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Political Economy of India’s Special Economic Zones: a Conceptual Frame Work

 

 Every country stands for its own development. For this purpose the state introduces and implements new policies and programmes such as Special Economic Zones Act. After 60 years of its independence India with its 110 core population has evolved a new paradigm of its political economy which is confusing. The policies and programmes initiated by Indian government to create a ‘global village’ based on free market economy and free trade among nations cutting across all barriers, abolition of national boundaries and dismantling the nation –state system giving priority to ‘market’ over the ‘state’ . After the enactment of Special Economic Zone Act 2005, it created tremendous effects on political economy of the country.

            The term ‘political economy’ came from the two Greek words ‘Politiko’ and ‘Oikonomia, where ‘Politiko’ stands for the state and society and ‘Oikonomia’means managing the house hold economy. Political economy thus means a study of the state, society and house hold economy. The concept of political economy arose historically as the economic doctrine of a new class – the capitalist class. It has been evolved since the days of Aristotle who gave a model of public good through guaranteeing each person private possession of what he was rationally and morally entitled. Private property was elaborated later by Locke, Adam Smith, Ricardo and the physiocrates, who came to be known as the Laissez Fairists in Economics, or, the liberal democrats in politics. Adam Smith referred to political economy as a branch of the system of civil government. It was concerned with public policy.

            In Marxian view, political economy can be regarded as a subject which studies the social relations evolves between different classes of people in course of production, distribution, exchange and consumption. Political economy belongs to the broad land of economics, which opens on to political science. After a prolonged period of hibernation, the subject has again been resurrected.

Marxist political economy makes a study of how the productive forces are used under the given relations of production taking account of the lines and trends in technical progress; political economy studies the influence of production relations on such progress and its socio economic consequences. Marxist political economy starts from the assumption that human vital activity is objectively based on social material production which includes man’s interactions with the nature and whole range of relations which arise in the process. It has been realized that every political action has its obvious economic repercussion, and every economic action has had its political implications.

 The liberal school of political economy offers economic implications of political facts and factors. The liberal school has economized politics. The liberal system focuses on the atomistic individual as the relevant unit, on the description of economic behavior in terms of subject choices among alternatives, on the notion of social welfare as the maximizations of individual utility sums. The socialist system views the entire economic system as the basic unit, views economic progress in terms of the growth of the forces of production and focuses on ‘relations of production’ ‘surplus value’ and the rapid increase of social product.

By contrast the Gandhian system eschews both the notions of the atomistic autonomous individual maximizing his utility in a self regulating economy and the notion of processes of production autonomously effecting changes in the organization of production ,class relationship and the magnitude and distribution of social product instead of the Gandhian model suggest that the fundamental attribute of human economic behaviour lies in the relationship of individual to socioeconomic micro groups and the relationship of micro groups to society .The basic economic act is neither the choice between economic alternatives nor the social division of natural products, but the adjustment between individual and the micro groups to which they belong, and of those micro groups to society .It is this collaboration which is the basic theme of the Gandhian system of political economy.

The Gandhian system is viewed in micro groups that are fundamental constituents of the economic system and given full scope to develop their potential in the context of no coercive forms of political control. Social welfare is defined in terms of the functioning of the collaborative micro groups vis –a-vis its members. Gandhi believed that the introduction of technology and patterns of development must be consistent with the full employment objective.

Today economist speaks of sustainable development and ecological values. Gandhi was not against industry but as he predicted it could not give people more employment. His constructive programmes were to give employment to all people whether it be kadhi, gobar gas or tree plantations, where all can be engaged in constructive work. Gandhian economics is an alternative to overcome the exploitation of both capitalism and communism for the exponents of human social order.He was against the large scale use of machinery which kept millions without work. Swadeshi is one of the core elements in the socio-economic organisation of Gandhian system.

