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The Reationship With Global Production Economics Essay

India’s experience of globalisation with the special thrust to economic development started with its opening of the market in 1990’s, with the introduction of New Economic policy (NEP). However statement with regard to India’s opening up of its market and its experience of globalisation is contestable as many says that India started liberalising its economy in late 80’s and in context of globalisation, India was engaged in cross border trade right from the Harappan period, 4500 years ago and India’s present culture is also a result of mass migration of foreign tribes and rulers from West and central Asia and also from North Africa. However not to be engaging with the debate of globalisation I start with the changing role of the Indian state within the present context, which is based on the belief of the economic globalisation and its faith in the market as an “invisible hand”, a theory that took birth with the Washington consensus. This form of globalisation is based on market fundamentalism, which basically means a model of unrestricted and free trade across border that has the ability of allocation and maximum utilisation of resources which are scarce. It believes that free market is best in world and any obstacle in free flow of the goods and services should be removed. Thus based on the this theory of market fundamentalism India too, stepped in, making its presence feel in the economic world of market of which Special Economic Zone (SEZ) is one of its outcome. In this paper I am going to deal with the rationale behind SEZ in the present context of India and its relation with global production, marketing and services which creates logic for SEZ. This paper is divided into five parts, the first part deals with the brief definitional introduction of SEZ, its salient features and the economic rationale behind it in general. The second part deals with the rationale behind MNC’s investing abroad and the positive argument put forth by economic liberals behind FDI’s. In this section I would also put forth the negative arguments against FDI, put forth by radical structuralists. The third section would be the Indian experience of SEZ, which would include brief history of SEZ in India along with rules and procedures. The fourth section would throw some light on debate related to SEZ. The fifth section is the critical analysis of SEZ and its socio-political outcome. This would be followed by concluding remark on the issue related to it.

THE DEFINITIONAL INTRODUCTION TO SEZ: OBJECTIVE AND THE ECONOMIC RATIONALE BEHIND IT:

In an article written by Rob Jenkins ‘The politics of India’s Special Economic Zones: India’s great transformation?’ definition of SEZ given by him is that, ‘a Special Economic Zone is a region within a nation state in which a distinct legal framework provides for more liberal policies and governance arrangements than prevails in a country at large, the intent being to stimulate investment, trade, and employment’ (see Jenkins 07, p.3). In another definition given by Soumitra Bose in his article ‘Special Economic Zone- Neoliberal Enclosure in India’- ‘SEZ is an enclosed space subsidised by the government and exempted from paying the excise duties and various other normal taxes’ (see Bose 07, p.3) however in this article he has given a very critical assessment of SEZ as a policy in Indian context, which I would focus in the later part of the paper. However SEZ exists in various countries across the world which includes People’s Republic of China, Iran Jordan and Poland, Kazakhstan, The Philippines, and Russia. North Korea also attempted but could not succeed. Currently Puno in Peru has been earmarked as ‘Zona Economica’ and in US it is known as ‘Urban Enterprise Zone’. Germany is also thinking of the same recently (See Dohramann 08, p.63).

The world’s first instance of SEZ is believed to be an industrial park set up in Puerto Rico in 1947 of goods and attract investment from US mainland. In 1960’s Ireland and Taiwan followed the same path but it was only after China’s economic success that made SEZ a global currency, with its largest SEZ in the metropolis of Shenzhen. India too started experimenting with the idea in 1965 in the form of Export Processing Zones (EPZ) (See Dohramann 08, p.64). Thus giving a more explanatory definition of SEZ Jona Aravinda Dohramann writes that:

SEZ is a geographically demarcated which has a different economic laws that are more liberal than the country’s typical economic laws, and where all units therein have specific privileges.SEZ specifically delineated duty free enclaves and are deemed to be foreign territory for the purpose of trade operations, duties and tariffs. The principle goal is to increase foreign investment (See Dohramann 08, 63).

