One attractive benefit of doing SEZs could have been a suspension of Indian labour law, just as trade barriers do not apply for SEZs. If SEZs had changed labour law, then many of the infirmities of SEZs might still have been worth living with, in order to create millions of jobs and Chinese-style exports. But this key ingredient was blocked by trade unions.

The best strategy now appears to be to go back to the pre-Kamal Nath path of strengthening the all-India situation on labour law, urban governance, trade reforms and capital account convertibility, in a framework of full compliance with tax laws. This appears to be a better path than trying to build enclaves where politicians help their friends obtain land and then taxes are exempted.

The SEZ policy debacle has had one positive contribution. It has put the land market on the agenda for reform. One factor which attracted developers and industrialists to SEZs (other than tax concessions) was the role the government was going to play in solving the problems of purchasing land. When small plots of land are owned by a large number of farmers and it is not easy to buy a large contiguous plot of land, a few holdouts can extract a king’s ransom. In addition, there are obsolete laws which reduce flexibility of land use between farming and non-agricultural applications. A clear land title is difficult to obtain, unless land is purchased from the government. These frictions pose genuine problems.

The lesson from the SEZ story so far is therefore that the government should focus on developing good land markets. There are four factors of production: land, labour, capital and enterprise. The worst state induced distortions of a factor market are found with land. Better land title systems need to be built, and the legal foundations of private land ownership need to be strengthened. Developing well-functioning land markets, removing government involvement in land use, acting as an enlightened middleman who helps to consolidate holdings and auction land to the highest bidder in transparent, publicly visible procedures — these are the areas which require state involvement. Training programmes ahead of time, facilitating schemes through which farmers are given the option of buying shares in the enterprise of the buyer and pushing for greater transparency and information in the plans of the developers, would allow the state to strengthen the interests of the farmers while facilitating industry to develop. The government’s focus should be on solving these problems for 297 million hectares that are India, rather than for merely 0.2 million sanctioned for SEZs.

... contd.