The Indian Economy Blog

September 5, 2006

Something Puzzling

Filed under: Business — Edward @ 7:48 pm

Economic comparisons are often made between India and China. More often than not those comparisons have as their end point a more or less favourable assessment of China’s virtues. It is therefore surprising for me to read this week that IMF economist Raghuram Rajan has recently been in the forefront of criticism of the “perverse economic incentives” underlying the recent proliferation of tax-advantaged special economic zones. This was particularly surprising to me in the light of the widespread and advantageous use which has been made of the special economic development zones idea in China.

Of course Raghuram Rajan is not alone in his criticism here as finance minister P.Chidambaram has also criticised the scheme, as has the BoI. Criticism in the press has also been quite widespread.

No, what’s puzzling me is not that people find this particular package perverse, but rather why it costs so much in India to get things right, and why there is evidently so little consensus about such measures in India (undoubtedly China’s great virtue at this stage this one). In fact Rajan is a little off target here when he says:

“If you create perverse economic incentives and then rely on bureaucrats to stand in the way of businesses exploiting them, the outcome will be little more investment?.?.?.? and a lot less revenue, but much richer bureaucrats,”

He is off target I think since I’m pretty sure in China there have been plenty of rather perverse economic incentives, and there have obviously been no shortage of bureaucrats who could have stood in the way of one thing or another. The main issue seems to be that normally they didn’t (even though they might well have enriched themselves in the process of not standing in the way), so the issue is why does India have such a deep and pervasive problem in this regard, that is the question.

After all, China itself has only last month announced the designation of eight special zones to make cars and car components for export (in the process naturally sending a warning shot off across the bows of the entire global car sector). And these zones are to receive preferential loans and export-tax rebates, and who gets what and how will of course be decided by the proverbial bunch of bureaucrats.

Yet hardly a murmur of criticism has emerged from any quarter. And the zones themselves are needed. If human capital and technology manipulation skills are to be aquired in the presence of increasing returns dynamics undoubtedly the use of some kind of incentive or other is entirely justifiable in the context of a developing economy. The question at the end of the day isn’t who it is who does the gatekeeping, it is how it is done. Of course if Rajan is right and the measures themselves are perverse in the first place then that naturally only makes a bad problem worse. Which would lead me to another puzzle. Given that there are the Chinese, Japanese, South Korean etc models to learn from, then why the hell does it cost so much to put a non-perverse package together: the gatekeeping starts here, and as Atanu never tires of reminding us, normally the ‘gatekeepers’ at this level are not the government functionaries but the politicians themselves.

35 Comments »

  1. I am also completely taken aback with crticism from many frontiers on the issue of SEZs!
    I fully endorse the idea of building SEzs.My arguement is simple.Our country cannot provide the level of infrastructure which is crucial for manufacturing growth and ultimately making India a manufacturing power much in the lines of China.So the best way out of this situation (bad infrastructure) is to build huge clusters of industrial activity which are well connected via land,sea and air , along with their complete set of infrastructural facilities viz. own power generation plant,water supply,etc.This way the whole country may not be propelled into the era of excellence but atleast these zones would surely become centers of excellence themselves and thus propell economic growth.

    As for ‘perverse’ economic packages we seem to forget that China grows at an rate of 10% yr on yr notwithstanding the NPAs of the state owned banks!!(&its just one example)

    Comment by Rahul Sen gupta — September 6, 2006 @ 12:13 am

  2. [...] Edward at The Indian Economy Blog writes on the misplaced criticisms of the Special Economic Zones (SEZ) strategies used to further economic growth. [...]

    Pingback by DesiPundit » Archives » Criticisms of SEZs — September 6, 2006 @ 2:55 am

  3. John McMillan in his interesting “Reinventing the Bazaar” mentions that actually one of the reasons for the success of the Chinese reforms lies precisely in the fact that the communist party has kept a tight (though not fool-proof) rein on the bureaucrats. Note that the penalty for corruption in China is quite severe – you can lose your life if found out. Our bureaucrats do not even remotely face such a possibility.

    The important point here is that the Chinese Special Economic Zones work because of the complementary institutions that the Chinese have put in place to overcome bureaucratic inertia and control. It is stupid to think that just by copying the Special Economic Zones idea – while ignoring the complementary institutions – we can somehow replicate the Chinese success. For what it’s worth, I think Raghuram Rajan is on the money in his critique. I would recommend McMillan’s discussion of the Chinese experience which is in one of the chapters in the latter part of the book.

