Power, Policy, and Protest: The Politics of India's Special Economic Zones

320 Pages·2014·18.098 MB·English

by  Rob Jenkins, Loraine Kennedy, Partha Mukhopadhyay

Introduction
Power, Policy, and Protest: The Politics of India's
Special Economic Zones
Rob Jenkins, Loraine Kennedy, and Partha Mukhopadhyay
Print publication date: 2014
Print ISBN-13: 9780198097341
Published to Oxford Scholarship Online: April 2014
DOI: 10.1093/acprof:oso/9780198097341.001.0001
Introduction
Power, Protest, and India’s Special Economic Zones
Rob Jenkins
Loraine Kennedy
Partha Mukhopadhyay
Industrialization, wherever it has occurred throughout the world, has been a
jarring process. The emergence of increasingly large-scale mechanized
production, undertaken through a range of organizational forms, inevitably
carries social dislocation and political conflict in its wake. India has been no
exception. For nearly a century, manufacturing and corporate service-provision
have developed alongside, drawn upon, and gradually supplanted the agrarian
economy as the dominant productive sectors.1 The growth of towns and cities—
both a cause and an effect of industrialization—has attracted rural Indians
seeking opportunity and fleeing distress. Traditional social relations have been
shuffled and reshuffled, often in unpredictable ways, in response to changing
conditions and new incentives.2
This fundamental shift—from a predominantly agricultural mode of existence
rooted in the countryside to one focused on urban industrial development—has
mirrored similar processes in other countries. It has also been uniquely Indian.3
The service economy, for instance, outstripped the manufacturing sector far
sooner in the industrialization process than elsewhere.4 The ability of the
country’s family-run business houses to diversify into a vast array of sectors,
while adapting to both the highly regulated economy bequeathed by India’s
immediate (p.2) post-independence leadership and the liberalized environment
of recent years, has defied prediction.5 Industrialization has proceeded unevenly
as well. Periods of rapid industrial growth have been followed by intervals of
relative stagnation. Agriculture, too, has changed dramatically, becoming, in
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Introduction
some areas, more commercial and reliant on modern infrastructure, such as
large-scale irrigation networks, chemical fertilizers, and genetically engineered
seeds. In many parts of India, however, industry and industrial employment are
scarce, and agricultural practices relatively unchanged.
It is in the context of this profound restructuring of the socioeconomic order that
one of India’s most concerted efforts to accelerate industrial development is best
viewed. The state’s efforts since the turn of the millennium to spur the creation
of Special Economic Zones (SEZs) represent a microcosm of the spatial and
temporal inequalities that have long been the hallmark of India’s
industrialization. Many proposed SEZs have been sited in areas inhabited by
farming families and others reliant on the agrarian economy. The resultant
physical displacement of agriculturalists, pastoralists, and practitioners of
traditional service occupations to make way for modern industry has been
accompanied by social disintegration and economic dislocation. SEZs are in this
sense a stylized representation of India’s industrialization. The process has been
accelerated and magnified, making it almost by definition unrepresentative of
the larger dynamic. Yet, for these same reasons, the development of SEZs
provides a unique window onto phenomena otherwise obscured by time’s
gradual passage. By creating export enclaves that are physically distinct from
India’s ‘ordinary’ economy—spaces that for certain legal purposes are ‘deemed
foreign territory’—India has continued a paradigm shift that began at least two
decades earlier.
Since the 1980s, India has been engaged in a protracted process of market-
oriented economic reform. The policy regime has gradually moved towards
greater reliance on private sector-led development and increasing engagement
with the global economy.6 The pace of liberalization has varied, but the process
has been punctuated by actions and decisions of particular significance,
moments that later stood out as turning points. These actions created
disruptions far-reaching enough to, in some cases, shake state institutions and
7
economic actors free from ‘path dependence’. The passage of India’s Special
Economic Zones (p.3) Act, 2005 (SEZA) is one such defining moment. By
establishing a legal framework for the creation of geographic areas governed by
a distinct regulatory regime—where taxes and bureaucratic burdens on business
activity, especially the development of export infrastructure, are substantially
reduced—the SEZA signalled a new approach to advancing economic reform.
