The God of Small Things

The Government of India -- notably the Ministry of Commerce, in the case of SEZs, but the Finance Ministry and the Reserve Bank of India (RBI) as well -- is able to take seemingly very minor regulatory decisions that have, in some instances, fairly significant implications for particular constituencies. A good example came recently in the form of recently amended SEZ rules. Manufacturers located in special economic zones will now have a full year to sell goods, including gems & jewellery, displayed in foreign shops and designated show-rooms, without attracting penalties. The previous limit had been six months. Unsold good can be re-imported within a year from the date of their export. The justification for the policy change: the global economic downturn.

Economic crises has, in fact, become something of a catch-all excuse for any number of policy revisions and discretionary decisions, including extensions on the amount of time within which SEZs must be developed, and rules governing external commercial borrowing by SEZ promoters. To avoid the appearance of favoring business interests, rule changes are often packaged alongside restrictive conditions of various types. For instance, the relaxation on external commercial borrowings on 'infrastructure' are limited to non-residential/non-commercial-real-estate portions of the SEZ; they cannot be applied, for instance, to Integrated Model Townships. Because money is fungible, the logic implicit in this restriction (that the Government of India and Reserve Bank do not want to encourage speculative investment in residential developments) is undercut in practice.

Pro-industry rule changes are also coupled with what are meant to be perceived as countervailing get-tough policies to ensure compliance with new or existing rules by those actors to whom concessions are being granted. Vowing to crack down on firms that have violated ECB norms, a statement by the Finance Ministry declared that the government will revoke access to the 'automatic route' (i.e., non-licensed procedure) for overseas loansby such companies. According to the statement: 'Currently, the ECB policy is not explicit about accessing of ECB by the corporates, which have violated the extant ECB policy and are under investigation by the Reserve Bank and or Directorate of Enforcement'; henceforth, however, a 'request by such corporates for ECB will be examined under the approval route', which hardly seems like a harsh punishment -- except insofar as the approval route will tend to result in demands for illicit payments by those granting these approvals. A strange form of disincentive, to be sure, but possibly effective.

Finding the Reverse Gear: Precedent-Setting on Denotification

The case of Goa's SEZs first raised the question of denotification. After initially supporting the applications of various SEZs at the Commerce-Ministry-led Board of Approvals (BoA) in Delhi, the state government eventually bowed to pressure from within Goa's civil society and announced its decision to 'scrap' the planned SEZs. The Goa government's requests to the BoA and other authorities in Delhi to have the notifications withdrawn met with a curious response: that there was no provision in law for denotification of SEZs. This delayed the process of scrapping the SEZs.

Just this week, the Board of Approvals announced that it would allow the the withdrawal of the Matyas biotech SEZ planned for Hyderabad that had been promoted by the relatives of the former head of IT giant Satyam. Whether there is a distinction between withdrawal and denotification is unclear. Presumably it matters which party initiates the request for denotification -- that is, the promoter or the state goverment. But in the Goa case, where the state government was a co-promoter in at least some of the SEZs, this distinction is less meaningful.

The bureaucratic machinery charged with implementing and overseeing the SEZ policy is making up the rules as it goes along. There is nothing inherently wrong with that, unless you believe that those framing the initial legislation and regulatory guildelines should foresee every potential contingency. On the other hand, it is perfectly legitimate to ask whether, in the process of framing and revising officials rules -- whether with regard to SEZs or any other policy domain -- biases manifest themselves. In the case of SEZs, it will be important to track whether the pressing concerns for equity and transparency among civil society receive the same treatment as corporate interests.

Vague Nods to Corporate Social Responsibility

The promoters of SEZs are, not without good reason, often portrayed as aloof from the concerns that responsible corporate citizens should, ideally, be addressing. This is putting it mildly, of course, since some see the SEZ phenomenon as an intentional method of avoiding regulation and indeed short-circuiting the democratic process. A 2006 paper by Anirudh Burman outlined some of the issues that reside at the intersection between CSR and SEZs in India, though how these will play themselves out in practice is still rather murky.

There are a few indications that at least some SEZ developers are at least aware of the complaints levelled against them, and want to be seen to be taking some kind of positive action. The promoters of Sri City, a 5000+ acre mega SEZ, near the border between Tamil Nadu and Andhra Pradesh, took the trouble to identify the availability of housing within the residential portion of the SEZ for 'workers' (as well as for executives, who are routinely catered for). But how many 'workers' will indeed be covered? What about those who will be employed in ancillary service industries that will (if the development is successful) grow up around the walls of the SEZ? What options will workers in the informal sector? These and other questions ought to be part of the master plan for the regions in which SEZs are located, but (as the research of Dr N Sridharan, a professor of Urban Planning at Delhi's School of Planning and Architecture, has shown), efforts to plan for such eventualities are rarely seen. (Dr Sridharan's work is one of the components of the research project with which this blog is affiliated).

