India's way: crafting Special Economic Zones.

In June 2005, the Indian government passed an act intended to significantly increase exports by legalizing the creation of numerous Special Economic Zones (SEZs). These zones are designed to increase economic growth and lure foreign investment with incentives such as tax exemptions and industrial business parks. SEZs have existed in Asia for many years now, and their success in China prompted India to introduce the same policy in 2000. As India embarks on its own SEZ program, it should study China's policies and success, but it must be wary of a wholesale importation of China's methods. India must acknowledge and take into account the vast differences between the two countries when crafting its own policies.

India has already experienced significant economic growth and is projected to become the world's third major economic power within the next two decades. Despite this prosperity, however, a full 10 percent of India's population is unemployed. India's government seeks to reduce that figure through the implementation of SEZs by compensating farmers for lost land and creating jobs through the private companies that will be moving into the zones. India first introduced the idea of its SEZs in 2000 and initiated the logistical program last year. Its success is now evident; the current 15 SEZs maintain US$780 million in investment and have created over 100,000 jobs.

Despite these achievements, however, India's growth and development are overshadowed by China's phenomenal success with its own SEZs, which have become hugely prosperous since their creation in 1980. Shenzhen, the biggest and first of China's six zones, annually exports more than the total export volume of India and has developed from a small fishing village into one of the world's most rapidly growing cities. Its economy grew at an average annual rate of 16.3 percent from 2001 to 2005. While Shenzhen is the most successful, all six Chinese SEZs have prospered due to certain shared characteristics such as prime locations along China's coastline, very large sizes, and government-driven initiatives. It is the success of these Chinese zones that provided the initial enthusiasm for similar enclaves in India.

China's relative success gives reason for India to study its counterpart's policies, and in certain circumstances, adopt similar efforts. For example, unlike China, India offers a blanket tax exemption to companies for the first five years of production. Under this policy, however, there is the possibility that companies already existing in India may move to one of the tax-free zones, thus taking advantage of an instrument that is instead intended to encourage new investment from foreign firms. As Indian Finance Minister Palaniappan Chidambaram points out, the fall in tax receipts could lead to future fiscal deficits. Instead, India should consider adopting China's policy, which only offers tax breaks to certain companies based on years of operation and types of export activity. In situations like this, it is to India's benefit to follow the example of its more experienced neighbor.

The Indian SEZs, however, cannot be based entirely upon those of their Chinese counterparts. Despite certain similarities, India and China are very different countries with fundamentally distinct societies, legal systems, and cultures. These exogenous differences necessitate different methods of implementing SEZs. One key difference is that India is a liberal democracy while China is not, and as such, India's government must consider not only the economic consequences of its actions but also the political consequences. The opinions of India's many companies and its large agricultural population must be heeded. Thus, despite criticism of the large number of small zones in India--their largest, the 25,000 acre Reliance SEZ, is dwarfed by Shenzhen--larger SEZs would create direct conflict with members of the Indian Parliament. Many representatives have already joined the influential Congress Party leader Sonia Gandhi to protect the interests of farmers and protest the transformation of agricultural land into SEZs. In India's case, politics is a factor that must be considered in policy making. Copying China's program exactly does not guarantee India the same success, but instead will most likely have negative consequences.

India has great potential to achieve further prosperity. An effective SEZ program will draw more funding from the private sector for infrastructure improvement and generate more employment opportunities for its large population. This ambitious project, however, requires selective deviation from the standard Chinese model of SEZs. By recognizing the fundamental differences between India and China, the Indian government can craft an SEZ policy specifically tailored to bring the greatest possible benefits to all of India.

saftt writer

LAUREN FULTON