The SEZA was passed just a year after the United Progressive Alliance (UPA)
coalition government took power. Headed by Prime Minister Manmohan Singh of
the Congress Party, the UPA government has been known for the innovative
social-protection legislation passed during its tenure, including two laws enacted
the same year that the SEZA was passed: the Right to Information Act, 2005
(RTIA) and the National Rural Employment Guarantee Act (NREGA), 2005.
These early measures were partly a response to the prevailing political mood of
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Introduction
the time. Commentators and leading politicians had concluded that the electoral
defeat of the National Democratic Alliance (NDA) government in 2004, which
brought the UPA to power, was caused by its inability to spread the benefits of
India’s stepped-up rate of economic growth.8 The rural poor, informal sector
workers, the socially and politically marginalized, all were perceived to have
been excluded from the new ‘Shining India’ that was the centrepiece of the
NDA’s election campaign imagery. The NDA government’s purportedly callous
approach to the globalization of the Indian economy was seen to have made
liberalization even less popular than it already was. Headed by Prime Minister
Atal Behari Vajpayee of the Hindu nationalist Bharatiya Janata Party (BJP), the

NDA government had, for instance, failed to protect India’s farmers and small-
scale manufacturers from the phasing out of various import restrictions, a
process required under World Trade Organization (WTO) rules.
Instead, according to this narrative, Vajpayee spent much of his six years in
power preoccupied with such high-profile initiatives as re-engineering the
financial-sector—for instance, opening India’s insurance market to foreign
companies. Indeed, under both the NDA and the centre-left United Front
coalition government that preceded it, the Government of India (GoI) pursued a
range of far-reaching reforms (by Indian standards, if not the World Bank’s):
foreign investment rules were liberalized in several sectors; legal mechanisms to
promote fiscal stability were introduced; and institutions were established to
oversee the entry of private firms into formerly state-dominated industries, (p.
4) such as telecommunications and electricity-generation. This second-
generation of economic reforms, to complement those introduced by Manmohan
Singh when he was finance minister under the Congress government of Prime
Minister P.V. Narasimha Rao in the early 1990s, had generated more sustained
political opposition to liberalization. The BJP and its allies paid the price at the
polls in 2004.
Whether or not this interpretation of the general election result was
substantially true,9 upon assuming office in mid-2004, the Congress Party’s
leadership felt the need to demonstrate that it would take a different tack. It
would pursue a rights-based approach to development aimed at addressing the
deprivations faced by Indians at the base of the economic pyramid, such as
record numbers of farmer suicides (allegedly due to the vagaries of liberalized
agricultural markets) and persistently high levels of malnutrition (allegedly the
result of scaled-back food subsidies). Jobless growth was a particular concern.
The passage of NREGA, which provided a kind of safety net for the rural poor,
was combined with an approach to economic reform that would relegate its most
radical manifestations to confined spaces, where capitalist dynamism could be
unleashed in small, concentrated doses. SEZs were the embodiment of this
vision. The promotion of SEZs was a way of sidestepping the political difficulties
of enacting, on a nationwide basis, those elements of the reform agenda that had
long languished, such as overhauling the industrial-relations regime and
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Introduction
streamlining governance structures. Because they were geographically
dispersed, and literally walled off from mainstream India, SEZs were regarded
by the ruling party’s strategists as a solution to the political dilemmas faced by
proponents of liberalization.10
Even before it came fully into force in early 2006, the SEZA had catalyzed an
enthusiastic response from businesses seeking profits and state governments
eager to attract investment to their jurisdictions. Proposals to establish SEZs
were formulated by private-sector developers working in partnership with state
government agencies. Hundreds of SEZs were approved in the five years after
the Act came into force in 2006. By August 2011, 133 SEZs, out of 585 formally
approved under the SEZA, were already operational. They covered a wide range
of sectors, though a disproportionate share was concentrated in just a few
sectors, including information technology (IT) and IT-enabled services (ITES),
pharmaceuticals, and gems and jewellery. Between 2006 and (p.5) 2011,
exports from SEZs increased tenfold in value terms, representing an average
annual growth rate of nearly 72 per cent.11
But the SEZA spurred other reactions as well—notably, protest movements in
states and localities where SEZs were proposed. Resistance varied considerably
in terms of the size and sustainability of opposition, the grievances articulated
by protesters, the range of actors involved, and the tactics they employed to
achieve their objectives. The responses of state governments varied considerably
as well. Over time, SEZs became a powerful symbol within India’s political and
policy discourse, one that remains open to multiple interpretations. To
supporters, the economic dynamism within SEZs demonstrates the growth
performance that the rest of India could achieve were it not shackled with
burdensome regulation, crushing taxes, insufficient infrastructure, and
tumultuous politics.12 Critics, on the other hand, see SEZs as a combination of
state-assisted land-grabbing,13 in which ordinary citizens are stripped of their
rights, and neoliberal extremism, in which business groups are accorded control
over governance within corporate fiefdoms. Ironically, whether one takes a
positive or negative view of SEZs, the picture that emerges of India’s actually
existing democracy is exceedingly grim.
