India’s Special Economic Zones: Socioeconomic Blunders In The Making

No scheme of the Indian government has evoked as much controversy in recent years as the creation of Special Economic Zones (SEZs) for industry aimed at exports. This has resulted in the displacement of poor farm families and villagers, brutal land acquisition, and gross human rights violations by the state at the behest of private capital. In addition, there is the economic infeasibility of the plan, which is not discussed as much. When the economic arguments are deconstructed, it becomes evident that SEZs are nothing but a manifestation of the state’s genuflection to private capital. The scheme is further invalidated when one observes the resistance to SEZs—resistance that has come in a variety of political hues and streams.Addressing the economic rationale (and its obvious weaknesses) is important because it is always given by the powers that be as justification for any rights violations, i.e., it is okay if poor families are brutally displaced because the employment generated will be of a much larger magnitude; or some agricultural land must be acquired because the exports industries set up will help in economic growth; or exports catering to the international market are important to boost the economy; or fiscal breaks and labor deregulation are needed to attract investment; or investment is needed because there is insufficient capital in the country, which is further needed to expand the industrial base.

So the list of economic justifications for rights violations goes on. In addition to providing counter-arguments, another reason for examining the economic invalidity is to change the paradigm of the debate. Thus far, the argument in the mainstream Indian media has tended to revolve around displacement and compensation, with an unspoken sentiment that if adequate compensation was given there would be no problems with SEZs. The crux of the argument needs to change to address whether there is  economic validity in SEZs.

Zones for export processing have been around for a while in India, but were still under a certain amount of regulation with respect to labor and taxes until about ten years into the liberalization era (post-1991). The government started looking at SEZs in 2000 to address what it felt was insufficient capital in the country to increase industrial capacity and put India on an export-led growth path. This was a manifestation of the shift from an import-substitution model to an export-promotion one, as well as the veering of the state in favor of large private capital. The plan followed the supposed success of SEZs in other countries, especially China. It was felt that SEZs would address infrastructural deficiencies, procedural and bureaucratic hassles, as well as inbuilt legal protectionist measures raised by monetary, trade, fiscal, taxation, tariff, and, probably most important of all, labor policies. The gain, as promised by the Indian government, was the expected employment it would generate for local people and the technology transfer that would benefit domestic industry. Thus, the stated rationale was a wholly economic one and constituted, in a nutshell, economic growth led by mostly private investment capital and the promotion of exports. However, this economic rationale falls apart when examined.

While industrialization aimed at exports might be important, it has to be diversified in order to protect it from the whims of the international market. Past Indian SEZs have made neither a particularly high contribution to exports, nor are they diverse. In 2004-05, SEZs accounted for barely 5 percent of India’s exports. Even if this trend improves, unit approvals for SEZs have come overwhelmingly in the IT sector. This concentration on one sector is always risky. This was evident in Sri Lanka, which had over 50 percent of its exports in the garment sector and soon collapsed with the end of the Multi-Fiber Agreement that had helped the country corner some of the market.

Furthermore, investment that is coming into SEZs because of tax breaks and labor deregulation will simply move on to the next most deregulated place at the drop of a hat. This happened with maquiladoras in Mexico when units in those zones closed due to capital flight to cheaper and more deregulated places like China. The same bodes for India as well in this proverbial race to the bottom. Investment for SEZs has overwhelmingly come from the private sector, which is far more unstable in terms of long-term economic growth than the public sector and which is based on one mantra—the increase of profits.

While footloose investment and non-diversified exports characterizes the nature of industrialization in SEZs, their implementation features massive labor, fiscal, and environmental deregulation. Large corporations have always lobbied for this from the state, especially “labor flexibility,” which is the benign term used by corporations. However, due to the relative strength of unions and other formations in India, this was impossible to implement throughout the country, which is why separate zones were required. This kind of deregulation places the “race to the bottom” between regions of the same country, as has been witnessed with many states in India falling over each other to set up SEZs with even more regional deregulation.

