Themes > Current Issues
31.10.2006
Primitive Accumulation by Another Name
C.P. Chandrasekhar
Liberalisation,
its advocates argue, is a flattening device. By breaking down barriers
and abandoning State policies that privilege the few, it ensures that
the market rewards the fittest and the best, whether large or small. This
perspective is wrong because the State never withers or disappears, but
merely changes the rules of the game. And since the game under a neoliberal
order is defined as one in which the private sector must lead economic
development, growth ''success'' is predicated on protecting and enhancing
private profit. New forms of State intervention are inevitably used to
realise this goal.
The policy to establish Special Economic Zones (SEZs) is a recent example of this tendency. Legislated into effect only a year back, the policy is already proving controversial because of its partial success. Partial because few (new) SEZs have been in operation for long enough to be evaluated for export success. On the other hand, the government has received a large number of applications to establish such zones and reports indicate that permission to develop more than 180 SEZs involving thousands of acres of land across the country has been granted. Thus far the success of the scheme has to do with its ability to attract the interest of real estate developers and the ability of the State to use its power of eminent domain to mobilise the land need to ensure this limited success.
There are two questions that arise in this context. Why is there such an interest among private developers, including property developers, to rush into the area of SEZ development? And, what are the prospects that this would make India a major exporter with a global footprint of the kind that China (whose example ostensibly inspires this policy) has?
The interest of developers of the SEZs is easily explained. So long as they have the support of the State with its power of eminent domain, they would be able to obtain access to large tracts of land at prices that are likely to be cheap relative to their post-development values and possibly also relative to prevailing market prices. In addition, in lieu of their activity contributing to an expected export effort they are provided huge tax concessions. When computing their total income for tax purposes, developers are allowed a deduction of an amount equal to one hundred per cent of the profits and gains derived from SEZ development for any ten consecutive assessment years during the fifteen years after the notification of the zone concerned. These benefits come on top of duty free import/domestic procurement of goods for development, operation and maintenance of the SEZ, exemption from Service Tax /Central Sales Tax and exemption from Service Tax. Further, the income of infrastructure capital funds/companies and individuals investing in these SEZs are exempt from Income Tax, facilitating the mobilisation of capital for the development.
The issue that remains is whether the developer would be in a position to earn an adequate income from the activity to capitalise on the tax concessions. This would depend on the set of activities that the developer can engage in for commercial gain and the attractiveness of the SEZs as potential sites for units that would serve as the clientele for the developer. The activities, of course, are multifarious. Provision of built up sites and space with township infrastructure for approved SEZ units on a commercial basis, provision and maintenance of services like water supply, security, restaurants and recreation centres on commercial lines, the right to generate, transmit and distribute power, and so on.
Thus, so long as the developer can find the clientele, huge untaxed profits are guaranteed. But would producers and service providers rush to the SEZs just like developers are moving in to create them? We must recall that the SEZs policy is an extension of the earlier policies with respect to free trade zones (FTZs that have now been converted into SEZs) and 100 per cent export oriented units (100% EOUs). Under the latter, even units set up in the domestic tariff area (DTA) specifically for export were to be provided benefits like duty free access to capital goods and inputs for export production and a direct tax holiday on profits earned from exports to the extent of 100 per cent of profits for the first five years and 50 per cent of profits for a further five years. The logic of the 100% EOU policy was that units unwilling to locate in FTZs but achieving the export targets and accompanying conditions associated with FTZ units should not be deprived of the benefits offered to the latter. Now, in a turn of policy, the SEZs policy seems to once again favour clustering of exporting units provided special benefits in an earmarked space. This would obviously mean, if everything else remains the same, that unless starved of land and infrastructural facilities elsewhere in the country, there would be no rush of exporting units to the SEZs. In a large country like India, this is unlikely to be a motivation.
The expectation of a major rush of units to the SEZs that warrants the large number of applications for setting up such zones must therefore be related to some other factors. In particular, it must be related to the likelihood of better concessions being afforded to units set up in SEZs relative to those located outside. What then is the difference between the SEZs policy and the earlier one relating to 100% EOUs? Principally, under the new policy, the government has relaxed conditions required for a unit to be considered an exporter needing special concessions. Units qualified as being 100% EOUs under the pre-existing policy needed to: (i) be net foreign exchange earners, which earn more foreign exchange through exports than then they spend on imports, technical fees, royalties and repatriated profits; AND (ii) sell (after paying applicable taxes) no more than goods valued at 50 per cent of the FOB value of their exports (10 per cent gems and jewellery units). Thus, there were clear limits (defined relative to export contribution) on the extent to which even units that were net foreign exchange earners could sell their wares in the domestic tariff area, with the limits being higher in the case of items with low domestic value added like gems and jewellery.
The change in the new policy is that that there is no limit, defined as a ratio to the FOB value of exports, that applies on the sales by units in SEZs to the domestic tariff are. The only requirement for qualifying as an exporter is to ensure positive net foreign exchange earnings. This should increase the flexibility of an SEZ unit in terms of its sale to the domestic market, subject to the customs duties applicable to the commodity concerned. However, since imports from the Indian market (DTA) are to be deducted from export revenues when calculating the net foreign exchange earning of the unit concerned, this increased flexibility is limited. Hence there is no overwhelming reason to believe that units of a kind that were not interested in operating as 100% EOUs under the earlier policy would choose to locate in SEZs.