And yet, the need to invest India’s institutions of democratic governance with
greater legitimacy is perhaps more acute now than ever. Twenty years of
market-oriented reform have made India more prosperous, on average, and
reduced the proportion of people below the official poverty line. But it has also
widened the gap between rich and poor. The ability of the Indian state to
address these contradictions—or at least to be seen to be doing so—is crucial to
restoring popular faith in the fairness and efficacy of democracy. Efforts to
stimulate the productive economy must be accompanied by procedural
safeguards that protect the interests of vulnerable people and the redistribution
of resources to ensure a decent standard of living for every citizen. In theory, it
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Introduction
should be possible to establish and operate SEZs in ways that conform to the
provisions of law, as well as to democratic principles of transparency and
accountability. Too often, this has not occurred. Identifying the ways in which
democratic space has permitted resistance movements to curb the excesses of
rapid industrialization—as well as the constraints on such influence—are,
therefore, of critical importance.
(p.6) While there have been many analyses of India’s approach to SEZs in
general, a systematic study of the politics surrounding the implementation of
SEZ projects has not been undertaken. The present volume seeks to remedy this
gap, and to do so in a way that makes use of India’s institutional environment.
India is not just a democracy, it is a federal democracy. The existence of
federalism provides a useful lens for examining SEZ politics. While the SEZA is
national in scope, its implementation requires the active involvement of India’s
state governments. Some states have passed corresponding state-level SEZ
legislation; others have issued policy statements to guide the process of
establishing and governing SEZs within their jurisdictions. Many state
governments have done more than merely shepherd private-sector SEZ
developers through the process of gaining the necessary approvals from the
central government; they have joined as equity partners in SEZ projects and in
some cases have promoted their own projects.
Because significant variation exists between the constituent units of India’s
federal system, the book examines developments in eleven states: Andhra
Pradesh (AP), Goa, Gujarat, Haryana, Karnataka, Maharashtra, Odisha, Punjab,
Tamil Nadu, Uttar Pradesh (UP), and West Bengal. Of the volume’s nine
chapters, seven are focused on a single state; two chapters consist of
comparisons between two states. For most states, at least two SEZ projects are
examined, allowing the role of more local factors to be assessed. Thus, taken
collectively, the authors identify (and suggest explanations for) differences
within and between states. These variations relate to the nature and extent of
SEZ-related political mobilization and the means by which government
authorities have sought to manage dissent, whether through policy measures or
through piecemeal responses to specific forms of resistance. By covering a
broad range of regional contexts, industrial sectors, political situations, and
economic conditions, this volume furnishes a reasonably comprehensive picture
of the politics of implementing India’s SEZ policy.
The remainder of this chapter outlines India’s SEZ policy regime and criticisms
that have emerged concerning its legal provisions and potential consequences;
provides an overview of the political context within which the SEZ policy
emerged and unfolded; surveys debates that have informed the research
process; and analyses the significance of the findings from the book’s case
studies of SEZ development in eleven states.