The firm's public relations presentation to an investment summit also highlighted its concern for the surrounding environment, noting that limited-carbon-impact was its goal. Towards this end, the developers were planting 1 million saplings on the 800-acre designated 'green' area within the SEZ. Whether such pro-environment trappings would be sufficient, given the huge water resources that the industrial sites within the SEZ would require, is open to question. Moreover, as production of automobile components is one of the sectoral thrusts of the SEZ, the project can hardly be called 'green.'

Informative Discussion of SEZ Land Issues

Demonstrating once again that it has some of the most creative editorial minds in India's business and economics press, LiveMint.com has had a series of articles on issues related to SEZ land acquisition. These have been produced in connection with the release of a report by Infrastructure Development Finance Co. (IDFC) entitled India Infrastructure 2009. The first is called 'The politics of land acquisition', and asks 'Why do some industrial projects face opposition and not others?'. This is one of the key questions that the indiaSEZpolitics research project (affiliated with this blog) has sought to address through its field studies in 12 states (currently in progress). LiveMint.com editors discussed this with the IDFC report's authors.

The discussion in this case included some very incisive points about the various aspects of India's Resettlement and Rehabilitation policy, of which compensation (to the individuals whose physical assets are being acquired) is just one part. The social dimensions (rebuilding the social fabric) and the question of sustainable livelihoods (for all project affected people) were also touched upon.

But there was, in fact, very little by way of an answer to the question posed above -- as to why opposition arises in some cases and not others. The obliquely supplied answer was that when private companies acquire land on their own they have been more attentive to these complex issues than when government does the acquiring on their behalf. A contrast was drawn between the Tata Nano (Singur) project (which, incidentally, was NOT an SEZ), where the West Bengal government acquired the land (or sought to), and the Jindal Steel plant (where the firms purchased land directly, placing some of the funds in reserve rather than paying out all at once). Whether this pattern (state bad, corporate good) is discernable among a larger set of cases is open to question. Especially given that many corporate land acquirers do not in fact attend to the multiple dimensions of rehabilitation mentioned above.

The second article in the series, 'Land acquisition and legislative lapses', looks at the legal issues involved in land acquisition for SEZs. Among other things, the discussion with LiveMint.com's editors included this striking opinion from CEO and Managing Director of IDFC, Rajiv Lall:

'What has happened in our country is that starting with that concept [SEZs], by the time you’ve got to the legislation [The SEZ Act 2005], you’ve completely distorted the notion of SEZ.

So along the way, because of interventions of a lot of vested interests, what you have created is legislation that allows for, technically, the creation of SEZs that have nothing to do with the original concept. Hence, the allegations or the suggestions that “Oh, this is just a scheme either to avoid taxes”—because one of the fiscal benefits associated with getting that status is a whole bunch of tax exemptions—or that it is a land grab in which you effectively change the land use and hence enhance the land value....

I think the allegation that the legislation has been completely distorted to undermine the original noble purpose of the initiative is the correct interpretation. So I don’t think I am a particular fan of the existing legislation.'

The launch of the report, where among the speakers was Kamal Nath (former Commerce Minister, now in charge of infrastructure -- a smooth transition thematically, if nevertheless viewed as a demotion, politically), was also covered on LiveMint.com. It includes video extracts which are quite revealing, not least about the Government of India's current intentions regarding reform/amendment of the Land Acquisition Act and reintroduction of the Resettlement and Rehabilitation Act. The former has run into some trouble, in the form of opposition from Mamata Banerjee, who led the anti-Nandigram agitations and whose Trinamul Congress is a member of the UPA.

Calcutta Art Exhibit on SEZs

The Statesmen carried a review of an art exhibit, ‘SEZ Who?’, curated by Tushar Joag at Kolkata's Experimenter gallery. The reviewer was critical in many respects, not least in terms of the quality of the exhibit's execution. But the ability of visitors to interact with activists concerned with the impact of SEZs, and the availability of (recorded) testimonials from people affected by SEZs, seems to have made it a worthwhile experience. As Partha Banerjee (a member of the research team for the 'Politics of SEZs' project with which this blog is affiliated) has noted in some of his writings on the subject, artists and intellectuals have engaged intensively with the SEZ debates and controversies in West Bengal. It is not clear whether there has been a similar level of involvement in other states.

A Question of Time?

