Citizens’ Research Collective on SEZ

Devangshu Datta

New Delhi, November 18, 2007: Incidents like Nandigram cause a lot of uncertainty and hassle for investors. Only serious changes in the legislation will change the situation.

The bloody chaos of Nandigram may mark a decisive shift in the public attitude to SEZs. In the short-term, it has embarrassed the West Bengal government enough to scare other states into shelving SEZ plans en masse.

Nandigram and other SEZs have put the focus on two legal concepts that are flawed and badly need re-examination. If those two legal concepts are rewritten or better still, junked, a new version of the SEZs may become politically and economically acceptable.

There is one underlying consideration that the folks who vehemently oppose SEZs gloss over. “Inclusive” growth, if it is ever to happen, must involve vast numbers of workers moving out of the agricultural sector.

Right now, 60-65 per cent of Indians are employed by a sector that produces less than 20 per cent of GDP. Both services (55 per cent) and manufacturing (26) are growing much faster than agriculture and that trend will continue. Ten years later, agriculture would contribute no more than 10-15 per cent of GDP.

The only reasonable way to prevent current income disparities getting worse is for 20-30 per cent of the agricultural workforce to relocate into services and manufacturing. You will need land to locate the new businesses that can absorb that many workers.

Services and manufacturing offer much more value-addition per acre than agriculture, which is why industrial and commercial real estate is priced much higher than agricultural land. The value of land converted from primary agricultural use to value-added usages promptly multiplies.

If agricultural land-owners receive a reasonable share of that value-addition and landless agricultural labour receives reasonable assurances of better employment, this vast demographic shift could happen. Unfortunately the laws as they currently stand, allow the babu-neta nexus (BNN) to swallow the entire gains generated during conversion. That is what has led to such widespread resentment.

The concept of eminent domain is used to seize land as the BNN chooses. The party seizing the land also sets the valuation. It is then free to transfer the land at the price it pleases to big business.

Even if a farmer wishes to sell land to an industrialist, he cannot cut out the middle-man (that is, the BNN) and get full value. You cannot simply build a factory or STP on a paddy-field - it’s illegal. Land deemed “agricultural” must be converted for non-agricultural use. This is done by the stroke of a pen - but the BNN comes into the picture. Upon conversion, the land-value multiplies ten-fold or more instantly

What would happen if the concept of “conversion” was chucked out of the window? That is, the land-owner could decide to plant paddy or run an STP as he pleased, without requiring that aforementioned stroke of the pen.

Land suitable for value addition (close to highways, possessing adequate power, telecom connectivity and other infrastructure, etc, would then be negotiated and sold on a commercial basis. The business buying it would still pay about the same amount - but it would pay the owner, not the BNN, which passed a fraction onto the owner.

What would happen if eminent domain was redefined so that it could not be used for random land-grabbing? Or, if valuations under eminent domain were set independently and the purchase price paid directly to the owner, cutting out the middle-man? Or if there was a system of lease for SEZs with the owner receiving revenue share? Exactly this occurs with share-cropping, so it’s not a novel concept in rural India. If this happened, the land-owner would again receive a greater share of value-addition.

Is there enough momentum for such drastic legislative changes to be contemplated? Big business will want it. Nandigrams cause far more uncertainty and hassle for investors than straight-forward commercial transactions.

Will land-owners and landless labour come around? Probably - if they see that they are getting a reasonable deal.

The BNN will resist because it means a drastic cut in the brokerage. However, the resistance to the current land-grabbing methods may have grown powerful enough for even the BNN to consider it. Some profit is better than no profit, after all.

Logically then, in the short run, investors should avoid SEZ-dependent realty plays. If there is a change in legislation on these key fronts, the entire picture changes. The SEZ-dependent bits of the real estate sector would then go through a reincarnation.

Source: Business Standard