Gandhi observes

                       “Life here will not be a pyramid with the apex sustained by the bottom, but it will be an oceanic circle whose centre will be the individual, always ready to perish for the village, the latter ready to perish for the circle of the villages, till at last the whole becomes one life composed of individual, never aggressive in their arrogance, but ever humble sharing the majesty of the oceanic circle of which they are integral units’. The idea of the circle stands for integrating, fullness and self-sufficiency. He wrote that independence must begin at the bottom. Thus every village will be a republic or Panchayat having full powers. It follows therefore, that every village has to be self sustained and capable of managing its affairs even to the extent of defending itself against the whole world.”

 Politics and economy are considered as two basic factors in determining the nature of the state and society. They are interrelated to such an extent that the changes in one affect the other, and hence both are ‘dynamic’ and ‘flexible’ ingredients of the national and the international systems. Politics and economy taken together as political economy refers to ‘managing the economy of the state’. Conceptually political economy connotes the relationship between the state, society and the economy, the cause–effect relationship between technological change and the process of development, the economic relations among the different nations of the world.

DEFINITION OF SPECIAL ECONOMIC ZONE

            A special economic zones is a geographical region that has economic; laws more liberal than a countries typical economic laws. According to the SEZ Act 2005, A SEZ is a ‘specially delineated duty free enclave and shall be deemed to be foreign territory for the purpose of trade operations and duties and tariffs. A SEZ also been viewed as “a geographical region with different economic laws than a countries typical economic laws with the main goal of attracting foreign investment’. “A SEZ or a Free Trade Zone (FTZ) is typically an enclave of units operating in a well –defined area within the geographical boundary of a country where certain economic activities are promoted by a set of policy measures that are generally not applicable to the rest of the country”.

            The concept of special economic zones is not new. In an International Labour Organization (ILO) report traces the roots of the concept to 13th centaury Spain and in more recent times to Ireland and Puerto Rico, which established Export Processing Zones (EPZ). Export Processing Zones is the former name of the Special Economic Zones. The countries like China, United Arab Emirates, Malaysia, India, Jordan, Philippines and Russia have utilized the concept of SEZ. In 1986, there were 176 zones across 47 countries. Now the number has increased to over 5000 across 147 countries.  

The zones are known by different names in different parts of the world. Most often these are Free Trade Zones  (FTZ),Industrial Free Zones (IFS) Export Processing Zones (EPZ) Bonded Free Zones and Special Economic Zones (SEZ).

          Export Processing Zone is the ancestor of SEZ. An Export Processing Zone is relatively small geographically spread area within a country. The purpose of which is to attract export oriented industries, by offering them especially favorable investment and trade conditions as compared with the reminder of the host country. The EPZ is just an industrial enclave but SEZ is an integrated township with fully developed infrastructure. The UN Industrial Development Organization (UNID) identifies five basic attributes of EPZ s are:

 ? EPZs are dominated by market mechanisms.

 ? EPZ are restricted to a limited region.

 ? EPZs specialize in the production of exports goods and offer special incentives for such production.

 ? Their major aims are to attract foreign investments, earn foreign exchange and to  generate employment

? Secondary aims are technology transfer, development linkages and regional             development .

Policies taken by the governments for the development of the nation obviously affect the people. SEZ policies are for the development of the country. These Developmental projects have economic, political and social impact. In Gandhian political economy, village level development is needed. Land needed for the establishment of the SEZs projects also affected the political economy of the country. Tax incentives, Foreign Direct Investment, New type of employment generation also affect the political economy of the country. The macro economic changes driven by SEZs will push the countries down the path of increasing socio-political crisis.  

A BRIEF HISTORY OF INDIA’S SPECIAL ECONOMIC ZONES

India became independent in 1947 and chose self- sufficiency along with economic autonomy. The Industrial Policy Resolution of 1948 marked the beginning of the evolution of the Indian Industrial policy. The Resolution not only defined the broad contours of the policy. But it delineated the role authority of the state in industrial development both as an entrepreneur and as an authority