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Introduction
(p.7) The SEZ Act and Its Origins
India’s SEZ policy can be traced back through a series of policy initiatives to
export enclaves established in the 1960s. The Kandla Export Processing Zone
(EPZ) in Gujarat opened for business in 1965. The Santa Cruz EPZ in
neighbouring Maharashtra followed in 1973, eventually evolving into an
important cluster for the electronics, software engineering, and gems and
jewellery industries. After a small wave of new EPZs emerged in the late 1980s,
revised central government policy guidelines were released in 1994. This
provided opportunities for greater private-sector involvement in the
establishment and operation of EPZs. A private-sector EPZ in Surat, Gujarat,
was developed under the 1994 EPZ policy.14
India’s push towards a more comprehensive SEZ policy began in earnest
following a visit by the then commerce minister, Murasoli Maran, to China in
2000. Reportedly impressed by China’s SEZs, Maran quickly initiated a change
in India’s policy regime. This took the form of new SEZ rules notified in the
commerce ministry’s Export-Import (Exim) Policy, which allowed conversion of
existing EPZs into SEZs. Whereas EPZs were akin to industrial estates, SEZs
would in theory contain all the facilities—housing, hospitals, schools, commercial
and recreational developments—required by a small city. India has had
considerable experience with industrial townships, dating back to the
development of the Jamshedpur ‘Steel City’ by the Tata Company in the early
twentieth century. A number of public-sector-led installations, such as those
found in Bhilai, Bokaro, and Rourkela, were built on this model. The existence of
such townships necessitated a specific exemption from constitutional
amendments introduced in the early 1990s that required the creation of elected
local governments throughout both rural and urban India. While the initial
handful of industrial townships made such exceptions acceptable, establishing
hundreds more in the form of SEZs has inevitably constituted a more radical
challenge to the idea of local democracy.
Another difference between EPZs and SEZs concerns their mode of governance.
For instance, SEZs are designed to operate on the principle of ‘self-certification’
when conducting tax-exempt business, whereas EPZs usually required official
attestation to formally verify each such transaction. A number of other fiscal and
regulatory differences help to distinguish EPZs from SEZs as well. Between
2000 and 2006, when (p.8) the SEZA came into force, only three additional
SEZs were established. However, during this same six-year period, several states
(including relatively under-industrialized states such as UP and Rajasthan)

enacted state-level SEZ legislation or introduced new state investment-­
promotion programmes.
For a major piece of economic legislation with far-reaching implications, the
SEZA was enacted with something approaching unseemly haste. The Act was
passed little more than a year after the UPA government’s unexpected arrival in
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Introduction
power in mid-2004. Debate in parliament on the SEZA’s fairly complex provisions
was minimal, in contrast to the prolonged discussions that accompanied the
passage of NREGA during the same session. The level of detailed scrutiny found
at the committee stage during NREGA’s journey to parliamentary passage was
absent in the case of the SEZA. The SEZA’s drafters did, however, build upon
policy development work conducted by the previous NDA government, notably
the Report of the Steering Group on Foreign Direct Investment (FDI), prepared
by the Planning Commission in 2002.15 This report quoted liberally from studies
conducted by international management consulting firms on the problems faced
by foreign investors in India.
Among the most important provisions of the SEZA and the associated SEZ Rules
are those concerning investment incentives. The Act’s immediate objective was
to attract investment in the development of export-oriented infrastructure. The
longer-term goals were enhanced growth, increased employment, and positive
externalities for the regional economies in which SEZs were to be situated.
Infrastructure developers were to be induced to invest with a package of defined
tax and non-tax concessions, including exemption from export and import tariffs,
general and sector-specific excise duties, and central and state sales tax. Under
the original package of incentives, firms were offered corporate income-tax
deductions on 100 per cent of profits from exports for the first five years of
operation within an SEZ; 50 per cent of profits from exports for the following
five years; and up to 50 per cent of profits for a further five years.16 In addition,
firms operating within SEZs were exempted from the need to acquire licences to
import capital goods or raw materials (or to pay taxes on their import). They
were also permitted to initiate—without the need for approval, except in a
handful of ‘sensitive’ industries—joint ventures in which 100 per cent of the
equity was held by foreign partners.
