“Well, you did not answer one question that I asked you. Don’t you agree that an SEZ is a concession to one particular private party, and hence creates a kind of unfair competition?”

Well look, as they are being implemented now this may well be the case, and as such this is not a good thing. But it doesn’t *have* to be like that, this would be my point.

OK, first off thanks everyone for some thoughtful and interesting comments. I don’t think there is any right answer here, only issues.

“Why do you prefer this over a uniform policy in which anybody is allowed to use his lawfully owned land as he pleases? ”

Well simply because I do think there is a need for rules and regulations in this area. Let me put it like this, right now they have just knocked a builing down right across the road from where I am writing. Ideally I’d prefer that they left it down, since there is more light, but I recognise that in the nature of things that can’t be, and that they will obviously build something. I am, however, reassured that we have land use regulations and that they won’t build a small industrial workshop to keep me awake at night. This system isn’t perfect, I know, since even here the ability to award planning permission is what allows the political parties to finance themselves.

“Here’s my question. Is there any reason to think that our private sector any longer lacks the capital?”

No, I agree, that isn’t realy the issue. It is what the capital will be invested in which is the question.

You see there is a more technical economic point in play here, and it has to do with the findings of what is known as the ‘new economic geography’ (Krugman in particular) and the existence of a phenomenon known as ‘increasing returns’.

Basically the economic landscape isn’t a flat surface. It is more like Mars, with craters dotted about all over the place. Now you could imagine existing economic activites as being concentrated in one or two craters, and the new activities you want to stimulate as being currently emply craters.

So what you want to do is encourage people (enterprises) to move into the empty craters. But this has economic costs, since first you have to be able to get up the steep wall from where you are before you can descend the slope into the next one. The issue is, who pays these costs?

Left to themselves many businesses are unlikely to do this, since profitability may be greater where they are, they simply need to expand sideways.

The costs involved are not only infrastructure, they are also to do with generating the necessary human capital, this is a heavy initial cost. Indian IT got off the ground so quickly because part of this cost was carried in California. But the next time, and the next, it won’t be so easy. This is why I think these activities need to be subsidised and encouraged. Of course all this needs to be done with a certain degree of rationality, and it is here we seem to have the problem.

A good example of this lack of rationality is the debate which is currently going on in Karnataka about English language schools (I’m about to post on this).

Nandan

“What I was trying to point out was that, under certain conditions (basicallly, good design/implementation), the cost-benefit can be beneficial because of multiplier effects of exports, forex earnings, etc. so SEZs aren’t inherently bad - they’re only bad in India.”

I think basically we agree about this, the way this is being done in India is wholly inadequate right now, but can we be happy that it stays like that? Can SEZs be bad in India permanently? I think not. If India is to become a developed economy then it has to achieve the political maturity necessary to have SEZs.

“I wish for once that Indians could get beyond the debate, and learn to focus on and realize the importance of good execution.”

This is really the point.

Shikhil

“Indian mini SEZ’s are filled with political tactics and strugle. The states want the SEZ to be in their state for ther to be more development. And the commerce and finace ministry is strugling to agree on things like the tax exemption given.”

Yep, this would seem to be the point. This needs a national not a state perspective (assuming that is, and this is in itself a very interesting question, that India is a ‘nation’. It is a nation state, but is it a nation?).

Envenkat

“I have been going to this place off and on for more than 15 years, and it is supposed to be the one SEZ contributing more than 50% to the exports from SEZ’s today !”

Thanks for this insight. Very interesting.

“But one thing is for sure, it has generated lot of interest domestically and internationally on the state of improving manufacturing and infrastructure. So in the serendipitous way the ‘market’ in its own way may shed some light on how it would generate the externalities.”

Yes, this is my sentiment entirely.

IMHO, this is primarily a land-grab play today. Adjoining parcels are being positioned by ‘insiders’ and sold off once it is notified. The few serious ones where FDI/ serious corporate investment interest is there are ones which would come up. But the intent of the SEZ’s was to facilitate the SMEs, who today constitute more than 50% of indian exports, to be more competitive. Where is that in all this heat & dust one doesnot know ?

But one thing is for sure, it has generated lot of interest domestically and internationally on the state of improving manufacturing and infrastructure. So in the serendipitous way the ‘market’ in its own way may shed some light on how it would generate the externalities

If the compensation is going to be money and land, and if the govt. land is useless for setting up sezs, how do you expect people to accept those lands as compensation?

If the compensation is going to be money and employment, what job do you think will be given to a bunch of uneducated farmers?

If the compensation is going to be only money, god help those people.

The govt has land, and if it has the will, it will create the infrastructure. But no they will not do anything sensible instead they will go for shortcuts, like what they are doing now. And what will happen is, it will only help the LEFT. Then you can see what good they will do.

By in large, I agree with your analysis and do believe that, given the pathetic state of governance in India right now, we are better off without SEZs. Instead, we should maintain our focus on nationwide reforms.

What I was trying to point out was that, under certain conditions (basicallly, good design/implementation), the cost-benefit can be beneficial because of multiplier effects of exports, forex earnings, etc. so SEZs aren’t inherently bad - they’re only bad in India.

“What you say would be the case if there were no land use restrictions whatsoever, then landowners could bid with each other to attract purchasers, but since this is impossible then those who get the change of use also get an economic rent, and they know it.”

Exactly! Why encourage people to make money out of what is essentially a process of bribing govt. officials to get this change of landuse approved? Why do you prefer this over a uniform policy in which anybody is allowed to use his lawfully owned land as he pleases? Doesn’t it remind you of the license quota regime in which a few companies made huge profits out of govt. patronage while the rest were not allowed to compete at all?

If I remember correctly, these are the reasons you gave justifying incentives to the services and manufacturing sectors.

“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.”

Here’s my question. Is there any reason to think that our private sector any longer lacks the capital? Or is it that business in India isn’t safe enough? Or is it not profitable enough? If it weren’t profitable enough, you would agree that it ought not to be encouraged. If neither of the remaining two is the case, then why is it that industries don’t spring up spontaneously?

“Infrastructural ones (like roads and ports, and power networks) certainly help.”

Certainly. And the government must concentrate on this work. For the benefit of all. All citizens, all companies.

Even if I were to accept that incentives are required, why should the incentive go to one particular company alone?

Fine, let’s accept that additional employment is the main attraction of an SEZ. Have you analysed any kind of cost-benefit analysis from the govt. point of view before coming out in support of SEZs? How do you monetarily fix the benefit of greater employment? Can you show us, even approximately, that this value exceeds the loss in terms of tax generation, compensation to displaced people etc.?