Introduction

The early 1990s marked the beginning of an economic transition in India. The state began withdrawing from the various key spaces it occupied in production with new regulations encouraging allocation of resources on market-driven principles. The policies continued through the 1990s and into the first decade of the next century.

As the country went into the 14th elections to the Lok Sabha (the Lower House of the Indian Parliament) in April–May 2004, there were no significant expectations of these policies changing under the next government. Expectations of market-friendly policies continuing became stronger with the victory of the Congress-led United Progressive Alliance (UPA) given that the Congress, and the new Prime Minister Manmohan Singh, was the harbinger of economic reforms in India.

Over time, however, these beliefs changed as the Congress and the UPA were found pursuing an economic programme hesitant to sanction greater freedom to market-based regulations in product and factor markets; on the contrary, the UPA increasingly, and particularly in its second tenure from May 2009 onwards, began pursuing policies that while not undoing the framework put in place by earlier economic reforms, tried balancing the thrust on markets by forcefully emphasizing greater role of the state in expanding economic entitlements of individuals and households and guaranteeing rights to such entitlements.

In the monsoon session of the Parliament in 2013, the UPA government enacted two major legislations. The first one prescribed a new framework for acquiring land and compensating the landowners and replaced the Land Acquisition Act (LAA) of 1894. The second was an Act entitling three-fourth of the rural population and half of the urban population to the receipt of subsidized food grains. Both the Acts were significant in their economic and political impacts. While they were in sync with the UPA's agenda of inclusive growth and a rights-based economic approach, they have been criticized on two grounds: first, for increasing production and fiscal costs in the national economy, and second, for being pushed as populist legislations for securing political gains.

INTRODUCTION

Nearly two decades after announcing its Look East Policy (LEP), India is poised to play a much greater role in the Asia-Pacific than it had probably envisaged at that point in time. After several years of lukewarm ties with most countries of the region since the beginning of the Cold War, India's strategic economic links with the region have increased sharply. This is reflected in its presence in regional institutional mechanisms like the East Asia Summit (EAS), ASEAN Regional Forum (ARF), and several other bilateral trade and economic cooperation agreements in the region. Notwithstanding these, it is still not as deeply entrenched in the economic domain of the Asia-Pacific as it could possibly be. A major factor behind the relatively low integration is India's hesitation to decisively abandon a defensive and inward-looking trade agenda. The hesitation has been a compelling determinant of its relatively lesser interface with a region that has long taken a more liberal approach to trade and investment than India and followed strongly outward-oriented policies.

The reputation of being a hesitant economic liberalizer and difficult trade negotiator is firmly affixed on India as it negotiates the Regional Comprehensive Economic Partnership (RCEP) — its largest trade and economic deal with the Asia-Pacific region so far. The gradual maturing of negotiations at the RCEP has been accompanied by significant domestic changes in India, the most notable being a change in government with the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) having a pronounced right-of-centre political and economic ideology replacing the more left-of-centre Congress-led United Progressive Alliance (UPA). There are wide expectations from the new government in pursuing a more aggressive course of market-based economic reforms than its predecessor. Such expectations extend to India adopting a forward-looking and constructive approach in its external trade negotiations, including the RCEP.

This chapter examines the context of India's participation at the RCEP, including its active Free Trade Agreement (FTA) policy and the questions about the benefits of these FTAs. It illustrates the economic and strategic significance of the RCEP for India, particularly the gains accruable from its greater presence in global value chains and a larger strategic role in the region.

The Indian Prime Minister Narendra Modi announced the upgrading of India's erstwhile “Look East Policy” (LEP) to a more action-oriented “Act East” strategy at the India–ASEAN summit in Myanmar in November 2014. Since then, much debate and discussion has taken place on the nature and content of the strategy. A large part of the debate has been speculative, since India is yet to come out with an official vision statement for it. However, various pronouncements by India, as well as the shifting pattern of its engagement with countries to its East, are beginning to throw greater light on the strategy. This chapter discusses the features of the strategy as discernible till now and emphasizes its geographic scope and strategic depth. It discusses the specific relevance and implications of the Act East strategy for Southeast Asia. While India's engagement with ASEAN is likely to become more comprehensive and strategic over time, the region would need to be prepared for the implications of India playing a more active role in regional affairs.

Act East: What it Means

One of the noticeable aspects of the Act East strategy has been the lack of any specific articulation about it from the Indian establishment. This could well be due to the strategy being an evolving one. Apart from its own evolution through the Indian strategic prism, Act East, clearly, is trying to take note of the rapid and complex developments in the region, particularly changes in the economic and security dynamics.