The main objectives of SEZ in general are as follows:

Creating additional economic activity.

To promote exports of goods and services.

Fostering investment from foreign and domestic sources.

Creating new and additional employment opportunities.

Development of infrastructural facilities.

However all these objectives needed to have a deep penetrating study to understand both its negative and positive implications in the long run especially in a state like India, where land is treated as a matter of pride.

The rationale behind SEZ:

In an article by Aradhna Aggarwal ‘Special Economic Zones: Revisiting the policy Zones’ in Economic and Political Weekly 2006, she puts the rationale behind SEZ in a very simple manner. She writes:

The promotion of SEZ is an attempt to deal with infrastructural deficiencies, procedural complexities, bureaucratic hassles and barrier raised by monetary, trade and fiscal taxations, tariff and labour policies. These structural bottlenecks affect the investments climate adversely by increasing production and transaction costs. Since country wide development of infrastructure is expensive and implementation of structural reform would require time, due to given socio-economic and political institution, establishment of political enclave (SEZ’s/EPZ’s) is seen as an important strategic tool for expediting the process of industrialisation in these countries. The Zones offers numerous of benefits, such as (i) tax incentives (ii) provision of standard factories/ plots at low rents with extended lease periods (iii) provision of infrastructure and utilities (iv) single window clearance (v) simplified procedures (vi)exemption of various restrictions that characterize the investment climate in the domestic economy. (See Aggarwal 06, p.4533).

Thus with an attempt to attract investment for the development for infrastructure and industries these changes as quoted above becomes indispensable. This benefits and concessions given by the respective government fosters congenial environment to attract local and foreign investments. The competitive environment can also be explained within the framework of ‘cluster approach’. These zones are industrial clusters as Aggarwal puts it:

Where external economies of scale and other advantages help the operating of firms in reducing costs, developing competitive production system and attracting investment, in particular FDI. As a result of these benefits, many developing countries have been promoting zones with experimentation that they will provide with engines of growth to propel industrialisation (Aggarwal 06, p.4533).

However the hope which has been attached to this policy has not proved much of a gain for most of the countries which adopted it with the above stated goals. Experience of many countries shows very less fruitful results far below expectations. The rationale behind the introduction of SEZ in a state, as explained so far is one side of picture, by that I mean that it is from the host country’s point of view. Now let us have a look at the idea of MNC’s behind investing overseas in the next section.

WHY DO MNC’S INVEST OVERSEAS?

There is no single theory that accounts for foreign direct investment. A comprehensive explanation for MNC’s invest overseas comprises of various factors. The important one’s can be given as follows:

Firm specific competitive advantage: the size of the MNC’s is usually large and they have enormous market power, this power helps them to arrange for the finance capital relatively easily at favourable terms. Not only this , they are also most often technological or marketing leaders of their country in addition to it their brand name , their efficient arrangement for system for production earns them huge marketing power, thus enables them to compete successfully in foreign countries. Such firms can sell or license their technological and marketing advantage to foreign firms, thereby benefitting directly from their advantages.

Location specific advantage: there are advantages to produce in the foreign land as the firm can have idea of local customer taste, in addition to it, avoids transport costs, it also enable them to save import barrier tax by locating its firm inside the foreign country.

Life cycle of products: Raymond vermon has joined the location specific advantage with that of product cycle theory, which says that at the time of a birth of a new a new product the firm faces competition and will tend to locate all its production close to its customers and R&D centre. This is done for enabling the product to get adapt to its primary market. Foreign market is served by exports. As the product gets mature and becomes easily imitated. Foreign competitors begins to challenge the export market of the pioneering firm, as they enjoy location specific advantage, thus in order to preserve its market share in the foreign market they establish their production in the foreign country. (See Grunberg in Balaam and Veseth 01, p. 350-52).