    Comment by economist — September 6, 2006 @ 2:57 am

  4. Hi, and thanks for the comments both of you.

    “It is stupid to think that just by copying the Special Economic Zones idea”

    I don’t disagree that it would be stupid for India to simply try and copy China, the two countries and cultures are very different. OTOH I do think the idea of SEZs is not, in principle, a bad one. I think China has a consensually founded development strategy, and it has, up to now, worked pretty well. It has not, however, been without winners and losers. Working conditions in the newly created economic zones have hardly been ideal, and many aspects of life in the rural areas during the transition have left a lot to be desired.

    The big difference is that in India, since it is a democracy, and has an intelligensia which speaks out (whether rightly or wrongly), we get to hear a lot about the deficiencies (as in the case of the suicide farmers who Nitin posts about). We don’t read so many of such stories from China, but this doesn’t mean that acute rural pain has not been suffered. Another example would be all those miners who died in overworked coal seams during the coal-powered energy prioritisation of the last couple of years.

    Incidentally in China it isn’t only bureaucrats who get shot, it’s anyone who is considered to be sufficiently inconvenient to the regime (like protesting peasants). And anyway I’m not especially in favour of shooting people, and I think we should keep well in our minds that China has severe human rights deficiencies that India does not have to anything like the same extent. (Another example would be all the fuss caused by the recent attempts to block potential islamist websites in India, while in China, of course, anyone considered sufficiently critical of the regime is routinely blocked).

    My point here isn’t to have a go at China, simply to stress the differences, and then to say that even within that context there are things to be learnt. China in a way is getting a lot of short term advantage from conformism and lack of democracy. The zones work in China in part because the communist administration have the power to follow Trotsky’s decidedly anti-ecological advice and put mountains and rivers where nature never imagined them while at the same time re-populating the zones (and controlling access through the use of internal pass laws) in a way which mean those who go to live and work in them initially have few basic rights.

    Short term, as I say, all this is working fine. What is hard to see at this stage is how China can really make the transition to being a democracy (since really the power of the party has grown, not reduced), and not only that how to make the transition from being an industrial society to becoming a post-industrial one. Above all what you need for this latter transition are ‘creatives’ and a battery of sophistocated intellectuals of whom it would seem India has no shortage.

    So what I am saying is that short term China works better on the development ladder than India, but in the longer run India may have the edge in high value activities. The hard part is to break out of the agricultural trap which Northern India seems to find itself stuck in. As we are saying in other posts, and most unfortunately, along the way a lot of farmers are going to suffer, there doesn’t seem to be any way out of this. But also along the way I am sure that some kind of variant of the SEZs has a role to play, but without the ‘perverse’ incentives of course, only with rational and effective ones.

    “Our country cannot provide the level of infrastructure which is crucial for manufacturing growth and ultimately making India a manufacturing power much in the lines of China.So the best way out of this situation (bad infrastructure) is to build huge clusters of industrial activity which are well connected via land,sea and air , along with their complete set of infrastructural facilities viz. own power generation plant,water supply,etc.This way the whole country may not be propelled into the era of excellence but atleast these zones would surely become centers of excellence themselves and thus propell economic growth.”

    I agree entirely with these sentiments. In particular I would stress the clustering and networking effects that are so essential to high and meduium value industrial activities. There are large ‘sunk costs’ in getting, say, a machine building, or aerospace industry off the ground. If you don’t make a conscious push to have these type of industries then they will never happen on their own. People need time to learn the skills etc. Initially investors are only likely to see losses. Think about the European airbus, or space sattelite industries. Airbus wouldn’t even get off the ground as a project, let alone as an airplane, if there weren’t a load of bureaucrats in Brussels and a lot of incentives. France indeed uses the SEZ concept admirably, look at Toulouse.

    On the ‘loss leader’ element the Chinese car industry is another good case. For all the hype the Chinese car export industry has yet to really get off the ground. Part of the problem is developing an efficient components industry, and part of the problem is at the design and management level. You need cheap cars, but they need good design and they need to work well. Up to now home grown Chinese cars have scored well on item one, and been a disaster on items two and three. This isn’t surprising since there is a learning curve involved. Ten years from now my guess is the Chinese will be nudging the Japanese out of some lucrative export markets, but they may need another ten years, and meantime someone has to foot the bill.