(p.9) The SEZA allowed for zones to be developed by state governments,
private promoters, or a mixture of the two. Applications for the establishment of
an SEZ require various certifications and evidence of financial and
organizational capacity. But under the Act the process of evaluating proposals to
establish SEZs takes place via a ‘single window’, an inter-ministerial Board of
Approval (BoA), chaired by the ministry of commerce and industry (MoC&I) in
New Delhi. (State governments were encouraged to develop single-window
mechanisms to speed clearances by the relevant agencies and departments
within their respective jurisdictions.) The department of commerce within the
MoC&I is the coordinating entity. Application forms and guidance material are
posted on the government’s dedicated SEZ website. However, the prospects for
an applicant’s success rely in large measure on the SEZ developer’s mastery of
unwritten rules.
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Introduction
The BoA operates under guidelines that have frequently been revised since they
were first issued in 2006. As of August 2011, the BoA had granted approval to
nearly 627 SEZs. This includes cases of both ‘in-principle’ and ‘formal’ approval.
Dozens of other SEZ proposals were ‘pending’, a good proportion of which were
application files on which state government responses were awaited.17 Many
projects stalled following the world economic downturn and particularly, the
credit freeze that hit the global economy in late 2008. The chapter by Jenkins in
this volume examines the process of more or less ‘permanent reform’ through
which the SEZ Rules as well as many of the minor administrative regulations
framed under them were amended during the first five years of the Act’s
operation.
According to the SEZA, the process for approving the inclusion of business units
within an SEZ is undertaken by an Approval Committee headed by a
development commissioner (DC), a senior civil servant (almost always an officer
of the Indian Administrative Service, or IAS) appointed by the GoI. The Approval
Committee also includes representatives of the customs authorities and of the
state government in which the SEZ is located. Once business units have been
established within an SEZ, further decision-making is relatively centralized in
the hands of the DC, who sets standards for the application of other rules
(regarding the location of social facilities, the measurements to be used in
determining ‘processing areas’, and so forth). The Approval Committee is
responsible for monitoring the performance of business (p.10) units within the
SEZ and can register violations pursuant to the Foreign Trade (Development and
Regulation) Act. In some states, such as Gujarat, SEZs are managed by a
‘Development Committee’, which includes the corporate developer (or an agent
nominated by the developer), the DC (or his or her nominee), and a
representative of the state government. The management committee, whatever
its name or composition in any given state, is responsible for preparing overall
plans for the SEZ, providing common infrastructure, facilitating the transfer of
land parcels, regulating building construction, and so forth. The Gujarat SEZ Act
of 2004, which pre-dated the passage of the central legislation, accorded SEZ-
specific Development Committees responsibility for a wide range of functions
normally associated with governments: ensuring access to such services as
hospitals, schools, and police stations; registering births and deaths; ‘conducting
public vaccinations’ and preventing ‘the spread of dangerous diseases’. The
Committee would also perform ‘[s]uch other functions as may be assigned by the
18
[state-level SEZ] Authority’.
The role of the DC, discussed in Section 11 of the SEZA, is crucial in the
functioning of the administrative machinery that governs an SEZ’s establishment
and operation. The range of powers accorded to the DC is a point of both factual
and normative contention. The DC must consult with state government officials
on certain issues (for example, compliance with environmental standards), but
for many matters appears to exercise a combination of legislative, executive, and
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Introduction
judicial powers. What particularly concerns critics are SEZA provisions that
permit state governments to delegate to DCs any regulatory powers they deem
appropriate.19 Sections 21 and 22 of the Act provide additional powers to the DC
that limit the ability of state governments to carry out normal law and order
functions within SEZs. Section 22 specifies that, without the consent of the DC,
‘[n]o investigation, search or seizure shall be carried out in a SEZ by any agency
or officer,’ with the exception of certain violations of national law. Section 23 of
the Act is another frequently debated provision. It empowers state governments
to establish special courts to adjudicate civil cases. Some critics suspect that
these courts will not only replicate, but possibly even magnify, the pro-business
biases that are alleged to have afflicted the wider judicial system over the past
two decades.20 Even more problematic from the perspective of democratic
accountability is the seeming exemption of SEZs, as noted (p.11) above, from
the provisions of the 74th Amendment, which provides for popular participation
in municipal governance through the election of local representatives.