However there are many positive reasons which have been put forth by the liberal political economists and by the business community to encourage FDI’s which is similar to the rationale as explained above while explaining rationale behind SEZ. To sum it up in short, these are in the form of technology transfer to the developing or the under-developed nation. They also hold that it also helps in proper utilisation of the resources of a nation which MNC’s are even more capable than the host countries (as put forth by Robert Reich), MNC’s are also credited with helping the host countries to improve balance of payment crisis due to flow of capital into the economy when they acquire an existing one or establishes new subsidiary there (See Grunberg in Balaam and Veseth 01, p.354-55) . Not only this on the part of the home country advantages which are put forth is that it will integrate the world leaving forces of nationalism aside, which would create unity and integrity in the world. This will also lead to a congenial environment for fostering democracy in the world. There is however critiques of this positive argument as pointed out by many radical-structuralists. They argue that MNC’s integrate poor nation into an unequally structured world system, reducing the poor to a peripheral status, heavily dependent on the rich few core nation where these MNC’s have headquarters. This school of thought argument ‘is for poor countries to cut their dependency by closing doors for MNC’s’ (See Grunberg in Balaam and Veseth 01, p. 355). After having a brief picture of the global economic rationale behind the FDI’s let us move towards India’s experience of SEZ, which it has adopted in the hope of achieving the goals aforesaid in the above section.

THE INDIAN EXPERIENCE OF SEZ:

In Indian context SEZ according to Rob Jenkins is a third generation of economic reform. The first two phases were dominated by the effort to liberalise the macro policy and by creation of institution to regulate market. This third phase has a special feature of facilitating India, to have a global presence in largest private sector firms and foster the physical infrastructure within which such firms operates ( See Jenkins 07, pp.3-4). India has been experimenting with such idea as early as 1960’s. The Kandla Export Processing Zones (EPZ) is said to have been world’s first. This was followed by creation of Santa Cruz Electronic Export Zone (SEEZ). The decade of 1980’s also saw the creation of EPZ’s in Noida, Chennai, Cochin and Falta (West Bengal). Vishakhapatnam had its first EPZ in 1994 and it was the same year that the policy got revised to permit in which in addition to the central government, the state government, autonomous agencies and private sectors firms developed and operated EPZ. Surat private sector EPZ is the first to emerge after the 1994 EPZ policy. However India was pushed towards more comprehensive SEZ policy which began by 2000 and it was inspired by Chinese model, thus a new form of SEZ came into being in the Commerce Ministry import and export policy of April 2000, and this was a precursor of what would later become the 2005 SEZ act. The 2000 Exim policy got EPZ converted into SEZ. However there is difference between EPZ and SEZ, the main difference between the two is that firstly, EPZ can be thought of as industrial estates whereas SEZ consist of array of social facilities which includes housing, hospital, school, retail development which is similar to small city. Secondly, SEZ are designed to operate on the principles of ‘Self Certification’, tax exemption in transaction whereas EPZ required only official attestation. Finally, SEZ tends to be governed by comprehensive legislation, under which far reaching regulations can be authorized rather than notification and orders issued by number of ministries (See Jenkins 07, p.4). Several states enacted SEZ policy which includes relatively under-developed industrialised states including UP and Rajasthan which passed SEZ act of 2002. On the eve of passage of SEZ act 2005, 811 business enterprises were operating inside the country, (See Jenkins 07, p.5). However the act got operationalised in February 2006 with its peculiar features to fit in Indian context.

SOME SALIENT FEATURES OF SEZ:

The salient features of Indian SEZ can be summarized as follows:

An important feature of the act is that it provides a comprehensive SEZ policy framework to satisfy the requirement of all principal stakeholders- the developer and operator, occupant enterprise, out zone supplier and residents. All of them are taken care in this policy.

Another major feature of this act is that it claims to provide expeditions and single window clearance mechanism. It consists of a board constituted by the centre and the responsibility of proper development of SEZ lies with it. However the central government may Suo Motu the set up zone, proposal of the state and private developer are to be approved by the this board.