    I suppose the key point I am emphasising is that at this level learning doesn’t only take place at school, it happens in the workplace, but for this you need the workplace for the learning to take place. Nobel economist Kenneth Arrow called this ‘learning by doing’(ie there is a certain circularity which you need to break out of). So more than all those famous engineers flooding out of all those renowned institutes and academies what we need are factories to let them go and practice in.

    Sorry if I’ve gone on a bit, but I hope I have got my point across.

    Comment by Edward — September 6, 2006 @ 3:47 pm

  5. A question. Why does a country like US have so many naturally evolved vs. planned clusters of interdependent industries – a la automobiles, parts, machining in Detroit, technology in Silicon Valley, chemicals in the northeasters states, furniture in the Carolinas, energy in Texas and Louisiana?

    Planned clusters are just that – another example of government involvement in free markets. But, as somebody pointed out, some force feeding might be necessary in a country like India, especially at the early stages, to scale up the manufacturing sector. But to declare SEZ type programs as essential to industrial growth is like wanting to be only a little bit pregnant with free market principles.

    I don’t know enough about economics to critique the Indian economic thinking, but I notice traces of the old school when the government is called to action with such frequency.

    Comment by Sarat — September 6, 2006 @ 9:25 pm

  6. Two points:

    1) One of the major objections in the idea of an SEZ is that it is likely to become a fiefdom with no government controls. Take the SEZ in Haryana for example. The land allocated for the SEZ is so huge that it is unlikely that Reliance can use even half of it for genuine manufacturing. The rest is probably going to be eaten up by real estate.

    2) Even if that were not to be the case, why this special treatment to any particular industry? In the very next post, the authors have argued against any incentives to the agricultural sector in Vidarbha.

    An SEZ is a loss of revenue. What are the benefits? Some employment, undoubtedly less than what is promised. No export duties. No taxes.

    We need to have reasons to believe that a SEZ will help all of us grow. Where is the cost-benefit analysis?

    Comment by Karthik Rao Cavale — September 6, 2006 @ 10:47 pm

  7. Edward,

    Beyond a point, the talk of long v/s short term is meaningless. By definition, you can never win against someone who says that something desirable will happen in the “long run.” The Chinese economy has been growing faster than the Indian economy for more than 25 years now and this trend shows no signs of changing anytime soon. I don’t really want to invoke Keynes’ oft-quoted cliche “In the long run we are all dead” but I will make an exception here.

    I am aware of the Chinese human rights record and have no wish to see it implemented in India. My point was – and this is the same as McMillan’s point – that the Chinese had put into place a whole range of institutions which somehow have collectively managed to allow markets to function. McMillan recognizes – as you do and I acknowledge – that this type of ad hoc policy making cannot continue indefinitely but the remarkable thing is that it has continued for so long. A corollary to this observation is that one cannot pick one aspect of the Chinese policies (SEZs for example) without paying attention to the other supporting policies.

    You say that there is a role for SEZs in India. Fine. Who is going to design them if not our bureaucracy? Can you see them coming up with a design which goes against their interests? I don’t think we are going to agree but I side with Raghuram Rajan here – don’t create SEZs since these inevitably involve creating exceptions to current procedures, which in turn leads to perverse incentives.

    Comment by economist — September 7, 2006 @ 12:04 am

  8. Economist,

    “A corollary to this observation is that one cannot pick one aspect of the Chinese policies (SEZs for example) without paying attention to the other supporting policies.”

    I don’t think we need to pick an argument where we don’t have one. I completely agree with the above.

    “Who is going to design them if not our bureaucracy? Can you see them coming up with a design which goes against their interests?”

    OK. But what your faced with here is a vicious circle, since in this world who is going to change anything? At the end of the day who is going to introduce ‘deregulation’ if not some sort of bureaucracy. The problem I am getting at is how to design a better bureaucracy in India, and who is going to do it. At the end of the day this means political changes, and changes in the level of maturity in the political arena. I suppose one of the thinks I am suggesting is some of the artificial polarisation in these arguments about ‘free’ vs ‘planned’ markets reflects this level of political immaturity. It isn’t fashionable to say this, but none of the developed economies is a pure free market economy, all of them are ‘mixed economies’ in some sense or another, the only real issues are over the extent of the mix.

    Again, I am sure there is a consensus that government should get out of the way as much as possible, it is precisely what ‘as possible’ means which is the issue. Today we have a much wider range of options of public and private mixes in things like health and education, and none of the models is perfect. Here there is plenty of room to chose.

