SEZs have nothing to do with land acquisition

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Kamal Nath, Union Minister for Commerce and Industry, interviewed by Shankar Gopalakrishnan and Aseem Shrivastava.

Minister: Before we begin, Iíd like to say a few things. Special Economic Zones are not anything new. These zones have existed in many countries and we have had Export Processing Zones in India too. The reason is simple: stable investment needs a stable regulatory regime. An SEZ is just an industrial cluster with an infrastructure, meant primarily for exports.

Now, the issue is what kind of SEZs will work for India. China has very large SEZs because they donít have forest land, they donít have gram panchayat lands, they donít have revenue lands, village lands, community lands etc. So they can have SEZs of 150 square kilometres. We have land constraints in India. So we learnt early that we need an India-specific model. What should be the size of SEZs in India? There will be variations between states, between sectors, etc; the situation of each state is different.

Thatís why we have both sector-specific and multi-product SEZs. For instance, we have SEZs for gems and jewellery, which donít require a lot of space. We have very great strengths in IT. We have IT SEZs, but IT growth happens vertically, not horizontally. So why should I insist on large SEZs to the disadvantage of our export sectors? We have to work with the sectors where we have an advantage.

We put the SEZ Bill on the Internet for 10 months, I heard over 1400 suggestions from all sides, I held open-houses, and finally we came up with an India-specific SEZ Act which suits our conditions.

What are the benefits that this act will provide? It will provide two main benefits: exports and employment. Exporters in India are already exempted from taxes, because around the world the principle is that you donít export taxes. Until now, the exporters would be exempted from taxes and could claim the duties they paid as a refund. In an SEZ, they simply donít pay the duties. When the Finance Ministry calculates the loss from duties, they donít take into account the fact that those duties would have been refunded anyway.

We also need to distinguish between two different players here: the person (the developer) who makes the infrastructure and the units that will use the infrastructure to export. The person who makes the infrastructure needs tax benefits, or else why should he invest? In any case, investors in infrastructure already receive tax breaks. Besides we also need space for housing of workers, because otherwise weíll have jhuggi jhopris coming up. But weíve made the rules strict, weíve said you can build houses, hospitals, schools, etc., but first build 25 per cent of what you propose and donít come back for permission for more until those are occupied. So thereís no question of real estate. As for persons who export, they get benefits outside, so why should they not get it inside the zone?

Investment and employment have been created by the zones. Exports are also increasing.

 

What is ĎPlan B?í Suppose the zones donít work?

Donít work in what sense?

 

If, for example, there is a global recession and investment does not take place.

You see, India is an attractive destination for investment globally. Why should the plan not work? And if it doesnít, we will deal with it in the circumstances as they arise. If investment in the country in general goes down, then yes of course investment will go down in SEZs too, but it wonít just be in SEZs, it will be everywhere.

 

What if an SEZ developer does not perform? There are no performance standards laid down in the act for SEZ developers.

If a developer doesnít perform, if he doesnít build infrastructure, he wonít make any profits. And that will be his loss.

 

But he will have the zone.

Itís his private land. If he wants to build flats on it, he can build flats on it; if he wants to make an SEZ on it, he can do that too. But he doesnít get any benefits purely from getting approval to be an SEZ.

 

Many of the state governments are acquiring land for the zones.

What the state governments do is a different matter. Land acquisition has nothing to do with SEZs.

 

The developer will still receive tax concessions for any profits he might make, for any activity in the non-processing area Ė even if itís not industrial.

The tax concessions are available to only those activities of the developer which are approved by the Board of Approval and moreover, the activities in the non-processing area have been linked with the activity level in the processing area.

 

In that case what happens?

The developer doesnít get any benefits just because he has the approval letter. The developer canít do whatever he wants in there. As soon as the SEZ is notified, it is bonded by customs and tax concessions are available only for authorised activities. Even for the authorized activities, duty free material has to be approved by the approval committee.

 

So the developer would lose SEZ status?

In any case, once the zone is notified, it is bonded by customs, if you do nothing there you are finished.

