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"If only India
can get its act together. As its economy
develops, more and more land is getting
converted from agricultural to industrial
and infrastructure uses. For many decades,
state government agencies have been
empowered to make compulsory land
acquisitions, using standard government
norms of valuation (read below market
prices) for all large projects, not just
SEZs. The practice has long stirred strong
feelings and confrontations. Those tensions
have intensified since SEZ developers seem
poised to reap large profits from government
incentives, while displaced farmers receive
far less.
Last December,
opposition from local citizens and political
parties forced the state government of Goa
to scrap all SEZ projects in its territory.
Seven projects had previously received the
green light there. Between January and March
2007, almost two dozen people died in
clashes between farmers and the police in
Nandigram in West Bengal, where land was
being acquired for a chemicals SEZ project
being set up
by Indonesia’s Salim Group. The Tata Group’s
high-profile small car project in Singur in
the same state, while not an SEZ, also met
concerted resistance.
In response to
this upheaval, the government issued a
circular stating that consent letters were
needed wherever land is acquired for an SEZ.
A new National Policy on Resettlement and
Rehabilitation for Project Affected Families
was also announced, including measures to
protect landowners, tenants, and
agricultural workers. Further, plans to
amend the existing land acquisition act are
in the works. The central government hopes
such changes will help avert future fights.
But SEZ
developers worry that the protests and New
Delhi’s populist response will result in
inflated price expectations. Worse, closed
deals may be reopened as disgruntled sellers
demand better terms. Gokaldas, which is
being acquired by the U.S. private-equity
firm Blackstone, had paid the Karnataka
Industrial Areas Development Board 200
million rupees (US$4.5 million) for that
state government agency to acquire 400 acres
of land and hand it over to the company. Two
years on, the agency has yet to do so
because of New Delhi’s changes to its SEZ
policy in response to protests from
landowners, politicians, and activists.
Gokaldas and
other SEZ developers facing similar problems
have had some success in lobbying New Delhi.
The cabinet has now agreed on an amendment
that will allow state governments to make
compulsory acquisitions of land. The
government can determine the price, provided
that at least 70 percent of the acreage has
already been purchased for the SEZ. The
policy change, says Gokaldas chairman
Hinduja, will ensure that “nobody acts
funny.” The decision is yet to become a
formal order or law, however. In India,
there are typically long gaps between policy
announcements and their implementation.
More Changes?
Divisions within
the cabinet may lead to more adjustments.
Finance Minister P. Chidambaram has made it
clear that he views the tax incentives on
offer as excessive. The Ministry of Commerce
and Industry, which crafted the SEZ policy,
argues that the perks are needed because the
private sector is being asked to carry most
of the burden of funding, constructing, and
operating the SEZs. The incentives are also
meant to make the Indian zones competitive
with those in other countries, although
China’s decision to abolish some of its SEZ
incentives may have weakened this argument.
The hands-off
approach is a change in India. Most of the
country’s 19 existing zones near major
cities, established prior to the SEZ Act
enacted in 2005, were funded and built by
the government. But the demands on state
resources and expertise led the government
to encourage private capital to take on the
lead role instead. The SEZ developers, like
the companies that locate within them,
received attractive fiscal incentives,
including a ten-year income tax holiday.
In addition, SEZ
tenants that generate positive net foreign
exchange earnings (that is, export earnings
net of imports) within five years of
starting operations can avoid income tax on
export earnings during the first five years.
Over the next five, half of export earnings
will be exempted from income tax. During the
third five-year period, half of reinvested
export profits will be tax-free, while
imports will be duty-free. The SEZ policy
also promises to cut red tape through
“single-window” clearances for the various
approvals needed by a number of government
agencies.
The government
is encouraging the SEZs to be industry- and,
in some cases, product-focused to avoid
overcapacity. India hopes to avoid two
unintended consequences of China’s
model—duplication and overcapacity—where
each local government sought to develop the
same industries.
So far, 36
textiles and apparel SEZs have been approved
formally or in principle in India. One of
them, Brandix India Apparel City in the port
city of Visakhapatnam in Andhra Pradesh, is
being developed by Brandix, Sri Lanka’s
largest apparel exporter. The SEZ’s CEO,
Reshan Wickramasinha, says that some of the
company’s supply chain partners, such as
Ocean India, have already started building
in the zone. The presence of
industry-specific suppliers offers the
prospect of conglomeration benefits.
Over half of the
formally approved SEZs in India are focused
on the IT industry. In addition to next
year’s phasing out of the software
technology parks scheme, a further reason
for this focus is that the minimum size of
IT zones dictated by the SEZ policy is
roughly 25 acres—much smaller than for other
sectors. Consequently, it is easier for
developers of IT SEZs to acquire land, since
they only need to negotiate with a few
parties. IT firms also have an incentive to
establish bases outside traditional hubs
such as Bangalore, where salaries and
employee turnover are rising.
In part to
discourage a proliferation of small SEZs,
the minimum size for non-IT zones is 250
acres, while that for multi-product zones is
2,500 acres. But following the problems at
Nandigram and Singur, New Delhi has
introduced a 50-square-kilometer
(12,355-acre) upper limit for multi-product
SEZs. This is much smaller than many of
China’s development zones, which are often
over 100 square kilometers. Setting a limit
could make it hard for companies to expand
later.
Long Wait
Despite the
problems, policymakers and many businesses
remain convinced that special economic zones
are good for India. Indeed, the prospect of
SEZs helping boost exports was a factor
behind the recent increase in the bilateral
trade target between India and China. Even
some traditional opponents of the idea are
coming around. In Uttar Pradesh, which has a
population three times that of Germany, the
populist chief minister Mayawati recently
told CFO Asia that she is “not averse” to
trying out China’s government-led SEZ model,
as opposed to New Delhi’s preference for the
private sector. The state government has
identified three large areas that can be
turned into SEZs.
India’s SEZs
will eventually be up and running, but
prepare for a long wait." 
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