A demographic time-bomb exploding into prosperity
Sunday, 7 October 2007
Vivek Mehra
INDIA'S special economic zones (SEZs) have long been the focus of controversy. The earliest critics argued that, unlike China's large SEZs, India's policy of permitting smaller, sector-specific SEZs was flawed because the zones would fail to derive the benefits of economies of scale.
The next wave of criticism was directed at the policy of permitting the use of 50 to 75 per cent of an SEZ for purposes other than manufacturing and support services. When policymakers sought to encourage the creation of social infrastructure alongside industrial infrastructure to reduce the burdens borne by the country's overflowing cities, detractors called this a real estate scam. Criticism of the alleged "land grab" sharpened as property developers jumped on to the SEZ bandwagon by acquiring large tracts of land.
The revenue department fuelled further controversy by complaining that SEZs would lead to large revenue losses, without fully considering the gains that would result from enhanced economic activity.
Then, ironically, violent and politically motivated opposition to land acquisition for a non-SEZ project resulted in the government's suspending SEZ approvals for more than three months.
SEZ approvals were at last restarted with the stipulation that they would be granted only if there were no objections from the farmers whose land would be acquired. The size of any SEZ was capped at 5,000 hectares, completing a full-circle policy revision.
A recently empowered ministerial group looking at land compensation and rehabilitation of displaced persons has recommended that where at least 70 per cent of the land area for an SEZ has been acquired by private parties voluntarily, the government may acquire up to 30 per cent to ensure necessary contiguity. This is a welcome step.
The inspiration for India's SEZs came from the success other countries, notably neighbouring China, had with their zones. India's policymakers had objectives similar to those of their counterparts: the development of infrastructure and accelerated economic growth and activity via increased investment, particularly from abroad. Job opportunities for the world's largest youth population was to be a by-product.
However, India's SEZ model differs from China's in one important respect. While China, not being a democracy, was able to develop large swaths of land on its coast with public funding, India has allowed zones to be developed by private, public or mixed funding. An overwhelming majority are being privately funded.
A look at the demographics underlines the importance of making India a global manufacturing hub. More than 550m people in the country are below 25 years of age, with 71m set to join the working age population by 2010. Two thirds of these people are from rural areas and survive on subsistence farming.
These "disguised unemployed" yearn for an urban environment and jobs, and it is the manufacturing sector that must generate suitable employment for them. The SEZs stand to provide much-needed incentives for globally mobile investors to set up manufacturing bases in India.
The resulting jobs would be the only way for India to take advantage of its demographic dividend.
Opponents of SEZs complain about an unfair disadvantage for those companies based outside the zones. However, with tariff barriers falling, non-tariff barriers being removed and India entering into trade liberalisation agreements with a number of countries, it is imperative that India sharpen its competitive edge by making available world-class industrial infrastructure supported by adequate social infrastructure. SEZs are the answer.
............................................
— FT Syndication Service
INDIA'S special economic zones (SEZs) have long been the focus of controversy. The earliest critics argued that, unlike China's large SEZs, India's policy of permitting smaller, sector-specific SEZs was flawed because the zones would fail to derive the benefits of economies of scale.
The next wave of criticism was directed at the policy of permitting the use of 50 to 75 per cent of an SEZ for purposes other than manufacturing and support services. When policymakers sought to encourage the creation of social infrastructure alongside industrial infrastructure to reduce the burdens borne by the country's overflowing cities, detractors called this a real estate scam. Criticism of the alleged "land grab" sharpened as property developers jumped on to the SEZ bandwagon by acquiring large tracts of land.
The revenue department fuelled further controversy by complaining that SEZs would lead to large revenue losses, without fully considering the gains that would result from enhanced economic activity.
Then, ironically, violent and politically motivated opposition to land acquisition for a non-SEZ project resulted in the government's suspending SEZ approvals for more than three months.
SEZ approvals were at last restarted with the stipulation that they would be granted only if there were no objections from the farmers whose land would be acquired. The size of any SEZ was capped at 5,000 hectares, completing a full-circle policy revision.
A recently empowered ministerial group looking at land compensation and rehabilitation of displaced persons has recommended that where at least 70 per cent of the land area for an SEZ has been acquired by private parties voluntarily, the government may acquire up to 30 per cent to ensure necessary contiguity. This is a welcome step.
The inspiration for India's SEZs came from the success other countries, notably neighbouring China, had with their zones. India's policymakers had objectives similar to those of their counterparts: the development of infrastructure and accelerated economic growth and activity via increased investment, particularly from abroad. Job opportunities for the world's largest youth population was to be a by-product.
However, India's SEZ model differs from China's in one important respect. While China, not being a democracy, was able to develop large swaths of land on its coast with public funding, India has allowed zones to be developed by private, public or mixed funding. An overwhelming majority are being privately funded.
A look at the demographics underlines the importance of making India a global manufacturing hub. More than 550m people in the country are below 25 years of age, with 71m set to join the working age population by 2010. Two thirds of these people are from rural areas and survive on subsistence farming.
These "disguised unemployed" yearn for an urban environment and jobs, and it is the manufacturing sector that must generate suitable employment for them. The SEZs stand to provide much-needed incentives for globally mobile investors to set up manufacturing bases in India.
The resulting jobs would be the only way for India to take advantage of its demographic dividend.
Opponents of SEZs complain about an unfair disadvantage for those companies based outside the zones. However, with tariff barriers falling, non-tariff barriers being removed and India entering into trade liberalisation agreements with a number of countries, it is imperative that India sharpen its competitive edge by making available world-class industrial infrastructure supported by adequate social infrastructure. SEZs are the answer.
............................................
— FT Syndication Service