish full information about all approved SEZs. Available data on the official website for 154 notified SEZs, occupying 20,388 hectares or about 204 square kilometres, show that 64 per cent is in the information technology and IT enabled services, the remainder being in areas of existing export strengths, namely, apparel, textiles, gems and jewellery, footwear and pharmaceuticals. They are located in the present mostly in industrialized states and districts that are already industrially developed: Andhra Pradesh, Gujarat, Maharashtra, Tamil Nadu and Karnataka. Thus there is no change in the present regional imbalance. Neither is there any major focus on large capacities in labour intensive industries and the substantial employment they could offer as they have done in China and elsewhere.

SEZs may no longer be relevant for India perhaps in the numbers now proposed. In some, their development might in fact be a major land-grabbing effort by organized industry together with the government. There is little information either on the monitoring and regulation of SEZs, or of consequences if promoters are unable to deliver the promised results.

Yet, there are many genuine industries that have gone into SEZs. We need to relax labour legislation within them. The government must own the land. Rehabilitation packages for those displaced must include lifetime employment in the project, investment of the capital sums and assured returns to the displaced persons. Offshore banking units must be encouraged in SEZs so that finances are available easily and cheaply.

It is unlikely that these requirements will be met. We must expect that the SEZs will promote exports to a limited extent, add little new employment and leave the displaced agriculturists worse off.