This act offers a high fiscal incentives package which ensures exemption from custom duties, service tax, central excise duties, central sale tax, and securities transaction tax to both the developers and the units. It also provides for tax holidays for fifteen years, 100% income tax exemption for ten year in a blocked period of 15 years for SEZ developers.

In the sphere of infrastructure, provision has been made for establishment of free trade and ware-housing zones. This is to build world class trade infrastructure to facilitate import and export of goods and services which aimed at making India a global trading hub. The setting up of off shore banking units and units in an international financial service centre in the area of what we call SEZ. In relation to infrastructural development the role of both private and public participation is open. There is also setting up of ‘SEZ authority’ in each central government SEZ, in order to develop new infrastructure and strengthen the same (See Aggarwal 06, pp. 4534-4535).

The above stated salient feature has been designed to meet India’s current need of development as per Ministry of commerce’s point of view. However it is one of the most hotly debated issues of this decade. So let us have a look at some of the debated areas of this highly contested act.

THE DEBATE:

The policy implication of SEZ is many and it is one of the most widely debated issues in India. Huge protest is demonstrated by those who have lost their land. There are campaign against SEZ by politicians, scholars, media and civil society to bring up the oppression which has been used by the state against poor. There are differences even within government; however in the midst of all these chaos there stand the Ministry of commerce who is not ready to change its tone over the issue. Let us see some of the initial debates which took place during its early phase as an act, between those who were in favour of SEZ and those who were against it. On the issue of relocation, on one hand those who were against SEZ they held that companies will simply take advantage of the tax concession and little development activity will generate and on the other hand those who favoured the policy stood by it and argued that ‘ special provision have been made in the act under which tax exemption are applicable only if the unit is not formed by splitting up, or the reconstruction of a business already in existence and it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Relocation of units to SEZ, would involve cost and loss of efficiency’ (See Aggarwal 06, p 4535).

On the issue of revenue loss those who are against the policy inform that it would cause a revenue loss of Rs. 9, 39,000 million over the next four years. If an annual average of these four figures is calculated it comes out to be Rs.23, 475 million, which is about 6.7 % of the central government’s total revenue receipt in the year 2005-06. The argument given on the issue of revenue loss in support of SEZ is that revenue loss is notional even without the act and it is held by the supporters that without SEZ, there would be not much investment in these enclosed zones. It would rather bring a net revenue gain of Rs. 4, 40,000 million (See Aggarwal 06, p. 4534). The third which is much debated, is the issue of land acquisition which has created much public debate in the country. Those who stood against the land acquisition held that the act will lead to large scale land acquisition by the developers, and which would end up by displacement of farmers. There would be meagre amount of compensation and there will be no guarantee of livelihood for them. For those who stood by the act put forth the argument that the land requirement of all SEZ constitute only 0.1 percent of India’s total cultivable land and SEZ developer are to provide with adequate relief and rehabilitation package for the affected farmers. The responsibility of transparent land acquisition law lies with the state government. Like in Maharashtra, MIDC has come up with a relief and rehabilitation package which includes assured employment for those who are being displaced and land at concessional rates in developed areas.

On the issue of Loss of agriculture those who did not favour the policy held the view that it would lead to food security problem as SEZ would be built on the prime agricultural land. Those who favoured forwarded that it has been decided by the board of approval and the state government that only waste or barren land would be taken for building SEZ or if necessary single crop land would be acquired for the purpose (See Aggarwal 06, p. 4536). However there are innumerous of debate on the issue but at the moment I would restrict myself on these few areas. The issue raised by those who were against it came to be true and their concern is very much visible in the country, in the form of insurgency movement against the government. The former prime minister of India V.P. Singh was quite correct when he said that ‘the current promotion of SEZ’s is unjust and would act as a trigger for a massive social unrest, which may even take the form of armed struggle’ (Singh 20th October 06 in Frontline as quoted in Dohrmann 08, p. 60). The political and social implications of SEZ are innumerous. In the next section I would be focusing on the critical assessment of the act, which is quite important at the present moment in the context of India.