An analytical understanding of Act East, since its announcement a year ago, has been largely gleaned from a number of official statements emphasizing India's eagerness to play a proactive role to its East. Most of these statements are attributable to Prime Minister Modi, who has contextually alluded to Act East on several occasions. As mentioned earlier, the first of these was at the ASEAN Summit in November 2014 in Myanmar, when he announced the upgrading of the LEP to the action-oriented Act East policy. He mentioned Act East again during his visit to South Korea in May 2014, emphasizing the country's importance as a partner in the policy. Soon after, External Affairs Minister Sushma Swaraj underlined India's efforts to engage more deeply with Southeast Asia through the Act East policy and described Thailand as a significant partner in this respect during her visit to Bangkok in June 2015.

South Asia has remained economically backward compared to most of Asia. Despite comprising India – the world's twelfth largest and one of the fastest growing emerging market economies – the region suffers from low per capita incomes, poor connectivity, inadequate human development and pervasive poverty. The Indian economy reflects these traits conspicuously mirroring what most of the region typifies. The economic potential of the region is enormous given its abundant natural and human resources and strategic geography. Yet, it fails to give a better life to vast numbers of its people.

South Asia's current and future economic outlooks, have been, and will be shaped by three “P”s: people, potential and politics. Being one of the world's most populous regions, people will be critical in determining South Asia's economic prospects. Its potential for achieving high economic growth can hardly be overstated. Last, but not the least, politics is inseparable from regional economics. Much of the region's politics is inspired by varied concerns of its people articulated by diverse interest groups. The populism-laden politics is usually counterproductive to harnessing greater economic potential. It is hardly surprising that policies aiming at long-term economic benefits are time and again circumscribed in scope and scale for safeguarding short-term political interests. The regional political economy is distinct from the rest of Asia in its unabashed eagerness to maximize ad hoc political gains.

Efforts to promote sub-regional economic cooperation within the SAARC are almost a decade old. These took shape in the 9th SAARC Summit at Male in 1997. The Summit endorsed the promotion of a South Asia Growth Quadrangle (SAGQ) within the SAARC framework. The SAGQ comprises the four South Asian countries of Bangladesh, Bhutan, India and Nepal (BBIN). The BBIN growth quadrangle was expected to create a facilitating environment for growth and development through identification and implementation of specific projects.

The SAGQ was conceived to be developed through the active institutional support and technical assistance of the Asian Development Bank (ADB). This led to the launching of the South Asia Sub-Regional Economic Cooperation (SASEC) Programme in September 2000. The SASEC emphasises on project-based development in the SAGQ. There are six priority sectors. These include – transport, energy and power, tourism, environment, trade, investment, and private sector cooperation, and information and communications technology.

Till now, SAGQ is the only sub-regional initiative exclusive to the SAARC framework. South Asia has experienced the growth of other sub-regional initiatives like the BIMSTEC. However, BIMSTEC is a ‘SAARC plus’ arrangement as it includes members from East Asia as well. In that sense, the SAGQ is conceptually identical to similar initiatives in Southeast Asia that include the Indonesia–Malaysia–Singapore Growth Triangle (IMS-GT) or the Brunei–Indonesia–Malaysia–Philippines (BIMP) sub-grouping.

Countries all over the world create fenced-in, geographically delimited ‘enclaves’ within their sovereign territories. Such enclaves have become known as ‘zones’ in economic and business parlances. These zones are distinguished from the rest of the land in terms of their specific administrative authority, benefits enjoyed by industries located in them and availability of better business facilities. Some of the zones are often deliberately conceived as ‘foreign’ territories functioning with a different set of economic laws compared with those applicable to the rest of the country. Being ‘foreign’ also implies that zones are different customs areas. Depending upon their specific purposes, benefits offered, economic regulations and administrative frameworks, the zones are called industrial zone (or estate), free trade zone (FTZ), export processing zone (EPZ), enterprise zone, special economic zone (SEZ) or free economic zone (FEZ). This taxonomy, however, is by no means fully exhaustive.

Zones should not be construed as products of the current phase of globalization that has been driven by breathtaking advances in information and computer technologies (ICT). Though modern zones can be dubbed as post-Second World War creatures with the first such zone coming up at the Shannon International Airport at Ireland in 1956, there are examples of zones during the mediaeval era, as well as in the early twentieth century. Over time, however, the visions of different countries on these zones, particularly in the developing world, have changed significantly.