The industrial policy Resolution of 1956 gave the public sector a strategic role in the economy. It categorized industries, which would be the exclusive responsibility of the state or would progressively come under state control and others. Earmarking the pre-eminent position of the public sector, it envisaged private sector coexisting with the state and thus attempted to give the policy framework flexibility. India opted for a planned economy with emphasis on state sponsored industrialization. The argument was that capital being scare in India, it was essential to regulate the flow of the available capital in to socially desirable channels. This was achieved by an elaborate system of industrial licensing and state monopoly and control over key industries.                                                                                                                        

More than 80% of the Indian population is still living in agricultural field. Agri-centered model of development was prevalent during the 1950sand the 60s. Agriculture contributes approximately one-fifth of total gross domestic product (GDP). It provides the means of livelihood to about two-thirds of the country’s population. The Sector provides employment to 59 percent of the countries workforce and is the single largest private sector occupation. Agriculture accounts for about 10 percent of the total export earnings and provides raw material to a large number of industries.

During the Jawaharlal Nehru’s period, foreign collaborations were promoted in certain sectors and foreign investment was encouraged. First Export Processing Zone (EPZ) was set up in 1965 at Kandla, in Gujarat. This was a predecessor of the Special Economic Zone in India. The Santa Cruz EPZ in Mumbai became operational in 1973.

After the death of Jawaharlal Nehru, Indira Gandhi became the prime Minister of India in 1966. She also did a lot for the economic development of the country. The Foreign Investment Board was set up in 1968. In 1973, Foreign Exchange Regulation Act (FERA) was enacted.. India set up the Santa Cruz Electronics Export Processing Zone (SEEPZ) between1973-74. It was the first EPZ which was dedicated to the electronic industry.

Doors of the Indian economy were opened during the 1980s, by Indira Gandhi and later by Rajiv Gandhi. From 1984 to 1989, the policy was to enable the middle class to consume more so as to raise the internal demand. This resulted in the raise of imports and the growth of Foreign Direct Investment. The government tried to raise the level of exports in order to balance this phenomenon. In 1984, the Free Zone policy received a fresh start. By 1991, the Indian economy was opened up for linking up the Indian market with the world leading to free flow of trade and commerce .The multilateral Financial Institutions like the World Bank and the International Monetary Fund while assisting the developing countries like India also insisted upon restructuring the polity and the administrative machinery. Following a change in the policy regime in this period and the formation of the World Trade Organization (WTO) with India becoming its founder member, it opted for a liberalized capitalist strategy. There had been introducing policies since July 1991 particularly in the industrial sector.

De-reservation of industries for the public sector was one of the major step taken by the government as part of the policy changes in the industrial sector. It was against the earlier 17 industries were reserved, there are now industries like defense production, atomic energy, coal and lignite, railways and mineral oils reserved for the public sector. Core industries like iron and steel, electricity, air transport, shipbuilding, and heavy machinery industries such as heavy electrical plants telecommunication cables and instruments are now open to private sector participation. Besides, equities held by the government in selected public sector enterprises like ONGC etc are now available to mutual funds, financial institutions, the general public and workers through a policy of divestment

In1998, the first private SEZ started its operations in Surat .This was under the jurisdiction of the Mumbai (SEEPZ)Development Commissioner, who was a nominee of the central Government.

From the beginning of the 21st century, most of the developing countries in the world have recognized the importance of facilitating international trade for the sustained growth of the economy and increased contribution to the GDP of the nation. As part of its continuing commitment to liberalisation, the Government of India has also adopted a multi-pronged approach to promote foreign investment in India. The Government of India has pushed ahead with second-generation reforms and has made several policy changes to achieve this objective.  The annual growth rate ranged between six and nine percent.

Bharathiya Janatha Party (BJP) government decided to re-launch the Free Trade Zone Policy in 2000. It changed the name of Export Processing Zone (EPZ) to Special Economic Zone (SEZ). The policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package both at the Centre and the State level with the minimum possible regulations. 

The salient features of the SEZ scheme are:

v No licenses required for import

v Manufacturing or service activities allowed.

v SEZ units to be positive net foreign exchange earner within three years.

v Domestic sales subject to full customs duty and import policy in force.

v Full freedom for sub contracting.

v No routine examination by customs authorities of export/import cargo.

