Many of India’s notified special economic zones (SEZs) want to exit, downsize or postpone their SEZ-specific obligations. Blame it on flaws in the basic SEZ policy itself, and not just the slowdown. Though India’s SEZ policy was inspired by global examples of government-industry efforts to cut costs and multiply forex earnings, in practice, the compromises made to adapt the model to Indian situations have undermined its viability.

The Comptroller and Auditor General’s performance-audit of some of the functional SEZs reveal domestic earnings are larger than exports for most of them. According to an OECD study, domestic sources account for 75% of the capital formation in Indian SEZs. The real problem is that SEZs are a half-baked solution to the rapidly rising demand for urban spaces generated by India’s fast growing industry and services. With the number of new urban dwellers over the next 15 years expected to be at least 200 million, India needs full-fledged new towns, not the townlets represented by SEZs: the size of an SEZ is capped at 50 sq km, whereas the additional demand for urban space to accommodate 200 million plus new urbanites would run to tens of thousands of sq km.

India needs hundreds of new townships equipped with world-class infrastructure to accommodate large-scale migration of newly skilled workmen from rural to urban areas. That requires new urban planning, innovative policy to release farm land and reskill people. Merely hoping that the private sector would build the urban infrastructure the economy needs, if they are given tax sops just won’t do.

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