4 mistakes and the SEZ fuss

If anyone wants a parable on how India works, make a case study of the special economic zones (SEZs). The idea began as a copycat solution: if China's rapid growth is because of zones like Shenzen, where special laws apply, why shouldn't India try the same magic potion?

The counter-argument was that China introduced such zones a quarter century ago, when it was breaking free from a communist production system and therefore needed capitalist enclaves.

Investors in today's India should not need to seek escape from poor infrastructure and irrational labour laws, in special zones; rather, the underlying problems should be tackled in the country as a whole. The government decided that this was beyond its capacity, and plumped for the zones. Mistake No. 1.

The new law on such zones was drafted, and the finance minister protested that providing generous tax breaks would divert existing (or already planned) investment into these zones. He calculated the resulting tax loss at a staggering Rs 100,000 crore (Rs 1,000 billion). But his ministerial colleagues gave Mr Chidambaram no support.

Also, the new law did not give investors freedom from rigid labour laws; that was left for each state government to decide. Mistakes No. 2 and 3.

When people like Mukesh Ambani get involved in such projects, you can expect the efficient provision of services. That would address the infrastructure problem. Many neutral observers were therefore willing to go along in the belief that some good would come out of efficiently-run agglomerations of factories, offices and people -- and that these would provide a welcome alternative to our messy cities.

They had a point, and the state governments, sensing big investment or because they were competing among themselves or for other reasons (dark hints here), began signing up business partners for dozens of zones -- sometimes allocating prime farmland. There were protests, but no one listened. Mistake No. 4.

Then the government framed rules on how much of these zones could be devoted to production (very little), how much to residential development (much more), and so on. Overnight, what had begun as zones that might help exports began to look like an idea for company towns with tax benefits, which (given the difference between the prices of farmland and urban housing lots) would yield mega-profits to developers.

The rules stipulated that something no bigger than a large factory building or an IT company's campus-like work site could be declared an SEZ! When the protests mounted over the distortion of the original idea, a cap of 150 zones was announced, then removed.

Up to now, the government had made the wrong choice at every turn. "Scam" began to look like the appropriate word to use.

But the protests began building up -- thank India's democratic DNA -- and the government began to backtrack. The rules were tightened, including the minimum size for the zones, and what could be done in them.

Former prime minister VP Singh and the mobiliser of the marginalised, Medha Patkar, began to organise farmers whose land would be taken over for such projects. The Reserve Bank stepped in with its own red flag: banks should treat such zones as real estate projects. With further amendments, we now had a very Indian solution: kill the idea with red tape.

But -- and you can decide whether this is a democracy's way of righting wrongs or party sycophancy or both -- as soon as Sonia Gandhi declared that prime farmland should be protected and that farmers should not lose out, the wind changed.

The commerce minister and chief champion of SEZs sounded conciliatory, Congress chief ministers did an about-turn, and the zones now smelt like something the cat brought in. Whether we will still get the zones, and whether they will be blessed with economic logic while retaining business appeal, is now the question. Either way, this saga serves as a mirror to hold up to ourselves.