  The United Progressive Alliance (UPA) government Currently in power enacted Special Economic Zone Act, 2005 which was passed in June 2005 and came into force on 10th February 2006 with the notification of the SEZ Rule in 2006. The Act provides for drastic simplification of rules and single window clearance on matters relating to the union and state governments .The state governments have also been enacted their own SEZ laws to cover State subjects.

The Act provides for single window clearance mechanisms for developers and operators for ensuring orderly development of SEZs, the responsibility is assigned to the Board of Approval, constituted by the union Government. The Union Government may set up a SEZ on its own or on the basis of proposals of the state government or private developers after the Board of Approval has duly screened them .At the regional level, the Development Commissioner and his /her office will exercise administrative control of SEZs. The Labor Commissioner’s power is also delegated to the Development Commissioner. There is an approval committee to approve /reject /modify proposals for setting up units in SEZs. All suits of civil nature and notified offences in SEZs will be tried and settled by specially notified courts and affected parties may appeal to high courts against the orders of the designated courts. The  corporate units operating under SEZs will enjoy special privileges and protection granted by law.

          The Act offers a special fiscal package to the units set up in the SEZs. This package includes, exemption from customs duties, central excise duties, service tax, central sales taxes, and securities transaction tax to both the developer and the units set-up, tax holiday for 15 years like 100 percent tax exemption for five years ,50 percent for next five years, and 50 percent for the ploughed back export profits for the next five years.100percent income tax exemption for 10 years in a block of 15 years for SEZ developers.

 There is a three-tier administrative structure. On the top, a Board of Approval at the level of the Union Government has been set up for the functioning of the SEZs. Next an authority has been created by the state governments for creation and promotion of the infrastructure within each state. Finally, in SEZ mechanism /authority is provided for single window approval.   According to the 2005 Act, these zones can be set up by the developers, who could be private real persons, companies, both Indian and foreign, as also the State governments or the central government by themselves or jointly with private parties. It is also being envisaged that some of the existing Export Processing Zones would be converted into Special Economic Zones.  The SEZ Act, 2005 supported by SEZ Rules, has come in to effect on 10th  February 2006.

THREE CATEGORIES OF SEZ

In India SEZs are divided in to three categories, Multi-product SEZs Sector specific SEZs, Free Trade and Ware housing Zone (FTWZ). The first category signifies a SEZ where units may be set up for manufacture/rendering of services of two or more goods in a sector or good/services falling in two or more sectors. For multi-product service SEZ, a contiguous area of 100 hectares or more is required. 

The second category defined as a zone meant exclusively for one or more product/services. The minimum area requirement is 100 hectors of contiguous and vacant land. Within sector specific SEZs, Bio-technology, Gems and Jewellery, Non conventional energy, electronics, hardware and software SEZ-including IT can be set up with minimum area has been relaxed to 50 hectares for Assam, Meghalaya, Nagaland and, Arunachalpradesh, Uttaranchal, Sikkim, J&K, Goa and the Union Territories.

 Free trade and warehousing zone (FTWZ) is the third category which minimum area requirement is 40 hectares of contiguous and vacant land. Built up area should not be less than 10 hectares.

There are 19 functional SEZs in the country which were set up prior to SEZ Act, and 154 SEZs that were notified under SEZ Act 2005. The maximum numbers of SEZs are coming up in the IT sectorThe total land requirement for the formal approvals granted till date is approximately 44,268 hectares. Out of this, about 87 approvals are for State Industrial Development Corporations (SIDCs) State Government ventures which account for over 21,169hectares 