    But for any of these systems to work well what you need is a very effective regulatory and infrastructural framework, and a good balance between central administration and regional autonomy. If all you get is bickering then the outcome is predictable

    I think in any reformed India something like SEZs will have a vital role to play. Think about the Ricardian comparative advantage argument, ‘you’ produce rice and ‘we’ produce Bio-tech. That way the people who produce rice will always get to produce rice, there just is no in-built mechanism to accummulate the skills and experience needed (it is the human capital component which is vital to all this) to start competing.

    This is the kind of globalisation that people in the developed world were always going to be happy with, the inequalities remain, in fact they are self-perpetuating. This isn’t win-win.

    Then along came China and broke the circle (as I say Japan had done it before them, and many on Walll Street still describe the Japanese phenomenon as financial socialism) and then all the agro started. Now we have calls for protectionism all over the place. If I am interested in India it is because I am really interested in a level playing field, not a make believe one.

    The Indian IT model broke the mould in another way since the internet boom meant that the US simply couldn’t produce all the IT engineers it needed (another example of market failure this, since the US simply can’t produce the skilled and scientific workers it needs. Free market economists – which I incidentally also consider myself to be – like Alan Greenspan and Paul Romer have made constant calls for more public subsidy for the university sector to try and address this problem. This is what ‘good government’ is all about).

    Then the internet bust came, and a lot of the engineers (appropriately trained) went home, and of course what did they do, they set up shop and passsed on their experience to others. And so the Indian outsourcing ‘problem’ started to hit the headlines.

    Bottom line: accumulating human capital is the key, and if India is going to accumulate it effectively then it needs a better (and of course much smaller) bunch of bureaucrats, controlled by a much more effective and collective-interest minded politicians, that is my main point.

    Comment by Edward — September 7, 2006 @ 2:38 pm

  9. Hi Sarat,

    “A question. Why does a country like US have so many naturally evolved vs. planned clusters of interdependent industries – a la automobiles, parts, machining in Detroit, technology in Silicon Valley, chemicals in the northeasters states, furniture in the Carolinas, energy in Texas and Louisiana?”

    An answer: I don’t know. I don’t know about the specific cases, and I don’t intend to start professing local knowledge I don’t have. I certainly don’t know either that any of these were ‘naturally evolved’.

    You would have to look at each case in detail. There is a Silicon Valley history project run by network theorist Mark Granovetter if you are interested:

    http://www.stanford.edu/group/esrg/siliconvalley/home.htm

    I’m sure the fact that the zone was near to some highly prestigious universities may well provide part of the explanation. Now of course, if you could persuade Stanford to move lock-stock-and-barrel to India, then that would probably mean you need one SEZ less, but who would pay for this?

    Basically, where network effects operate initial conditions matter, and the butterfly phenomenon is evident. Obviously if your economy is already a world leader it is much more probable that you can stay there, especially if you yourself de-regulate. Of this I have no doubt. The issue is, if you are at the back of the queue how do you get to the front?

    Bangalore is to some extent an example of this butterfly effect as I sort of explained in the reply to Economist.

    On the Carolinas, this is just the point, they got to specialise in furniture (I think why Texas is in energy is obvious). This wasn’t a very satisfactory outcome for them I don’t think, so they have now made a big collective push (using planning permission for housing among other incentives) to attract young ICT workers and other ‘mobile’ professionals. As a result things are changing I think.

    On the US the whole availability of housing and housing finance would be another thing you should look at, since the big mortgage agencies like Fanny Mae:

    http://www.fanniemaefoundation.org/

    and Freddy Mac:

    http://www.freddiemac.com/

    are not exactly free market entities you know. In fact they exist precisely because of market failure in the sector (don’t you remember the US had a whopping crash once, when the free market dynamics of the banking sector were left to themselves). Basically when you consider how important housing refinance has been to the recent US consumption boom I you have to reach the conclusion that there is a hell lot of nonesense talked by some of the so-called ‘free market’ people.

    Comment by Edward — September 7, 2006 @ 3:00 pm

  10. Hi Karthik,

    “One of the major objections in the idea of an SEZ is that it is likely to become a fiefdom with no government controls.”

    This is an objection. I thought this was one of the main ideas of the thing. In China , as I suggested, many of the people who went to the zones in the begining were almost literally ‘wage slaves’, but it was still better than a life of poverty and despair in agriculture. Now they are generally much better off.

    I would say it is essential that the brunt of all this is done through joint ventures with non-Indian multinationals, otherwise there is no technology or management-expertise transfer.

