It has been two years since India’s Parliament passed legislation to allow the creation of Chinese-style Special Economic Zones (SEZs), enclaves whose tax breaks and relaxed regulatory requirements are intended to attract foreign investment, spur the creation of world-class infrastructure, and create jobs. Since February 2006, when the Special Economic Zone Act 2005 came into force, India’s usually slow-moving bureaucracy has acted with unprecedented vigor, clearing proposals for more than 400 SEZs. But what is motivating this move towards spatially defined reform? How has the SEZ policy fared so far? And why is the response it has generated significant?
India’s adoption of the SEZ concept was, according to a former commerce minister, “inspired” by the success of China’s SEZs, which turned sleepy provincial backwaters like Shenzhen into global manufacturing hubs in less than two decades.
If so, it still remains a mystery why India’s SEZ policy is so strikingly different from the Chinese one. In China, the emphasis was on large sites – industrial cities, really – whereas Indian SEZs can be as small as 10 hectares (about 25 acres, or 1.07 million square feet). The theory behind SEZs favors larger sites. In the absence of scale, it is difficult to recoup the costs of building world-class infrastructure. Additionally, without a critical mass of firms in a given sector, the synergies arising from ‘clustering’ are lost.
More significantly, China’s SEZs were established on land belonging to the state, and developed by Chinese government agencies in anticipation of leasing space and facilities to private firms; in India, the policy framework relies largely on private developers to own, develop, and operate the SEZs.
Tailoring foreign ideas to fit domestic circumstances is not necessarily a bad impulse. But the design of India’s SEZ policy, and the manner in which it has been implemented, raises suspicion that the Chinese model was indigenized not so much to suit India’s national interest as to benefit elite interest groups. These include prominent industrial houses, real estate developers, and last, but by no means least, the politicians and bureaucrats who stand to gain (politically and personally) by acting as midwives at the birth of SEZs. By approving hundreds of small SEZs throughout India, the government has adapted the policy concept to India’s democratic context, where placating powerful interests across the country helps to cultivate broad-based support among the political elite.
The entire SEZ phenomenon, in fact, provides a useful lens on the politics of economic reform in India. One way of looking at the process is to see it as the Indian state finally deciding to abandon its cautious approach to liberalization. The creation of SEZs is, indeed, an aggressive attempt to promote investment, trade, job-creation, and growth.
On the other hand, one could just as easily regard the decision to pursue SEZs as a capitulation to the realities of India’s democratic system. Reformers, who face formidable political obstacles to the next wave of liberalization (labor deregulation, tax policy changes, easing restrictions on foreign investment, privatization), can be seen as having scaled back their ambitions – not by reducing the scope of the reform agenda, mind you, but by shrinking massively the extent of the territory to which new reforms will apply.
In other words, if (politically speaking) India as a whole is not ready for radical change, then why not simply confine such reforms to those parts of the country that are prepared to embrace liberalization? Through the expedient of SEZs, the cutting edge of reform can be applied selectively, creating a patchwork of tiny hyper-liberalized jurisdictions dotting the country. Political resistance to reform would thereby be fragmented: opponents would be isolated from one another, dissipating their energies in highly localized protest movements, each with its own peculiar issues and personalities.
Unfortunately, confining the vanguard of the reform agenda to just a small fraction of India’s landmass has not quelled political resistance in quite the fashion that the SEZ policy’s architects in Delhi had hoped.
To implement the policy, the central government must rely on India’s state governments to assist SEZ developers to acquire land, to obtain the necessary clearances from state-level agencies, and to shepherd SEZ applications through the approval process in New Delhi. States are pleased with the investment-promotion opportunities the new policy makes possible, and have acted with remarkable alacrity to facilitate the process. State governments have thus demonstrated a high level of ‘buy in’ to the SEZ policy. And because state governments are ruled by a wide array of political parties, many of whom sit in opposition in the national Parliament, their participation as enthusiastic implementers of the SEZ policy should, in theory, weaken the association of the policy with solely the parties that make up the United Progressive Alliance coalition government in Delhi. This should make the SEZ policy a much less partisan issue.
It has not quite worked out that way. This is because many state governments have failed to perform the other function their colleagues in Delhi were counting on them to: managing the political tensions that arise when large infrastructure projects are undertaken.
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Rob Jenkins is Professor of Political Science at Birkbeck College, University of London. He is currently a Visiting Senior Fellow at the Ralph Bunche Institute for International Studies at The Graduate Center, City University of New York. He is also a Non-Resident Visiting Scholar at the Center for the Advanced Study of India, University of Pennsylvania.
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