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Mon, Oct 02, 2006 - Page 10 News List

Row brewing in India over SEZs


A major row is brewing in India over Special Economic Zones (SEZ) which have been touted by the government as a way to lure foreign investment and boost exports.

Hailed as one of the biggest pushes for industrial expansion in post-independence India when the SEZ Act was passed last year, some critics now are dubbing the duty-free enclaves "Special Exploitation Zones."

The privately run zones, intended to be oases of world class infrastructure in a country where power and water shortages are routine, are drawing fire over the lucrative tax breaks they offer and the way land is being acquired and used.

The government has cleared 150 applications from foreign and domestic companies and 225 are in the pipeline, Ministry of Commerce Secretary Gopal Pillai says.

The Congress-led government estimates the zones, inspired by the SEZs set up a quarter century ago in China that helped drive its rapid industrial growth, will create at least 2 million jobs and draw billions of dollars of investment in coming years.

But despite this, the Cabinet cannot agree whether the zones will be a money spinner or a drain on government coffers.

The finance ministry says the tax holidays and other perks offered by the zones will divert existing or planned investment into these zones. It calculates the resulting loss in direct taxes, customs and excise duties at a massive 900 billion rupees or US$19.5 billion by 2009-2010.

Even the IMF has expressed doubt about the zones.

"Overall it [the tax concessions] becomes yet another giveaway that the government cannot afford," IMF chief economist Raghuram Rajan says.

Commerce Minister Kamal Nath insists that the zones will earn the treasury billions of rupees in the next few years "by acting as a trigger and catalyst for economic activity."

Another bone of contention is that only 35 percent of land has to be devoted to industrial activity and the remaining 65 percent can be used for commercial complexes or housing projects -- raising fears the zones could become a real estate gold rush.

"Why should incentives be given to real estate developers in the name of SEZs?" asks Communist leader Sitaram Yechury, whose party helps prop up the government in parliament.

A Morgan Stanley report suggests that "many of the applications are being made in a rush to just block the land."

The concept behind India's SEZs is simple.

Keen to become more competitive with rivals like China in drawing global investment but lacking the political muscle to bring about rapid improvements in water, power supplies and transport, the government decided to allow the private sector to set up SEZs.

In return for establishing the infrastructure, SEZ developers would be offered tax breaks.

But as the details emerged, "what had begun as zones that might help exports began to look like an idea for company towns with tax benefits which would yield mega-profits for developers," Business Standard editor T.N. Ninan says.

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