CRITICAL ANALYSIS:

There has been a serious impact of SEZ as we have parties divided over the issue. Some supporting and some challenging the setting up of SEZ’s. There has been number of cases in the court challenging the setting up of SEZ, especially the legitimacy of ‘Eminent Domain’ in which the state using its exceptional power acquires the land on the ground of ‘Public Purposes’. Land especially agricultural land in India is a very sensitive issue as it is directly related to the emotion of the people ever since the Zamindari days. One case can be cited here as an example, in November 2006, farmer from the Jamnagar District in Gujarat moved to high court and later even to supreme-court to challenge the setting up of a 10, 000 acre SEZ by Reliance infrastructure. Another illustration can be Nandi gram in which heavy participation of women and children can be witness and it has also been widely covered by Media (See Dohrmann 08, p.73).

A report published by NCAS, in November 2007, gave a very critical assessment of the SEZ in context of globalisation, governance and grassroots. They have critically examined the impact of the SEZ on the areas where it has been established. According to them, the assumption that the SEZ will have a positive impact on the entire country through economic spillover and it will ultimately lead to new Era of rapid industrialisation, employment generation and domestic and foreign investment was completely shattered. Serious doubt regarding the role of Indian State as an upholder of justice, equality, and as an agent constituted for protecting the largest interest of its citizens have been raised. For instance it writes in its report that:

The SEZ legislative framework clearly indicates the changes in the operational framework of governance. Declaration of SEZ’s as “Deemed Foreign territory”, provision for the position of Development Commissioner (DC), fusing the various role of the executive and the judiciary, and the judiciary, and exemption from the jurisdiction of local bodies all indicate the changed direction of state governance. (See NACS report 07, p. 44)

Thus instead of strengthening the regulatory provision of the country, it has been diluted to allow a handful of large corporate interests to make profit. This certainly violates the spirit of constitution. Democracy is being undermined as we witness violence and brutal suppression of people’s dissent against land acquisition by the state for private developers. The plethora of benefits, subsidies, and massive expenditure to promote industrialisation is all at the cost of social sectors. This indicates bad economics and misplaced priorities. It has completely changed the nature of governance in the state of India. Sovereignty, Democracy and local self government is all at stake. Here I would like to point out the single window clearance mechanism- as has been explained above, it is for the speedy facilitating the firm to escape from the long procedural hassles- needs to be revisited as it seriously undermines the principles of federalism as the DC, the SEZ committee and the SEZ authority are all appointed by the central government, which has the sole power to super cede, them without consulting the state. In addition to it the role of executive and judiciary has been fused into judiciary (See NCAS report 08, p. 45-46).

SEZ’s as an industrial township seriously undermines the authority of local bodies from having jurisdiction over SEZs. SEZ legislation has been constituted without the consultation of the local bodies even though the local communities are worst affected by it. Depletion of water tables, pollution of land, air and water, destruction of flora and fauna cannot be addressed by the people and here it needs a locale body to stand for the issue in favour of local communities. There is rampant violation of the mandatory consent of the gram Sabha required under PESA (Panchayat Extension to Scheduled Areas) act. One can site illustration from various media reports. Two of them are: in a report published by mines and communities in 2003 ‘land, forests, displacement and livelihood: protecting women mining rights’ it was pointed out, how state policy ranging from the recommendation to mineral policy and amendments in other acts related to mining activities like the labour policy, the coal nationalization act, the fifth schedule, the land acquisition act, the forest conservation act, PESA (panchayat extension in scheduled areas) environment protection act, shows increasing disrespect by the state towards the rights of the communities. The setting up of big mining giants in these resource rich areas has only led to multiple exploitation and degradation of women’s rights with regard to land and livelihood. However before I start with the wider implications of these policies adopted by the state, let us have a brief look at what happened in Nagarnar and Khudaridih village in Chhattisgarh where one can witness the effect of the draconian law of land acquisition in this country, which gives over-riding power to the state to encroach onto the people’s land for any ‘public purpose’ including mining (see report by MAC, 15 April 2003). In most of the situation the community is being aware of the project at the time of eviction. The public hearing is also biased toward people. One such case can be cited as an illustration, where even after the valiant protest against the public sector mining project NDMC steel plant in Nagarnar , the protestors were suppressed brutally and there were violation of PESA act and land acquisition procedures. Gram Sabha was never consulted and there was deliration of duties and procedures by the authorities. Company with regard to obtaining consent and NOC’s from the people denied any violation brought out by National SC/ST commission for fact finding report on Nagarnar.