    “The land allocated for the SEZ is so huge that it is unlikely that Reliance can use even half of it for genuine manufacturing. The rest is probably going to be eaten up by real estate.”

    Even better. They are going to “make the desert bloom” evidently. As I am saying about the US, what the hell is wrong with real estate, it is an industry of the future. The real point is that if you have a huge area, the only way you can get the people to go live there and be able to buy the houses you want to build is by also offering them jobs which will eventually pay them the wages they need to buy the houses.

    “Even if that were not to be the case, why this special treatment to any particular industry? In the very next post, the authors have argued against any incentives to the agricultural sector in Vidarbha.”

    For the simple reason that industry and services are India’s future so they are worth subsidising to get them going (and to provide employment for the people displaced from agriculture), agriculture (in its present form) is India’s past and needs closing down, or at least ‘rationalising’ and industrialising enormously. In this sense there is no inconsistency between the posts, not that Nitin and I need to agree about everything :).

    I hope I haven’t been too hrash here, I am just trying to get the point across strongly since I think it is important.

    Comment by Edward — September 7, 2006 @ 3:15 pm

  11. One will have to agree that even free markets require good governance, albeit of a different type and with different priorities. The question is why India is incapable of creating good governance. Perhaps the explanation is that the better educated people who could make a difference don’t go into politics in India at all. There have been a few cases of professional-turned-politician of late, and let’s hope this becomes the norm someday, but politics in India does not attract people with education and aspirations. How many IIT or IIM graduates have gone into politics? Therefore bad government is not a policy problem. In India it is a social and cultural problem that cannot be fixed with a policy decision.

    The best brains of India do go into the public sector as career bureaucrats. To qualify for the IAS or any of the other services, a person needs to be among the top .0001% of the class. It is easier to get into IIT than IAS (sorry IIT alums). But highly educated public servants, toiling away under semi-literate and often corrupt politicians, eventually get corrupted or sidelined.

    Business as a career carried the same stigma in the pre-India Shining era. In a society where the core professions such as politics and business are relegated to the social misfits, criminals or incompetents or scions of the rich, one will not get good governments or smart businesses. India’s business weaknesses may be disappearing fast but not its government problems.

    Comment by Sarat — September 7, 2006 @ 3:50 pm

  12. The question is why India is incapable of creating good governance. Perhaps the explanation is that the better educated people who could make a difference don’t go into politics in India at all. There have been a few cases of professional-turned-politician of late, and let’s hope this becomes the norm someday, but politics in India does not attract people with education and aspirations.

    TCA’s analysis said it far better than anything else I’ve read — see this http://indianeconomy.org/2006/02/15/why-does-india-have-such-terrible-politicians-2/

    Comment by Prashant — September 7, 2006 @ 8:13 pm

  13. Edward, I highly enjoyed your informative comments.
    Your argument about breaking the vicious cycle is a very important one, particularly for high-end products and services.
    More so in India which doesn’t have a culture that values creation. In that respect, I’d disagree with you that India has more creative intellectuals than China. It is most manifestly not true: neither in hard scientific disciplines nor in social-science/public policy areas.
    I’d differentiate argumentativeness from creativity; India has a lot of the former and little of the latter.

    Comment by seven_times_six — September 8, 2006 @ 2:29 am

  14. Sarat, I’d not be very sad if few IIT alums get into politics. That is because IITs select for analytical ability, something that is not exactly predictive of good political or sociological acumen.

    You’re perhaps swayed by the example of top universities in the US; but Harvard and Yale explicitly select for an all-round ability that is predictive of future leadership and other public successes. Yale has more politician alums because it selects people who are going to be politicians anyway.

    Comment by seven_times_six — September 8, 2006 @ 2:36 am

  15. Edward,

    You are right in that bureaucratic reform will not take place through the initiative of the bureaucracy and it is the politician (like Thatcher) who will have to do this job. This doesn’t look like happening anytime soon in India. Given this, the only thing that can be done is to at least avoid giving the bureaucracy more discretionary power. I acknowledge that SEZs may have their good points but they also involve – as I said – creating exceptions to existing procedures, something which gives more power to the bureaucracy. You seem confident that something can be designed where the net effects of the SEZs will still be positive. I am sceptical. Let us agree to disagree.