There would be a few areas where the policy is likely to encourage production aimed at the domestic market through units established in the SEZs. These are sectors restricted to large firms, such as those producing items reserved for the small scale sectors, which would be able to undertake such production within the SEZs. Moreover, with foreign firms allowed to set up units with no cap on equity holding and with access to the full range of concessions, they too may find production for the Indian and regional market based in SEZs a desirable option relative to export from abroad. The export success of the SEZs would then depend on attracting substantially export oriented units, including transnational firms that choose to use these SEZs as sourcing hubs for exports to the regional market. But, given past experience, it is not clear that the mere creation of SEZs would substantially change the trajectory of export growth from India as happened in the case of China.
In sum, there is no definitive basis for the expectation that a large number of units would be willing to set up in the SEZs as to ensure adequate clients for the developers. This has implications for the future direction of the SEZ policy. If export zones fail to attract adequate number of clients, what happens to the land acquired by the developers through the State? There is reason to believe that the State, to justify its actions would have to relax its definition of net foreign exchange earnings and regulations on land use to make the scheme a ''success''. There have been other instances, such as the migration from a fixed licence fee to a revenue-sharing scheme in the telecom sector, which reflect adjustments made to render liberalisation a success.
If that happens, the SEZs would become locations for production for the domestic market with adverse implications for existing domestic producers. The real gainers would be the developers, who would make large tax free profits partly at the expense of the State. Add on the fact that the State is using its powers of eminent domain to acquire land at relatively low prices for these developers and there is additional profit being made by the developer at the expense of the original owners of the concerned property, with the explicit support of the State. In sum, the whole scheme is one which paves the way for private capital to make huge profits at the expense of the small property owner and the State with limited benefits in the form of foreign exchange revenues—a process which is nothing short of a crude form of primitive accumulation of capital.
Not surprisingly, the rush to set up SEZs has set off opposition to the government indiscriminately using its power of eminent domain to mobilise land for the purpose; spawned criticism of the inadequate compensation afforded to the original owners of the land in a situation when it is being transferred to speculative, profit-making developers; and raised concerns about the likely transfer of cultivable or potentially cultivable land away from agriculture to industry, with implications for the country’s agricultural production capabilities.
All this is legitimised by neoliberal ideology which privileges the ''notion'' of export over production for the domestic market, favours private capital and benefits it with ''public-private partnerships'', and honours profit-making independent of how it is ensured: apologies for a policy regime that while pretending to ''roll-back'' the State, uses it to enrich big investors, including speculators.
The policy to establish Special Economic Zones (SEZs) is a recent example of this tendency. Legislated into effect only a year back, the policy is already proving controversial because of its partial success. Partial because few (new) SEZs have been in operation for long enough to be evaluated for export success. On the other hand, the government has received a large number of applications to establish such zones and reports indicate that permission to develop more than 180 SEZs involving thousands of acres of land across the country has been granted. Thus far the success of the scheme has to do with its ability to attract the interest of real estate developers and the ability of the State to use its power of eminent domain to mobilise the land need to ensure this limited success.
There are two questions that arise in this context. Why is there such an interest among private developers, including property developers, to rush into the area of SEZ development? And, what are the prospects that this would make India a major exporter with a global footprint of the kind that China (whose example ostensibly inspires this policy) has?
The interest of developers of the SEZs is easily explained. So long as they have the support of the State with its power of eminent domain, they would be able to obtain access to large tracts of land at prices that are likely to be cheap relative to their post-development values and possibly also relative to prevailing market prices. In addition, in lieu of their activity contributing to an expected export effort they are provided huge tax concessions. When computing their total income for tax purposes, developers are allowed a deduction of an amount equal to one hundred per cent of the profits and gains derived from SEZ development for any ten consecutive assessment years during the fifteen years after the notification of the zone concerned. These benefits come on top of duty free import/domestic procurement of goods for development, operation and maintenance of the SEZ, exemption from Service Tax /Central Sales Tax and exemption from Service Tax. Further, the income of infrastructure capital funds/companies and individuals investing in these SEZs are exempt from Income Tax, facilitating the mobilisation of capital for the development.
The issue that remains is whether the developer would be in a position to earn an adequate income from the activity to capitalise on the tax concessions. This would depend on the set of activities that the developer can engage in for commercial gain and the attractiveness of the SEZs as potential sites for units that would serve as the clientele for the developer. The activities, of course, are multifarious. Provision of built up sites and space with township infrastructure for approved SEZ units on a commercial basis, provision and maintenance of services like water supply, security, restaurants and recreation centres on commercial lines, the right to generate, transmit and distribute power, and so on.
