The Coastal Economic Zone Push: Why Confine Reforms And Infrastructure To Enclaves?

The NITI Aayog is pushing big time for the setting up of coastal economic zones (CEZs). According to a media report, at the recently concluded fourth Strategic Economic Dialogue between India and China, the Aayog sought the cooperation of its Chinese counterpart, the National Development and Reforms Commission, to develop CEZs in India on the lines of Chinese enclaves like Shenzen and Guangzhou.

Another report in September had said that the NITI Aayog was seeking a 10-year corporation tax holiday for CEZs.

Clearly, the Aayog vice-chairman Arvind Panagariya, who first floated the idea last year as a blog on the Aayog’s website, wants to see it succeed. He appears to see it as part of a larger coastal area development strategy that India should adopt and, as the discussion paper shows, believes this is the right way to get large firms into employment-intensive sectors, which also happen to have enormous export potential. He links it with the Sagarmala programme (focussing on port connectivity and modernisation) of the government being helmed by Nitin Gadkari, minister for shipping, road transport and highways.

Panagariya makes a pitch for one Shenzen-style CEZ each on the eastern and western coasts, which would be very large economic enclaves with a business-friendly environment. To this end, while briefing journalists about the Strategic Economic Dialogue, he also spoke about implementing difficult land and labour reforms that are not possible in other parts of the country in these enclaves.

Hang on, isn’t that what the special economic zones (SEZs) were supposed to be all about – economic enclaves getting handsome tax sops, with better infrastructure and friendlier labour laws and other business-related regulations in order to push exports-focussed manufacturing? What became of them? It’s not clear how the CEZs Panagariya envisions is vastly different from the SEZs, apart from the obvious fact that the former are to be in the coastal areas.

The SEZs, an idea first mooted by the first National Democratic Alliance (NDA-1) government in 2000, became a reality when the United Progressive Alliance (UPA) government passed the Special Economic Zones Act in 2005. But both the idea and the implementation faced rough weather from the start. There were charges that fertile agricultural land was being taken away for the SEZs, there were disputes between the commerce and finance ministry about likely revenue loss, there was resistance to the relaxation of labour laws.

Land acquisition proved problematic and the promised state-of-the-art infrastructure didn’t quite materialise. Later tax incentives on minimum alternate tax and dividend distribution tax were withdrawn. And then exporters outside the SEZs got even better incentives. So companies and exporters lost interest in these enclaves.

Ultimately (and unfortunately), the SEZs became associated with land and tax avoidance scams. In late 2014, the Comptroller and Auditor General (CAG) gave a damning indictment of the programme. Over 50 per cent of the land allotted remained idle six years after approval was given; land acquired for public purposes was later not used and de-notified with real estate developers making a killing from the escalated price of land.

Sure, the share of exports from SEZs have increased from between 5 per cent and 11 per cent in the first four years to the 24-27 per cent range between 2009-10 and 2016-17, but those who have studied SEZs closely say the bulk of this is from a handful of SEZs and most of these are the export processing zones (EPZs) that were established much before the SEZ Act was passed.

Even as the SEZs were floundering, the National Manufacturing Policy 2011 mooted the idea of National Investment and Manufacturing Zones (NIMZs). These, too, were supposed to be large enclaves of at least 50 square km with top notch infrastructure, tax breaks, faster clearances and a hassle-free operating environment. The guidelines for the NIMZ came through in 2013, but the scheme also faced problems relating to land acquisition and environmental clearances.

It’s not very clear how the CEZs that Panagariya is rooting for will be vastly different in design from the SEZs and the NIMZs, if they too are going to be dependent on tax breaks and an easier legal and regulatory regime. Since these are to be greenfield enclaves, the process of setting them up and operationalising them will be time consuming and potential benefits may take a while to flow in. The issue of land acquisition may dog these too.

So, to repeat a question that was often asked in the early days of the SEZ programme – why not make the entire country a SEZ, why not have an easier business environment, great infrastructure and flexible labour laws across the country?

In the briefing on the Strategic Economic Dialogue, Panagariya has said that the coastal states CEZs could implement the land and labour law reform that would be difficult in the rest of the country. But why does one need the excuse of a CEZ to do that? States are still free to reform these laws and some states like Rajasthan have taken the initiative. If they carry out these reforms and provide good infrastructure across the state, that will bring faster dividends than carving out areas for and setting up CEZs.

It is possible that CEZs could gain from the Sagarmala project and the emphasis on developing ports and connecting them with the hinterland. Poor port infrastructure was another reason why the SEZs failed. But why should separate CEZs be needed to propel this? Gadkari is going full steam ahead on port connectivity and on highways. So it may be possible to link markets in the interiors with ports faster than approving and setting up CEZs and making them operational.

Instead of pushing ideas that have the potential of turning into real estate rackets or tax break rackets, it might be best for NITI Aayog to push for speedier implementation of highways and port connectivity projects and for states to reform the land and labour laws.