#dnaEdit: Do away with SEZs

The Comptroller and Auditor General’s (C&AG) performance report on Special Economic Zones (SEZs), likely to be tabled in the winter session of Parliament, raises basic doubts about their usefulness in augmenting productivity, creating jobs and earning foreign exchange. The national auditor, according to media reports, noted that the revenue foregone from the SEZs ran to a tune of Rs83,000 crore. Besides, the land allotted for public interest in these economic zones was diverted to private use. There is clearly need for a critical review of the idea of SEZs which has gained currency with politicians and policymakers, who are advocating economic reforms. They believe SEZs to be among the ideal economic structures for showcasing liberalisation. 

However, the flaws in this argument have been overlooked by these ardent believers in economic liberalisation. The SEZ serves well in a closed economy. And it is usually situated on the periphery of the country, on the coast with a port facility. It is an open economic enclave created in an otherwise closed economy. The SEZs offer not just tax incentives but also create easier terms for foreign direct investment and the repatriation of profits. Of course, there are obvious ironies, figurative as well as real, in such an idea. If liberalisation has opened up the Indian economy, then there is no need for a SEZ. There is a conducive atmosphere for economic activity throughout the country. Tax incentives and tax holidays can be provided anywhere, any time. In fact, it can even be polemically argued that the whole country, and not just designated spaces, should be opened up for easy economic investment. That is how developed economies function and that is the model adopted by the open economies of the Association of South East Asian Nations (ASEAN). 

It can be argued that SEZs gained currency among liberalisation advocates who believed that the national economy cannot be opened up on all fronts — and simultaneously. This will be a weak thesis after more than a decade and half of liberalisation. It is true the financial markets are not fully globalised, but they are now more open than before even though the entry and exit of foreign investments continue to be erratic and less than expectation. 
The SEZs came into existence in 2005. The C&AG’s performance audit reportedly scans the period from 2007 to 2013. Industry and business are always looking for government sops, including tax. However, the SEZs may not be the ideal conduits for the government to help industry to grow. 

There are enough compelling reasons for the SEZs not to have functioned well between 2007 and 2013. This is primarily because of global recession that set in 2008, which is yet to be fully overcome. It is because of this sluggish world economy that many of the designated SEZs are lying idle. And even those that have started functioning are performing poorly. There has not been an increase in productive activities, nor is there any growth in employment in SEZs. But this is also true of the economy as a whole.

The government of the day should certainly be faulted for its acts of omission and commission with regard to the working of the existing SEZs. There is also, however, the need to look beyond the expediency of SEZs in revving up the economy. SEZ is an idea whose time has passed. It would not make sense to tinker with the idea any longer. SEZs should be abandoned, and the designated zones should be converted into industrial parks.