In a few years from now, India is likely to have one of the largest numbers of zones in the world. With more than 500 SEZs in various stages of growth and maturity – that is functional, notified, formally approved and cleared in-principle – not many countries in the world will come close to India as a ‘land of zones’. At the last count, Asia has 900 plus zones with the US following with 713. But these estimates by the ILO (Boyenge, 2007) will change dramatically once the new Indian SEZs get going. These shall not transform the ‘zone’ landscape only in Asia, but in the entire world.

The change will not be restricted to numbers alone. The economic literature on zones, particularly their impacts, will also enlarge after adding new chapters on the Indian experience. At present, the debate on zones tends to draw most of its inspiration from the Chinese story. Very soon, the Chinese experiences will be compared and contrasted with those from India. This will undoubtedly add more spice to one of the most discussed themes of modern times: the race between the Chinese dragon and the Indian elephant.

The Chinese experience provides an appropriate platform for reflecting on the Indian story. India's SEZ policy was heavily inspired by China. Speaking at a convention organized by the Federation of Indian Chamber of Commerce and Industry (FICCI) at Delhi on 21 March 2002, the late Mr Murasoli Maran, India's former Commerce Minister and the creator of its SEZs, commented: ‘I had been to Peoples’ Republic of China to observe the success story of SEZ.

The thought of doing a book on SEZs was nowhere in our scheme of things till about a year ago. We were merely following the twists and turns in the SEZ story like most others. By end 2006, however, SEZs ceased to remain academic controversies. As SEZ-related developments became murkier, the debate assumed larger sociopolitical dimensions. Slowly it turned emotional and propagandist. Finally, the story took a fatal turn with violent clashes over SEZs leading to loss of property and lives.

We were shocked by the ugly turn of events. We were also taken aback by the amount of hype being fed into the debate by both its supporters and opponents. In practically all forums, particularly the popular media, SEZs were portrayed as either angels or demons. Somehow, somewhere, the debate on SEZs has compromised heavily on logic and sanity. We also feel that the hysteria and emotion surrounding the debate has been used by some sections for implementing narrow divisive agendas.

As SEZs continued to create ripples and grab headlines, we got increasingly disillusioned by the quality of the debate. Indeed, the rampant rabble-rousing was not only diluting the intellectual content of the discourse, but was also doing grave injustice to the common man by imparting distorted impressions. This is what provoked us into writing this book. We felt it important to examine popular perceptions on SEZs, as thrown up by the ongoing debate, in a dispassionate, factual manner.

A reader of this book would have by now noticed the critical differences between the international development of the SEZs and the way they have evolved in India. We have already touched on this aspect in the first two chapters.

The second concerns the SEZs as a business model for corporate India. Related to that is the topic of how the stakes involved in the SEZ business for developers compares with that of the units which set up shop in those zones.

In this chapter, we will try to give a synoptic view to these subjects. We have mentioned earlier that these zones are by far the most ambitious of all the economic models that India has experimented with so far. They have the potential, if handled well, to alter the contours of the Indian economy fundamentally in the next 10–15 years.

The SEZs as a Business Model

What sort of a business model are the SEZs for India? An examination of the available literature shows that there are no models to emulate for this business in India. As the previous chapters have shown, the Indian plan has been pretty unique, with no precedence to rely upon.

There are, therefore, three aspects with respect to which one can try to understand the business of the SEZs. The first concerns the question of economic viability of the zone. This is a tricky issue. For various reasons, the SEZ business in India has become identified with the real estate businesses.

Project Details

Total Area : 2000 Hectares (20,234,300 sq. meters)

Processing Area : 500 Hectares (5,058,570 sq. meters)

Non-Processing Area : 1500 Hectares (15,175,711 sq. meters)

Processing Area: 700 Hectares

Textile: 25%

IT/ITES: 10%

Auto: 20%

Food Processing: 10%

Biotech: 15%

Gems & Jewelry: 5%

Others: 15%

Non-Processing Area: 1300 Hectares

Residential: 50% Sports & Rec.: 5%

Commercial: 25% Education: 3%

Hospitality: 10% Health: 2%

Other: 5%

Modes of Investment

As a Equity holder.

By Leasing of Land.

By a Collaboration Agreement.

As a Co-developer.

Secured Loans

Existing SPV can issue shares in lieu of current valuation to any person.

Land owner to be allotted proportionate share in SPV.

Equity holder can be given exit clause, by selling his share to SPV.

Revenue out of SEZ operation to be shared in terms of holding in SPV.

As an Equity Holder

Raheja can acquire land from owners by way of lease agreement for minimum period of 20 years. At any point of time lease or possession can be encashed for an agreed consideration. Consideration can be in the form of portion of built-up area. Lease can be with individuals, association of persons, company or a society or any other legal body being a conglomeration of land holders.