With deadlines in prospect for time-bound development rights for SEZs in many states, promoters are having to seek extensions. This is the case in two high profile SEZs : Quark City in Punjab (the state's only IT SEZ), and the (Mukesh) Ambani Reliance Haryana SEZ (a 90:10 joint venture betweeen Ambani and the state government). In both cases, the reasons cited for the delay in completing the planned developments is the global financial-crisis-cum-recession.

It is clear, however, that in both cases, other factors have been at work. The Reliance-Haryana project has been beset with problems from the outset, including slow acquisition of land, the changing size-ceiling norms under the SEZ Act's amended rules, frictions with the state government, and charges of corruption (leveled by Bhajan Lal's son, no less).

The Quark City project in neighbouring Punjab is also facing delays arising from a broadly similar set of constraints, though the size issue is of a different magnitude (it is much smaller). The fact that Quark's promoters also have two other SEZs under development in the state may influence the decision on their request for more time.

There are other cases elsewhere in India where extensions will be needed/requested. A key issue will be the attitude of the state governments concerned (thought the official decision on whether to grant an extension rests with the BoA in Delhi). It will be revealing, perhaps, to see how inclined state governments are to accommodate the various promoters -- particularly in states where elections have seen a new party or coalition come to power.

SEZs and Labour Laws

A short article on the position of existing labour law within India's SEZs (and the larger SEZ policy regime) highlights the ambiguities involved. The author, Jaivir Singh, calls into question claims made in the 2006/07 and 2007/08 Economic Surveys concerning the allegedly negative impact on employment produced by India's existing labour laws and regulations.

Singh makes the point that businesses have found all kinds of ways of avoiding labour laws -- including contracting out, casualization, and collusion with labour inspectors, among other techniques. This is consistent with arguments concerning the politics of liberalization which stress that India has witnessed over the past two decades a process of policy change that can best be described as 'reform by stealth'. The ability to evade labour regulations effectively, Singh points out, has been 'assisted to various degrees by ongoing executive and judicial practice'.

Singh's larger point is that SEZs take this logic a step further by blurring the formal-informal distinction in practice:

'Given the overall desire of the SEZ endeavour to push for labour-intensive export oriented consumer goods, the entire enterprise is probably best understood as being located at the border between the formal and informal sectors, drawing the labour force from the informal/agricultural sector. At this location, the very act of employment generates a dilemma because the instant a worker is drawn from the informal/agricultural sector and ‘employed’, she becomes eligible for all the benefits provided by law to formal sector workers. If this were indeed to be allowed, it would raise perceived labour costs which would presumably dampen national and international investment. If disallowed explicitly, the political rhetoric associated with the SEZ enterprise would end up being more widely challenged. Given the frontier location of the labour involved, the solution to this dilemma has been to nudge the practice of law in a manner which minimises the coverage of labour law without actually changing the law—a relatively smoothly accomplished step, given the nature of Indian labour law as well as the structure of the enabling law associated with SEZs.

'Though the Special Economic Zones Act, 2005 overrides certain other laws (particularly granting fiscal benefits to firms located in a SEZ), the Act maintains that in relation to labour, standard labour laws are to continue to operate in the SEZs. While there is no change in the laws, under this regime the implementation of labour law is shifted from the control of the Labour Commissioner to the Development Commissioner of the SEZ, a figure who is given substantial power over all aspects of governance of the SEZ. Furthermore, the ability of workers to organise strikes is curtailed by undertaking a general policy measure that labels economic activity within a SEZ as a ‘public utility service’, which under Indian law makes strikes in units labelled as such entirely illegal. All these factors taken together result in the fact that while the ‘speak’ says that labour laws are supposed to be operational in a SEZ, they are almost entirely absent in practice.'

Singh goes on to discuss a variety of studies of labour practicies within SEZs. The literature on India's SEZs is thin, largely because the SEZ Act is so new, having been passed only in 2005. Still, some of the pre-2005 Export Processing Zones (which had been converted to SEZs following a change to the Export-Import policy of 2002) have been around long enough to have attracted the scrutiny of scholars.

Singh cites, in particular, Padmini Swaminathan (2005) “The Trauma of ‘Wage Employment’ and the ‘Burden of Work’ for Women in India” in Kalpana Kannabiran (ed.) The Violence of Normal Times: Essays on Women’s Lived Realities, New Delhi, Women Unlimited). In terms of the net impact on women's well-being, the study paints a mixed picture. But in terms of the application of labour laws to SEZs, the sense is that enforcement mechanisms are even weaker than in the formal economy as a whole, though (in a de facto sense) clearly have more of an impact than the non-existent regime affecting the informal sector. All of this refers to the pre-2005 SEZ Act dispensation, which may be a different animal altogether.