It is first of all a myth to think that labor deregulation is important for industrial productivity. Evidence from many erstwhile socialist countries shows that providing fair and safe work with proper employment conditions and benefits for workers improves productivity. The International Labor Organization (ILO) has also found that productivity is highest in countries with well-regulated labor relations systems and high wage growth. The real reason for deregulating labor is to further bolster the profit margins of big business, giving them an escape route from paying proper wages, ensuring adequate benefits, providing safe work environments, etc.

With regards to fiscal deregulation in order to attract investment, it’s critical to understand that it is not the investment itself that is important, but the positive impacts of that investment. One of the most important impacts of investment resulting in growth is widening the tax base of the national exchequer, which can then be used for a variety of social security measures, public sector undertakings, public health systems, scientific research, public education, subsidies for farmers, further industrialization measures, and a host of other social programs. Many of these are the very areas that the government is supposedly trying to address through SEZs, such as widening the industrial base, research, infrastructure development, etc. The revenue loss coming from SEZs will amount to more than $40 billion over the next 5 years, by some conservative estimates, and possibly much more. This money could feed the country’s 320 million hungry people for a couple of years or provide employment to at least 2 members of every rural family for the next 5 years. The annual tax concessions envisaged originally in the SEZ proposals is five times the annual budget for the National Rural Employment Guarantee Scheme. To put this number further in perspective, the allocations in the 2007-08 budget for Secondary Education is about $900 million; for the Rajiv Gandhi National Drinking Water Mission $1.4 billion; for the National Rural Health Mission $2.4 billion; for the entire North-Eastern Region $3.5 billion; and for women’s development $5.5 billion. It does not bode well for Indian society to take this kind of a fiscal blow to cater to private capital.

Among the stated benefits of the SEZ scheme has been an increase in employment and improvement in infrastructure. There is little evidence to suggest that either will happen with the SEZ plan. Employment generation is merely a guideline and not even a mandated requirement for approval. The employment claims are varied and dubious. They have ranged from 5 million jobs to 15 million in the next 4 years, to a foolhardy claim of 25 million jobs in the Mumbai SEZ alone, which is more than the total number of organized sector jobs created in the entire country in 15 years of liberalization. In April 2005 all the SEZs in the country combined were providing employment to a little over one million people. Some estimates show that there will be only one job created for every four taken away. Also, only a handful of skilled workers and staff are likely to benefit. The farm families and farm workers being displaced are hardly going to be considered for anything other than casual labor, if at all. This does not include the many other rural workers, such as artisans who, despite being displaced, are not considered eligible for employment in the SEZs. Private companies have always given impossible claims of employment growth. In Punjab, when Pepsico entered in the 1980s, it promised 50,000 jobs; in 1991 the Food Production Ministry acknowledged that it had created only 482. There is only one thing that concerns the holders of private capital and that’s the further increase of profits. One of the best ways to do that, as already mentioned, is to chip away at the wage/benefits share meant for workers.

The SEZs have likewise seen no real infrastructure development except in real estate growth and speculation— the dominant private sector investment in SEZs—with a whopping 61 percent of developer approvals. It has already been reported from different areas that such land mafia are using the SEZs to carve up huge chunks of overpriced real estate. With the state all but withdrawing completely from these zones, the only infrastructure that is going to be created won’t be for the public, but for tax-free profit. Even in terms of efficiency the SEZs have fallen short. In April 2007, of the 63 new SEZs, which were given approval since March 2006, none had yet developed infrastructure and started manufacturing. SEZs are completely sequestered enclaves and parallel institutions, so even if some infrastructure does develop, it is only going to benefit the main stakeholders. What is likely to then happen is the sprouting of little gated islands to benefit the upper class. This is already on display in a place like Noida, the first SEZ on the outskirts of Delhi. Noida has good roads and adequate services, primarily catering to Delhi, but sucks up even more resources as investors pump money there while the rest of the area languishes.

