CEZs on shaky ground

Economic enclaves have a patchy history in India

The government has taken the first step in its ambitious Sagarmala project of creating 14 coastal economic zones (CEZs) by approving the enclave for the Jawaharlal Nehru Port Trust in Maharashtra. Reports suggest that 45 companies from the telecom, technology, and automobile industries are expected to bid for 200 hectares, or 2 sq km. The zone expects to attract investment worth Rs 15,000 crore and create 150,000 jobs in the first phase. Since the JNPT accounts for 40 per cent of India’s trade, this appears to be a reassuring start to the National Democratic Alliance’s stated objective of boosting foreign investment and creating jobs. Concerns, however, arise over, first, the project in its entirety and, second, the wisdom of creating enclaves of exceptionalism for industrial development.

For one, the broader CEZ project seems to have become a casualty of the chronic problem that besets all major business projects in India: Land acquisition. Reports suggest that several projects have hit roadblocks either on account of high prices or limited land availability. For some CEZs, real estate prices have soared as much as five times once the plan was announced to acquire land for the mammoth spatial-economic zones, which could extend 300 km to 500 km adjacent to deep-water ports. Others are stuck for want of contiguous land parcels. The issue of contiguity, in particular, is likely to be a serious one for CEZs because they do not attract the provisions of “eminent domain” that exclude some 13 exceptions such as railways and coal-bearing tracts from the requirement of prior consent. This raises the larger question about the advisability of CEZs in the first place. If the experience of special economic zones (SEZs) – smaller cousins of the CEZs – is anything to go by, investor appetite is unlikely to be large without tax concessions and relaxations in labour laws. Indeed, the enthusiasm for SEZs waned considerably once the government imposed the minimum alternate tax and the dividend distribution tax. Although the NITI Aayog has recommended tax relief for CEZs, the government has so far desisted from offering it, deeming easy port access and single window approvals sufficient incentives for companies to invest. Given this sensible abstention from tax giveaways, it may make sense for the government to reconsider the CEZ policy altogether. 

To be sure, the SEZ policy appears to have been a success. They accounted for a third of exports, but much of this was on account of the IT and ITeS sectors, which merely shifted location when the sunset clause on their sector-specific tax breaks kicked in. This makes it difficult to gauge the real performance of SEZs, but they highlight the risk that creating islands of “doing business” excellence is unlikely to generate the kind of all-round economic development that India urgently needs. Although it has been argued that the SEZ mode of growth was the basis for China’s economic miracle, it is surely realistic to recognise that political and social dynamics differ significantly to make that model the least optimum solution for India. The dangers of encouraging investors to go “concession shopping” were inherent in “backward area schemes”, which companies promptly abandoned when the sops were withdrawn. India, thus, needs to be seen as an SEZ in its entirety. Without that holistic view, economic development will remain on shaky ground.