India’s Congress-led government has lifted its freeze on new special economic zones but at the same time tightened rules governing the creation of the tax-exempt capitalist enclaves in an attempt to defuse mounting social protests.
Continuing problems with the policy highlight India’s difficulties in emulating China’s emergence as a global manufacturing hub in an environment in which technocrats struggle to prevail over populist politicians.
Protests in West Bengal state prompted the government in January to put on hold new approvals for SEZs, pending the announcement of a “progressive and humane” policy on the rehabilitation of displaced people.
At least 14 villagers were killed and 45 injured in clashes with police in West Bengal three weeks ago in the worst violence seen over government plans to acquire farmland for SEZs.
Police shot tear gas and live rounds at protesters, preventing them from entering villages in the Nandigram area of the communist-ruled state, site of a proposed SEZ to be developed by Indonesia’s Salim Group.
The government wants to promote industrialisation in India, where two-thirds of the population still depend on agriculture, but it has struggled to secure a political consensus in support of many of its reforms.
The new rules will halve the maximum size allowed for SEZs to 5,000 hectares and forbid state governments from using powers of eminent domain to acquire land compulsorily on behalf of private developers.
Economists criticise India’s SEZ policy for failing to relax restrictive labour laws and for allowing a proliferation of sub-scale SEZs in which manufacturers will struggle to achieve scale economies necessary to be globally competitive.
“I’m against giving tax breaks for these small SEZs,” said Chetan Ahya, an economist at Morgan Stanley in Mumbai. “The ideal size for SEZs is around 10,000-15,000 hectares, which is enough space for the development of alternative cities.”
Other large-scale SEZs likely to be affected by the new land ceiling include Reliance Industries’ plans for a new city covering about 10,000 hectares across the harbour from Mumbai, India’s congested commercial capital.
The government’s clampdown on new SEZs had followed an intervention by Sonia Gandhi. The president of the Congress party, which was swept to power in 2004 on a wave of discontent in rural areas, expressed her concern at the large-scale uprooting of people from agricultural lands.
The move threw hundreds of proposed SEZs into doubt. Since the SEZ Act was passed in February 2006, more than 400 zones have been announced, of which 63 had received final governmental approval as of January 16.