The final argument given by Indian policy-makers for SEZs is the supposed Chinese success. The reality is that SEZs in China have resulted in arable land loss, inequities in development, rampant real estate speculation, labor violence and abuse, increasing crime including smuggling, sex trafficking, and child labor, as well as huge resource and environmental costs. SEZs were empowered to create their own land regulations, which resulted in the large-scale transfer of rural and arable land to developers, undoing all the gains of the revolution that protected farmers’ land. Soon local provincial governments declared their own “development zones” for private industries and it went out of control. By 1993 there were 6,000-9,000 development zones with a built up area of more than all of China’s cities combined. Lots of the construction lies idle at great cost to farm families. This has not happened quietly, as protests and spontaneous outbursts of anger happen every day in these regions. In 2004 the government admitted to 74,000 riots in the countryside. There has also been rampant abuse of labor, including 500,000 child laborers in Shenzen alone, which is supposed to be the shining star of China’s SEZ program. Companies have defaulted on wages or are paying well below minimum wages. Though unions are not allowed, there were 10,000 wildcat strikes in Shenzen in 2006 alone. In addition China’s pursuit of fast growth and resource consumption has resulted in an environmental time bomb, with over 20 percent of the population living in severely polluted areas and over 70 percent of the rivers and lakes in grim shape. This trend has resulted in an inequality index worse than India, when just three or four decades ago China had one of the most equitable societies in the world.

A very visible sign of the undemocratic, anti-people nature of the planned SEZs comes from the resistance—from peasant groups, farmers associations, trade unions, political parties, unaffiliated progressive movements, and the radical left. The widespread protests resulted in the federal government announcing a suspension of all land acquisition for establishing new SEZs in February 2007 until a new rehabilitation program for displaced people was realized. This temporary retreat on the part of the government represented a significant victory of sorts for the various movements and gave particular cheer for those believing in participatory democracy and people’s enfranchisement.


In Raigad, Maharashtra many farmers’ organizations came together to resist the SEZ being developed for Reliance. The movement started in early 2006 and gained the support of parliamentary left parties, trade unions, and other people’s movements. Kalinganagar in Orissa bore witness to a very militant agitation against the acquisition of land by the state for the MNC Posco (although not an SEZ). When the struggle was launched in January 2006, 13 people were killed in the village of Ambagodia. The movement is believed to be led by tribal villagers and staunchly supported by the radical left. The movement has since stood firm on its “no displacement” stand and refused to compromise or back down, hoping to merge with other similar movements.

The outskirts of Bangalore in Karnataka saw the beginning of a fledgling resistance movement in mid-2007. The movement was led by Karnataka Rajya Raitha Sangha, a large peasants’ association, along with local left groups and various trade unions. A movement resisting the SEZ in Nandigram, West Bengal consisted primarily of local villagers and miscellaneous political fronts, including the more radical left. However, while the largest parliamentary left party, the Communist Party of India (Marxist), supported the resistance against many SEZs across the country, it was also serving as the ruling party in West Bengal and thus acquiring land for the SEZ in Nandigram (which they had to later back down from in the face of continued protests). With the SEZ in Jhajjar, Haryana, the resistance primarily came from local farmers who formed an umbrella committee to lead the struggle along with the support of some political parties.

The All India Trade Union Congress came out vociferously against a plan to set up an SEZ in Pondicherry, saying that the project would displace hundreds of farmers. Various movements and activists resisting the SEZs came together in June 2007 for a convention in Delhi which ended with the formation of an All India Committee Against SEZs and Forcible Acquisition of Land. The committee, consisting of experienced social activists and advised by prominent intellectuals supporting the movement, was formed to help develop and coordinate anti-SEZ movements throughout the country.

The SEZs have not been the only target of grassroots resistance. Similar activism is occurring in areas where land was acquired for different private companies in various regions—from Haryana to Karnataka, from Maharashtra to West Bengal. The movements have been varied, even disparate in nature and have often failed to sustain momentum or link up with larger struggles. But it is this variety that has exemplified the popular nature of resistance against SEZs—proof that a truly people-friendly and democratic industrialization alternative should be sought.


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