    On a related note, I was looking (on google) for some academic analysis of SEZs. In particular, the relevant questions are: (i) Is there any theoretical argument to support SEZs? and (ii) What type of discretionary policies are needed for succesful running of SEZs? I managed to find one article published in Pacific Economic Journal (Li, Whitwell and Yao, 2005) and another in Oxford Economic Papers (Schweinberger, 2003) but that’s all. The best I could come up with was to go to the World Bank website and type “Special Economic Zones” into their search facility. It threw up a bunch of relevant links – I haven’t had the time to go over them, but some looked interesting. It’s worth noting that a bunch of countries have tried out variants of the SEZ idea. The experience of the countries other than China should be worth examining as well. (May be some other time.)

    Comment by economist — September 8, 2006 @ 5:35 am

  16. economist and others not in favor of SEZs; I’m intrigued by the argument that it will result in an increase in discretionary power to bureaucrats and an increase in governmental oversight.

    Isn’t the point of an SEZ that it has less taxation, less regulation and less oversight?
    One of the commenters above in fact pointed this lack of (bureaucratic) regulation as a disadvantage.

    Yes, it has targetted infrastructure creation as well, but wasn’t that one of the oft-repeated topics in this blog — how to get govt to create infrastructure?

    Regarding fiscal issues pointed out by the IMF and Finance Ministry, I mean, obviously they are going to bemoan anything that results in a loss of short-term tax revenue. Why are free marketeers bothered by this?

    If Edward is somewhat puzzled, I’m morewhat puzzled.

    Comment by seven_times_six — September 8, 2006 @ 5:59 am

  17. seven_times_six,

    I am not a “free marketeer” whatever that means. Unlike you, I have never used that term. I am simply an economist.

    SEZs involve creating exceptions and this always involves additional governmental oversight. Not to mention – as Raghuram Rajan observed – that it creates perverse incentives in terms of firms’ decision making. The Chinese state, I suppose, came up with the idea of SEZs because they wanted to deliberately create *exceptions*; their preferred option was and is tight control. We presumably are a democracy, albeit one more regulated than I would like. I prefer a lessening of control overall rather than creating fresh exceptions. The problem with exceptions – like any other type of subsidy – is that it creates vested interests who (obviously) would prefer to continue enjoying the subsidy. Thus, here, the firms in SEZs can be depended upon to argue that these exceptions should continue for ever. One possible solution may be for the state to credibly commit itself to providing exceptions for no longer than a certain period, fixed in advance. However, such credible commitment requires a strong state, something not characteristic of the Indian state at present.

    Comment by economist — September 8, 2006 @ 12:26 pm

  18. Economist, so in other words, reform should be an all or nothing process.
    Incomplete reform creates exceptions and that is just not acceptable.
    Give me all or give me nothing, you big bad government.

    Comment by seven_times_six — September 8, 2006 @ 6:56 pm

  19. seven_times_six,

    Right, that’s exactly what I said. *Plonk*

    Comment by economist — September 8, 2006 @ 7:42 pm

  20. Edward,

    I wonder why an SEZ is necessary to ‘make the desert bloom’. Instead, if the Government simply lifted the restrictions on land use in Haryana, the whole stretch would be full of Industries within no time. And they’ll be paying tax too! Really, I don’t see why we are still in the mindset that private enterprise in the service and industrial sectors needs a push from the government. It is, on the other hand, agriculture that needs a push. With an evergrowing population, we need agriculture. And it has to be supported so that the farmers are able to live a decent life.

    I have no problems with real estate. I just don’t like the idea of the Government giving Reliance land at low costs and the Reliance making huge profits out of it, with little value addition being done. Instead, if the Government just lifted restrictions on use of farmland, and industries come up in Haryana, the real estate market will automatically bloom there, giving the farmers their share of the profit.

    My argument is that this is essentially a deal that profits Reliance, some bureaucrats and no one else.

    Comment by Karthik Rao Cavale — September 10, 2006 @ 8:38 pm

  21. Addendum: It is very sad that we have reached a stage where government control over it’s own land has become undesirable. Arguably, this is a direct result of poor standards of governance in our country, but I feel that the right way is to improve governance, and not to create enclaves free of government control.

    Visualize this: The SEZ in Haryana is likely to have lots and lots of people living inside the SEZ. Now if a factory inside the SEZ lets out too much of, say, Ammonia, then what means of redress do these people have? It is Reliance land. Obviously, Reliance doesn’t care if the people there die of Asthma. Obviously Govt. regulation is important. That is what the Government is here for.