 

On a different topic, thereís a sense that the SEZ policy has not taken into account other interests. For instance the Ministries of Agriculture, Rural Development, Urban Development, Labour, Panchayati Raj and Environment are not represented in the Empowered Group of Ministers (EGoM) or on the Board of Approvals Ė itís the Finance and Commerce Ministries, the Defence Ministry, the Home and External Affairs Ministries. Why is this the case?

Those ministries are not concerned with SEZs. See, SEZs have nothing to do with land acquisition. This is not about land acquisition. Every project requires land. If we want industry, we need to have land. If we donít want industry, itís a different matter. Like the Tata project in Singur, itís not even an SEZ, but itís causing problems because of land acquisition. Nandigram Ė everyone is saying that Nandigram had trouble because of SEZs, but it is not about SEZs, it is about land acquisition.

 

But it is a development issue?

Everything is a development issue. Does that mean the Ministry of Health should also be represented?

 

The WTO has barred export subsidies as per the Agreement on Subsidies and Countervailing Measures. Countries that use export subsidies can be subjected to countervailing duties on their exports. The incentives in SEZs, like tax concessions, tariff reductions on imports etc. would be barred under these agreements.

We are not giving any cash incentives for exports from SEZs and as such there are no export subsidies there. I have been emphasizing that taxes should not be exported. Remember that SEZs are all about single window clearances and simplified procedures. So instead of asking the SEZ developers and units to pay taxes first and then refunding the same through drawback etc., we have provided for exemption right in the beginning.

 

India is subject to the highest number of countervailing duties in the world...

You mean anti-dumping duties? Yes, we are fighting that, but we also pushed for those provisions in the WTO, so that we can use them against other countries.

 

In future then if the SEZs are doing well and there is large-scale exports from them, wonít we be subjected to countervailing duties?

Donít give me hypothetical situations. Till date India has not been subjected to any action under NAMA.

 

SEZs were officially claimed to have three main goals: employment, exports and infrastructure. But most SEZs are coming up in suburban areas where there is already good infrastructure. Shouldnít they be directed to poorer areas or wastelands?

If an investor comes and says I want to build my zone here, and I tell him to go build it somewhere else, he will leave. I canít do that.

 

In that case they will not contribute to infrastructure?

No, they are contributing. Already so much investment has taken place. They are creating infrastructure. Thousands of crores have come in, which is going into infrastructure.

 

So they are not contributing to infrastructure generally, only for their own needs.

They are contributing to infrastructure inside the zone.

 

In most countries that have created SEZs, the government has decided where the zone should be located so as to achieve balanced regional development etc. Why is Indiaís policy different?

We have to be market-friendly. Where the investor wants the zone is his business decision. Otherwise they wonít come. We must have a model that works. As I said, they do contribute to infrastructure Ė inside the zone.

 

But often it is the state government (and not private investors) that has promised to spend money from the public exchequer on infrastructure to facilitate investment in the zone. The Andhra government, for instance, recently sanctioned Rs 750 crores from the state budget to create infrastructure for SEZs in the state.

I donít know what the state governments are doing. But if they want to build a road to an SEZ, why should anyone object?

 

The Parliamentary Standing Committee on Commerce recommended that there should be a freeze on zone approvals. Why has the government not done so?

We said, letís wait for a couple of years and see what happens. Besides a lot of these things are motivated by competitors, people who have got SEZs and want to make sure that no other SEZ comes up anywhere close to theirs. They donít want competition.

 

Export zones are now regarded largely as outdated. The IMF, the World Bank, the ADB, the OECD and so on have criticized zone policies.

Donít tell me about the IMF. These people in the IMF and the World Bank, sitting in Washington, have never visited any SEZ in India. I told the World Bank President, come and see an SEZ, then make your comments. These people are against the developing countries. Tell me what is their own track record? Have they ever succeeded?

 

The Act and the Rules contain various provisions on criminal law, special courts, etc. What is the reason for these separate systems of law?

All the laws of the land apply. Which laws donít apply?

 

But the permission of the Development Commissioner is required before any investigation, search or seizure can take place.

Yes, it only means that the inspector needs to get permission before entering, he canít enter just like that. But all the laws of the land apply. Every law applies.

Look, the zones are working, they are functioning. They are doing well. Crores of investment are coming in, thanks to the competition amongst the different states in the country. Go and see well-functioning SEZs like Nokia, Mahindra and others.

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