Thus, so long as the developer can find the clientele, huge untaxed profits are guaranteed. But would producers and service providers rush to the SEZs just like developers are moving in to create them? We must recall that the SEZs policy is an extension of the earlier policies with respect to free trade zones (FTZs that have now been converted into SEZs) and 100 per cent export oriented units (100% EOUs). Under the latter, even units set up in the domestic tariff area (DTA) specifically for export were to be provided benefits like duty free access to capital goods and inputs for export production and a direct tax holiday on profits earned from exports to the extent of 100 per cent of profits for the first five years and 50 per cent of profits for a further five years. The logic of the 100% EOU policy was that units unwilling to locate in FTZs but achieving the export targets and accompanying conditions associated with FTZ units should not be deprived of the benefits offered to the latter. Now, in a turn of policy, the SEZs policy seems to once again favour clustering of exporting units provided special benefits in an earmarked space. This would obviously mean, if everything else remains the same, that unless starved of land and infrastructural facilities elsewhere in the country, there would be no rush of exporting units to the SEZs. In a large country like India, this is unlikely to be a motivation.
The expectation of a major rush of units to the SEZs that warrants the large number of applications for setting up such zones must therefore be related to some other factors. In particular, it must be related to the likelihood of better concessions being afforded to units set up in SEZs relative to those located outside. What then is the difference between the SEZs policy and the earlier one relating to 100% EOUs? Principally, under the new policy, the government has relaxed conditions required for a unit to be considered an exporter needing special concessions. Units qualified as being 100% EOUs under the pre-existing policy needed to: (i) be net foreign exchange earners, which earn more foreign exchange through exports than then they spend on imports, technical fees, royalties and repatriated profits; AND (ii) sell (after paying applicable taxes) no more than goods valued at 50 per cent of the FOB value of their exports (10 per cent gems and jewellery units). Thus, there were clear limits (defined relative to export contribution) on the extent to which even units that were net foreign exchange earners could sell their wares in the domestic tariff area, with the limits being higher in the case of items with low domestic value added like gems and jewellery.
The change in the new policy is that that there is no limit, defined as a ratio to the FOB value of exports, that applies on the sales by units in SEZs to the domestic tariff are. The only requirement for qualifying as an exporter is to ensure positive net foreign exchange earnings. This should increase the flexibility of an SEZ unit in terms of its sale to the domestic market, subject to the customs duties applicable to the commodity concerned. However, since imports from the Indian market (DTA) are to be deducted from export revenues when calculating the net foreign exchange earning of the unit concerned, this increased flexibility is limited. Hence there is no overwhelming reason to believe that units of a kind that were not interested in operating as 100% EOUs under the earlier policy would choose to locate in SEZs.
There would be a few areas where the policy is likely to encourage production aimed at the domestic market through units established in the SEZs. These are sectors restricted to large firms, such as those producing items reserved for the small scale sectors, which would be able to undertake such production within the SEZs. Moreover, with foreign firms allowed to set up units with no cap on equity holding and with access to the full range of concessions, they too may find production for the Indian and regional market based in SEZs a desirable option relative to export from abroad. The export success of the SEZs would then depend on attracting substantially export oriented units, including transnational firms that choose to use these SEZs as sourcing hubs for exports to the regional market. But, given past experience, it is not clear that the mere creation of SEZs would substantially change the trajectory of export growth from India as happened in the case of China.
In sum, there is no definitive basis for the expectation that a large number of units would be willing to set up in the SEZs as to ensure adequate clients for the developers. This has implications for the future direction of the SEZ policy. If export zones fail to attract adequate number of clients, what happens to the land acquired by the developers through the State? There is reason to believe that the State, to justify its actions would have to relax its definition of net foreign exchange earnings and regulations on land use to make the scheme a ''success''. There have been other instances, such as the migration from a fixed licence fee to a revenue-sharing scheme in the telecom sector, which reflect adjustments made to render liberalisation a success.
If that happens, the SEZs would become locations for production for the domestic market with adverse implications for existing domestic producers. The real gainers would be the developers, who would make large tax free profits partly at the expense of the State. Add on the fact that the State is using its powers of eminent domain to acquire land at relatively low prices for these developers and there is additional profit being made by the developer at the expense of the original owners of the concerned property, with the explicit support of the State. In sum, the whole scheme is one which paves the way for private capital to make huge profits at the expense of the small property owner and the State with limited benefits in the form of foreign exchange revenues—a process which is nothing short of a crude form of primitive accumulation of capital.
Not surprisingly, the rush to set up SEZs has set off opposition to the government indiscriminately using its power of eminent domain to mobilise land for the purpose; spawned criticism of the inadequate compensation afforded to the original owners of the land in a situation when it is being transferred to speculative, profit-making developers; and raised concerns about the likely transfer of cultivable or potentially cultivable land away from agriculture to industry, with implications for the country’s agricultural production capabilities.
All this is legitimised by neoliberal ideology which privileges the ''notion'' of export over production for the domestic market, favours private capital and benefits it with ''public-private partnerships'', and honours profit-making independent of how it is ensured: apologies for a policy regime that while pretending to ''roll-back'' the State, uses it to enrich big investors, including speculators.
© MACROSCAN 2006