    Comment by Karthik Rao Cavale — September 10, 2006 @ 8:47 pm

  22. i cant agree with u more , sezs are designed specifically to help developing countries like us to escape from the clutches of the entangled systems of the govt ,it is definitively easier to have a areas with reasonable level of autonomy free from the system to grow faster than the rest of the country can ,especially it becomes easier to attract foreign investment withsuch schemes which we need so bad

    Comment by balaji — September 11, 2006 @ 11:03 am

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  24. First of all, it is the end of Sep. 11th where I live and the terrorists have not pulled off anything perversely commemorative anywhere in the world. Thank God for that.

    “Really, I don’t see why we are still in the mindset that private enterprise in the service and industrial sectors needs a push from the government.” Karthik, I agree wholeheartedly.

    “It is, on the other hand, agriculture that needs a push. With an evergrowing population, we need agriculture. And it has to be supported so that the farmers are able to live a decent life.” Karthik, I don’t understand why you are a “planner” on agriculture but a “free market thinker” on industry. What’s the difference between the two sectors to necessitate such a change?

    Comment by Sarat — September 12, 2006 @ 5:42 am

  25. Sarat,

    I don’t care to assign -isms to my views. For one, I don’t believe in a kind of planning that involves some one else taking decisions for the farmers. However, if the prices they are being given is too low for their sustainence, then there is no option for the government to give them some incentive to continue. Fortunately, this situation doesn’t exist in industry. By and large, the industry gets a decent price for its product.

    Comment by Karthik Rao Cavale — September 12, 2006 @ 5:55 am

  26. “However, if the prices they are being given is too low for their sustainence, then there is no option for the government to give them some incentive to continue.”

    Karthik, not to nitpick, but isn’t supply-and-demand still the operative rule of any economy and the fairest arbiter of price? Or should there be another entity, such as the government, that should decide what the “fair” price is for agriculture and whether or not industry is getting a “decent” price?

    If you are an economist, as most of the bloggers here are, then feel free to educate me on this fine point. I am not an economist.

    Comment by Sarat — September 12, 2006 @ 7:25 pm

  27. To say the truth, I have little understanding of both economics and agriculture. But this is commonsense. Our agricultural sector is inherently inefficient because of small land holdings and too many people dependent on agriculture. But it is not going to be possible to change the situation overnight (it has to be done on the long run, not by promoting migration to towns, but by promoting village industries). But till then, being a welfare state, the state has to ensure a living wage to the farmers.

    Comment by Karthik Rao Cavale — September 12, 2006 @ 8:14 pm

  28. karthik,

    ‘Our agricultural sector is inherently inefficient because of small land holdings and too many people dependent on agriculture.’

    this report – http://www.fao.org/docrep/005/ac484e/ac484e0a.htm – says, contrary to the widely held belief that small farms mean inefficiencies, the small, marginal and sub-marginal farmers in india are more efficient and productive than large, medium farmers.

    the only problem being, because of their small size (

    Comment by kuffir — September 12, 2006 @ 11:49 pm

  29. Comment by kuffir — September 12, 2006 @ 11:58 pm

  30. half my comment has been eaten away..is there a problem?

    Comment by kuffir — September 13, 2006 @ 12:00 am

  31. [...] Following on from the recent discussion we have had here on SEZs, I couldn’t help noticing this piece in Bloomberg today about China’s move to restructure its export rebates policy. Note: they are not removing export incentives, but simply trying to redirect them as part of a policy to move up the value chain. As such this move may well be ‘neutral’ on China’s trade surplus situation. As I have a go at explaining on my own blog here, China’s problem is not so much that it has too much cash coming in, as that this cash is leading to distortions in the investment process. Basically I have less sympathy with those who simply criticise China for having the surplus per se, since it is hard to see China importing consumer products from the developed world on any substantial scale at present so most of the purchases they make are bound to be as a contribution to the investment budget, this is simply a way of redirecting surplus investment into higher value activities. As such is a good move on China’s part. Now we will see whether those who were worried about China producing too many T-shirts and sandals are any happier with their IT products. [...]

    Pingback by The Indian Economy Blog » Just A Detail — September 15, 2006 @ 1:49 pm

  32. We know the problem. How can it be addressed?

    http://apunkadesh.blogspot.com/

    Comment by Apun Ka Desh — September 15, 2006 @ 4:58 pm

  33. hi
    see my point is little diff as i am a studnt of IILM gurgaon(haryana)i m very much intrested in this SEZ topic… many times i have felt like is it a making or breaking. but i think it is kind of essential for a country like India to take this step forward in eye of infastucture building, see why we have regrets for SEZs????mainly becoz of these resons….