Although the SEZA permits—indeed encourages—state governments to enact
state-level SEZ legislation, only eight have done so (Gujarat, West Bengal,
Madhya Pradesh, Haryana, Punjab, UP, Rajasthan, and Tamil Nadu).21
Maharashtra proposed several versions of an SEZ law, but they stalled because
of controversial provisions concerning the application of labour regulations
within SEZs. Unlike Gujarat’s Act, which (as we have seen) was enacted prior to
the SEZA, laws passed by other states have generally avoided spelling out a
clear position with regard to such ‘social and economic’ issues, implying that
existing legislation will apply. The advice given to state governments by New
Delhi on such matters has been inconsistent, at best. The MoC&I has
recommended that state governments delegate as many responsibilities as
possible to DCs to ensure coherent decision-making across traditional
bureaucratic lines. Yet, an official in the AP government reported that the state’s
draft SEZ Bill, dating from late 2005, met with objections from the GoIs labour
ministry because it would have provided DCs both regulative and adjudicative
powers. New Delhi decided that, at least in AP, the DC would be insufficiently
accountable.22
The SEZ policy of the early 2000s was the culmination of a move towards export-
led growth, a major element of India’s economic reform programme since the
1980s. This reorientation was realized through measures to reduce import
duties (particularly on intermediate and capital goods) and to ease restrictions
on foreign investment. Some clearances remain, but in many sectors ventures
that are 100 per cent-owned by foreign firms receive ‘automatic approval’. In
2005, the year the SEZA was passed, the government began permitting 100 per
cent foreign ownership in real estate firms. This did not, in the end, lead to SEZ
development taking place primarily under the auspices of foreign firms, but the
perception that they were involved took hold nonetheless, not least because
many of the occupants of SEZs have been multinational corporations. Critics
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Introduction
maintain that many SEZ promoters are obtaining lucrative tax concessions to
develop luxury housing and high-end commercial developments rather than to
catalyze new export activities or create jobs for the growing ranks of the
unemployed.
(p.12) Viewed in conjunction with other policy decisions, however, the SEZA
can be seen as marking a new phase in India’s liberalization process, a ‘third
generation’ of economic reform, aimed at enhancing the capacity of India’s
largest private-sector firms to penetrate global markets.23 By pursuing radical
deregulation on a limited geographic scale, India appears to be following the
same approach as South Korea, which regarded SEZs as vectors for
liberalization policies that were politically unacceptable on a national basis.24 As
one account put it, ‘[g]raduated sovereignty in the form of various SEZs was
thus employed as a state strategy to create spaces where liberalization and
25
deregulation could take place in the face of significant resistance.’
Theoretical Orientations
This volume’s case-study authors, representing a wide range of professional and
disciplinary backgrounds, have (not surprisingly) been informed by theoretical
perspectives from a diverse array of fields. Concepts and analytical frameworks
from economic geography, political economy, and social movement theory were
particularly salient in analysing India’s SEZ policy and the responses it has
generated.
The first literature—on state (or territorial) ‘rescaling’—regards the
development of infrastructure through the creation of SEZs and other such
investment-promotion vehicles as a particular type of ‘glocalization’ strategy.
These strategies involve adapting state institutions to engage more effectively
with global markets, notably by enhancing the capacity of subnational
jurisdictions to promote capital accumulation. As Neil Brenner notes, ‘[t]he
glocalization of state territorial power is at once the outcome of crisis-induced
socioeconomic restructuring on urban-regional scales and a medium of state-led
reindustrialization through a profound redefinition of each state’s relationship to
26
its major cities and regions.’
To a degree, the governance of India’s SEZs occurs outside the legal framework
prevailing in the rest of the country. By carving out such extraterritorial spaces,
India’s SEZ policy offers a compelling illustration of state or territorial
rescaling.27 State rescaling generally refers to one of two things. First, it can
mean a scaling up of certain state functions in response to exogenous pressures
such as treaty obligations stemming from membership in, for instance, the
European Union or the WTO. (p.13) In this variant of rescaling, selected nation-
state prerogatives are conditionally granted, upward, to a supranational entity.
Second, rescaling can refer to scaling down. This can occur either as part of a
deliberate process of political reform (for instance, democratic decentralization)
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