In an another incident which took place in Chhattisgarh, some tribal land in Khudaridih village are being acquired to provide the raw material for BALCO but after the Sterlite take over the promises made at the time of acquisitions are being bounced between government and the new private owners. Neither the state nor the private owner is ready to take responsibility of proper rehabilitation (see report by MAC, 15 April 2003). In a democratic country like India we still do not have any relief and rehabilitation policy as a constitutional safeguard for the people. There is no basis on which communities can fight for compensation of their losses either of land or common properties of livelihood.

SEZ act has done away with the need of conducting the Environment Impact Assessment (EIA). SEZ is deemed to be non-polluting in nature. Public hearing for SEZ whether they are polluting or non-polluting have been removed. In addition to it even ‘though no SEZs have been planned in forest land, national parks and wild life sanctuaries SEZs that propose to gobble up parts of forest lands are in the pipeline’ (See NCAS report 08, p. 51). The original dwellers of the forest areas are increasingly thrown out of their respective areas most often with the help of violent means which greatly affect their culture and livelihood patterns.

States have also been directed to modify labour laws in their respective areas in order to introduce self certification, hire and fire system and prevent unionisation and strike. This stands in complete opposition to strict labour laws of the countries in order to attract investments. ‘Gujarat, Madhya Pradesh, Orissa, Maharashtra and some other states, in their respective SEZ act and its notification and resolution has declared all its units within the SEZs as Public Utility Services under Industrial Dispute act 1947. Thus several labour rights such as right to strike, lockout, and legally suspend work to protest injustices have been completely removed’ by the SEZ legislation (See NCAS report 08, p. 52). On the question of rehabilitation and relief, which is already non-existent, there is unjust below market rates compensation to the communities that are displaced and they are doomed forever. Bose has given very critical theoretical underpinning of this act within Marxists perspective he says:

The concept of enclosed spaces has changed its point of incidence. Marx saw enclosed space as a catchment basin from where cheap labour will be evicted and called to work in industries. Labourers from not specialized but specially charted out areas will be brought in to the most “advanced” type of production relation or that is what will be touted. In reality it will never be the never be the most advanced type of production relation but will have the most advanced type of surplus extraction from the labourers. (See Bose 07, p.1)

With this extract from Marxist work I would end with concluding remark, which is the next final section.

CONCLUDING REMARKS:

There is a need to rethink about SEZ as a policy of development as it has been put to operation at the social cost. The social cost incurred by the affected people of this country cannot lead to economic efficiency, so to speak in the jargons of economics. There is a need to focus on Corporate Social Responsibility with a louder voice. In addition to it, question like-development for whom? needed to be strongly put forth before policy makers of this nation. Why cannot we have development without these corporate enclaves? A different model needs to be thought by the economist of this country. This policys is eating away the social capability, which is obviously, just not development. With the development goal in mind ironically, the Indian state has credited to have created violent forces from within. State needs to revise its policy related to SEZ, as it is not only affecting its people socially, politically and economically but on the top of it is destroying people emotionally. It is this emotional attachment of the people to their land that has led these people to side by those, such as Maoist insurgents, one out of many insurgent forces of our country. However the failure or success of the policy on economic front is difficult to point out, as it is just four years old but on social and political front it is definitely a big failure.



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