ISSUES RELATING SEZs IN INDIA

One of the main issue is related with SEZ is locating land for SEZs. Many state governments are in the process of establishing SEZs. The issue of displacement, that of compensation or land price, rehabilitation, residential property development and land speculation, the threat of possible relocation of units from other parts of the state to SEZs and the consequent loss of revenue have been flagged . Farmers are protesting against the forced acquisition of their lands. The development of SEZs would lead to the destruction of employment of peasants whose land will be acquired and will create very little employment for high tech or high skilled persons and total net employment generated may well be negative. Handing over thousands of hectares of land cheaply to promoters of industry and relaxing the laws of the land, including those that relate to the welfare of the industrial workers, protection of the environment, taxation, etc, would automatically promote industrialization and solve the nagging unemployment problem of the country overnight. The farmers/peasants in various states such as West Bengal, Orissa, Maharastra, and Punjab have opposed acquisition of their land for SEZs. The highest level of opposition has been observed in West Bengal when land was acquired by the state government for the Tata group at Singur and Salim group of Indonesia at Nandigram.  Besides the loss of agriculture land, concerns have also been raised about the project affected People.

Using water for SEZs is one of the major problems rising from different parts of the country. Mundra SEZ as per official website of the SEZ, it expects to get at least 6 million liters per day from the Sardar sarovar project, as promised by Gujarat water infrastructure Ltd.

The another main issue is rising from different parts of the country, the labour laws applicable to the rest of the country have been relaxed for the SEZs. The existing laws are well intentioned and they promote worker welfare. Relaxing such laws exclusively for the SEZs shows the government’s lack of conviction in its own commitment to social justice.

In some SEZs, the state governments are joint venture partners. In the case of some, special incentives by way of concessional electricity and water tariffs have been offered .In almost all the cases, valuable lands have been given away at concessional prices.

Considering the SEZ Act, it violates the letter and spirit of the Indian Constitution; it infringes the Fundamental Rights of the citizen guaranteed in part 3rd of the Constitution. Relaxation /inapplicability of many labour Laws (including under the Industrial Dispute Act, Contract Labour Act, Factories Act, Minimum wages Act, Trade Union Act), Environment (Protection) Act is inapplicable to SEZs ,No environmental clearance needed.  Violates  Panchayat Raj Act (1996) for local self government, violating laws granting rights and control to adivasi communities over their land, violating many international conventions on human rights.

To sum up, SEZs and other emerging developmental issues can be seen in a broad perspective and theoretical underpinnings of neo-liberalism. As far as Indian polity is considered the implications emerging from SEZs may cause increasing socio-political crisis because the society is far more complex than we assumed and that will result in organized or unorganized resistance and that may even cause anti-neo liberal political forces. So, in order to avoid the polarization of the society, civil society should engage to create a consensus on developmental issues. More over, in order to understand the continuities and changes that are taking place in the developmental scenario it needs further study.     

Endnotes

Bijoiny Mohanthy and S.C Hazary(Ed), Political Economy of India Retrospect and Prospects (New Delhi: APH Publ).

 S.C Hazary, Political Economy of India Retrospect and Prospects, ( New Delhi: APH Publi,1997.)

 

Sukhendu Mazumder, Politico-Economic Ideas of Mahatma Gandhi  (New Delhi: Concept Publishing House, 2004.).

B.Mohanan,(Ed), Gandhis Legacy and New Human Civilisation, Gyam publishing house, New Delhi,1999.

Vineetha Sharma, ‘Implications Of A Special Economic Zone on Project Affected People a case study of Reliance Haryana SEZ”, Man & Development, Vol.39,Dec,2007.

Jermy Grasset and Frederic Landy, ‘Special Economic Zones in India Between International integration and Real Estate Speculation’, Man &Development, Vol. 39,No.4, Dec, 2007.

India 2008, A Reference Annual, Publication Division, Ministry of Information and Broadcasting , Govt:of India, New Delhi,2008.

Partha Mukhopadhyay, “The promised land of SEZs” Seminar, Jan, 2008

.

Sheetal Sharma and Kishan Pratap,  “ The Prosperous Few and the Pauperized Many: A Perspective on Special Economic Zones”, Mainstream, February,23-March,1,2007.

 

About the Author

Jipson V. Paul
MA. Politics and International Relations from M G.University Kerala
MPhil. Politics and Intrrnational Relations from M G University Kerala
Doing PhD in Pondichery Cental University Puducherry.

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