1. Social and Economic Impact of SEZs in India Aradhna Aggarwal, Senior fellow NCAER aradhnaaggarwal@ncaer.org aradhna.aggarwal@gmail.com 9 th May, 2012

2. Motivation “Few topics in development economics have generated such heated debate as SEZs. Academics, civil society groups, politicians, and activists across the ideological spectrum have for their respective reasons united in criticism of SEZs” (p.1) Liberals: distortions in markets and generating political rents, leftists: a tool of labour exploitation; women activists: working conditions of female workers; Greens: environmental impacts; Finance departments: colossal revenue losses

3. SEZs: Global proliferation 19751986199519972006 Countries 25 47 73 93 138 Zones 79176500 845>3000 Employment (million) 22.5 67.8 Is it a viable development strategy?

4. It contains… A historical perspective A global perspective Evolution of SEZ Policy in India Theoretical perspectives Strategising of SEZs : Experience of China vis-à-vis Taiwan and S.Korea) Economic impact: A quantitative assessment Economic impact: A qualitative impact Impact of SEZs on human development Social effect: Emerging issues Opportunities, challenges and suggestions

5. Historical perspective: Free trade zones in the 12 th Century in Europe –-enclaves with regard to customs' tariffs and the commercial code in force in the host country. These are Custom free enclaves for trading Since then –Export processing zones (EPZs) : good infrastructure and single window with tax benefits. –SEZs : Industrial towns –Enterprise specific zones : Single enterprise zones –Country specific zones –Highly specialised zones : ETDZs, tourism, logistics –Border economic zones –International SEZs (Cross Border SEZs)

6. Cont. Evolved in terms of –Objectives ( shift from trade to manufacturing to services to urban development) –Incentives –Range of facilities offered –Sectoral composition –Ownership –Spatial dimensions –designs dramatic differences in the ways in which these zones have been conceived, developed, managed, regulated and governed.

7. Global perspective Studied developed countries and 26 developing countries. They are not operating in developing countries alone. Several developed countries have SEZs of FTZ variety and enterprise zones. The US model is somewhere between FTZ and EPZ. Most developing countries are upgrading their SEZs rather proactively

8. SEZs in India: origin and evolution India: the first Asian country to have an EPZ in 1965. Four phases of evolution : 1965-1990: 1991-2000: 2000 –2006 (Feb 9) 2006 (Feb 10 onwards)

9. India1965-2000EPZsSmall Diversified activity 7 SEZs all owned by the central government Preferred small scale industry set up Limited incentives Set up mainly near port No legal apparatus 2000-05EPZs/SEZsPrivate zones allowed, Location decision deregulated Incentives raised No legal apparatus Mostly created by state government 2005-SEZsLow tech to very high tech Wide variety Wide ownership profile SEZ act 2005, SEZ act 2006 Large scale industrialisation Evolution of SEZs

10. Is the SEZ policy a paradigm shift? Paradigm shift is thinking out of the box. Not a paradigm shift but radical reforms Some suggestions.

11. Why SEZs: Theoretical perspectives Right wing: –Orthodox approach (Neo classical) –Political economy approach Left wing –International division of labour approach (IDL) Heterodox approach New international division of labour approach

12. Industrial clustering approach Widely prevalent perception: –SEZs are an alternative strategy of development which is based on second best solutions either to total liberalization or economy wide improvement in investment climate. Alternative perception: SEZs –are not an alternative development policy. –are a component of the broader industrial strategy and their development needs to be synthesised with the overall cluster development policy. –should be strategically located in or around existing clusters, natural or government-promoted. Alternatively, plan large SEZs or foster the development of clusters of several small SEZs to ensure a critical mass of activity. Encourage the growth of local industries around them and facilitate the synthesis of SEZs with local production networks.

13. Promoting agglomeration economies: Some observations Creation of industrial estates for promoting new industries (Andhra Pradesh) (Genome valley for bio tech, Geetanjali SEZ for gems and jewellery) Augmenting existing industrial estates (AP, Maharashtra, Gujrat, Rajasthan, UP, Karnataka) (Jamnagar in Guj., Jaipur in Raj., Noida in UP, Mumbai-Nashik-Pune in Mah.) Reinforcing industrial clusters (Gujrat, Rajasthan, UP) ( Ahemdabad, Vadodara, Bharuch in Gujrat, Jodhpur in Rajasthan, Moradabad in UP) Promotion of corridors of industrial excellence (Tamilnadu) (Chennai-Manali-Ennore corridor; Chengalpattu-Sriperumbudur- Ranipet corridor; Madurai-Thoothukkudi and Coimbator - Salem) Promotion of industrial clusters in backward regions (Maharashtra) (Nagpur, Jalna, Nanded, Latur, Amravati, and Akola, among others )

14. Qualitative benefits Economic restructuring : increased productivity Scale advantage and shift to virtuous circle Diversification of exports ( old vs new) New industries : EMS, Solar energy, Windmill, aerospace, Biotechnology, sports shoes Geographical diversification of industries –AP : promotion of IT, bio-tech, gems and jewellery –Tamil Nadu : Electronics, Localisation of global supply chains –Nokia, Suzlon, Geetanjali, Uniparts in Vizag

15. Quantitative impact: A big push Latest data –585 SEZs approved, 381 have been notified of which 143 SEZs are already exporting. –SEZs now export in excess of Rs. 3,00,000 crore –With an investment of Rs. 2,00,000 crore, –SEZs today provide direct employment to over 7,00,000 persons.

16. However, there are costs… Regional inequalities Only 5 states Only 5 top SEZs Positive correlations between SEZ and domestic economy investment and employment Tax loss : Indirect tax loss per unit of exports from outside SEZs larger than that within SEZs Relocation: No evidence of decline in investment outside SEZs except in large IT sector.

17. Social impacts Human development (race to bottom?) Human capital upgradation Environment (race to bottom?) Spatial restructuring and urbanisation Empowerment of rural communities

18. Issues Land acquisition –International experience –Newer models of land acquisition –LARR ( will it help?) Food security Private vs public SEZs Real estate proposition

19. Are these issues SEZ-centric issues?? Perhaps not. Can be overcome through dynamic learning and institution building? SEZs : testing lab for large industrialisation programme.

20. Challenges Policy gaps –RTAs: large Indian markets and SEZs –WTO: Trade based subsidies Major hurdles –Weak commitment, lack of political will power, uncertainties and policy dilutions