• Strategy
  • CFO Asia

India’s Turn?

As China phases out foreign investment incentives, companies may find havens in India's special economic zones — if they get built.

In less than six months, property developer QuarkCity is expected to
complete its special
economic zone (SEZ) in Mohali, a district in the
Indian state of Punjab. “Frankly, we paid more than
the market rate,” says Fred Ebrahimi, QuarkCity’s
chairman, talking about land acquisitions. “In my
opinion, if one is reasonable and gives a premium to
farmers, then there won’t be any problem.” He
expects the SEZ to start operations this June.

Tell that to Rajendra Hinduja, managing director
of Gokaldas Exports, India’s largest apparel exporter.
In 2006, the company bought land near Bangalore
for its apparel and textiles SEZ, but last year some
holdout farmers began asking for what the company
considers “exorbitant” prices. Gokaldas feared that
those who already sold would demand the same
rates, rendering the project uneconomical.

Eight years after India first announced its SEZ policy,
there are still more frustrated Hindujas than satisfied
Ebrahimis across the country. True, more than
400 projects have won formal approval, and scores
more have been given the go-ahead in principle (see
charts, page 40). But most are behind schedule largely
because of land acquisition problems. QuarkCity is
the exception rather than the rule — it can afford to be
generous because its SEZ is just 36 acres. Gokaldas’s
special economic zone sprawls across 400 acres.

It’s getting frustrating for export-oriented and
other companies in Asia and elsewhere, including
India’s own IT enterprises. Income tax holidays on
exports under the Software Technology Parks
scheme are set to expire in March 2009, putting
pressure on India’s globally focused IT firms — from
Infosys to Wipro — to find space in SEZs where they
will continue to benefit from such incentives. China,
which built its economic prowess on a system of
SEZs and development zones, is phasing out incentives
for many industries. Vietnam,
Cambodia and other developing economies in
Southeast Asia can take up some of the slack, but
many see India and its mostly young population of one billion as the ideal
alternative.

Balancing Act

If only India can get its act
together. As its economy
develops, more and more
land is getting converted
from agricultural to industrial
and infrastructure
uses. For many decades,
state government agencies
have been empowered to
make compulsory land
acquisitions, using standard
government norms of
valuation (read below market
prices) for all large
projects, not just SEZs.
The practice has long
stirred strong feelings and
confrontations. Those tensions
have intensified since
SEZ developers seem
poised to reap large profits
from government incentives,
while displaced farmers
receive far less.

Last December, opposition
from local citizens and
political parties forced the
state government of Goa to
scrap all SEZ projects in its
territory. Seven projects
had previously received the
green light there. Between
January and March 2007,
almost two dozen people
died in clashes between
farmers and the police in
Nandigram in West Bengal,
where land was being
acquired for a chemicals
SEZ project being set up
by Indonesia’s Salim Group. The Tata
Group’s high-profile small car project in
Singur in the same state, while not an
SEZ, also met concerted resistance.

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