    1. we think it will results in huge revenue losses, say INCOME TAX,etc as it has a provision for 10 years 100% exemption from tax in first 15 yrs of oprt.

    2.a setback to farmmes or agricultre ind

    3. crowded places

    4.economy imblances ( rich will get more richer and poor on the recieving end)

    now these all resons r there which makes pepole crib about sez, say kind of reactions left is showing i can predict that this current goverment of India is going to lose coming elections and tat will be soley for this issue…..newyz these resons r good enough to shake any pillars of an economy. but why we dont see where r we at present and without taking these steps what ll be our position in the world economy. say at present INDIA has huge amount of tax which is some whr around 40,0000 cr (undisputed only) is to be collected i can bet cant be collected in next 10 yrs,courtesy – GOI as it has a form called SARAL which is too kathin in practice for a layman. say if we r use to this status that tax r not recovered or we have great tool which we allways use in bureocratic manner tat is “corruption” whr 70% of corporate revenues to GOI goes for a ride. so why we r geting worried for future revenues ????

    say every year govt losses 4000 cr rs only on wear and tears for the course of exports thanx to well maintened infastucture….. if sez can help in making a better India atleast look wise ( sorry for getting too sarcastic)had no choice to answer those who believes India has touched 8 % growth and should sit on that only.

    In fact i pesonally feel that govt shouls hav BOT model here tat is more suitable as- suppose FOR EX- rel has invested 100 cr for a sez then they thr should a fixed amount near 100 cr which it can enjoy as 100% exempted tax and after tat amount tat sez should be tranfer to GOI and thr after rel should pay tax to GOI.

    so be open to ideas no matter it is a copy or original….cheers

    feedback plzzzzz= kamal.sahdev@iilm.in

    Comment by kamal — September 23, 2006 @ 10:41 pm

  34. We cannot do things by bits and pieces.Either you are free maket or you are not.If you are free market you follow its own rules.Such rules preclude for instance i> use of eminent domain ( land acquisition) without a public purpose ii> setting up such large tax incenstives that have the effect of subsidising one componentof the economy over another, iii> giving an allpurpose exemption to rules of the moderating then market like that of labour and environment.

    In India we rank low on the economic fredom enjoyed.A farmer for example cannot freely convert his land to any other non-agricultural use.There are a plethora of restrictions on transfer and ownership.This is why the use of Land Acquisition Act becomes necessary.Because the Govt must step in and taske through force land thatn given chance the farmer probably will willingly sell but for a higher price.Thus you create a situation whereby you distort prices , use coercion and generally create a law and order problem.The solution for this is not to create SEZs but to remove the various restrictive land laws that operate in the country.

    As for inter-sectoral equity I think the SEZ Act .creates i) adiscrimination towards palyers in DTA ii) its restrictions on sale in DTA creates the situation whereby serious scope of what I call internal smuggling becomes a probility.Also it subsidies exporters that I thinkis perfectly unnecessary.I think the weakest point of the SEZ Act shall be that in time industries in the DTA shall demand the same concessions as SEZ and polity shall have to concede

    As for labour law and SSi reservation if you think they are imoprtant keep them otherwise kill yhem.Do not keep them and encourage people to circumvent them.The solution is rationalization and not exemption in some selected areas.

    Finally the SEs cannot be a stand alone venture without any impact on surroundings.Pollution in a SEZ for example shall lead to impact in the surrounding farmland.This burden shall be disproportionately higher on the rest of the country as the SEZs shall enjoy a variety of tax exemptions.This essentially creates a free rider prolem.

    I shall like to conclude by saying that the Indian growth model so far has been radically diffrent from China.We have grown on innovation ( IT), sophisticated legal and financial norms ( Stock Market our legal system) and strong domestic demand.There is no reason for us to try to emulate the Chinese model of cheap labour , exploitation swaet shps ad a mad rush for exports disregarding rules of trade like IP protection.

    Comment by Suvrajyoti Gupta — October 18, 2006 @ 7:51 pm

  35. I also don’t understand…Why such a fuss over agricultural land being used for sezs? Even after taking into consideration the land to be used by all 150 proposed sezs, the area is only around 0.0006% of total cultivated land India has. And I am talking about land under actual cultivation, not total agricultural land.

    Comment by Amit Abhyankar — November 15, 2006 @ 2:01 pm

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