Political scientists draw a distinction between business-friendly and market-friendly governments.

A business-friendly government works closely with business leaders, individually or collectively, to promote preferred activities. It likes to play God and decide who will be the winners.

A market-friendly government, on the other hand, focuses more on setting rules of the game and levelling the playing field for all producers and sectors. A market-friendly policy does not rule out measures to assist producers. It only requires that such measures should be based on a sound analysis of market failure.

Where does the SEZ policy fall in this distinction between a business-friendly and market-friendly development policy? The policy is clearly well liked by large businesses that are falling over themselves getting a piece of the action. Of course, the winners will be those who are best at deploying the old pre-reform skills in lobbying and winning over politicians.

The policy relaxations for the SEZs basically involve tax concessions that treat them as if they were units located outside India -- a more liberal regime for external borrowings, and some significant relaxations of environmental and labour laws and of conditions governing infrastructure and urban development.

The SEZ policy is not a response to market failure. If anything, it is a response to governance failure. Perhaps it reflects a belief that growth and social justice cannot be reconciled -- so go for growth in the SEZs and leave all the social justice stuff for the domestic tariff area.

If the policy regimes that are to apply to the SEZs are a good idea, they should be made applicable throughout. If they are an attempt to by-pass political constraints they will run into agitations sooner rather than later.

Today these protests relate to land acquisition. Tomorrow they will be triggered by the application of more relaxed labour and environmental laws in the SEZs. Recent reports suggest that Naxals have already trained their sights on them.

The SEZs involve discrimination and discretion. The discrimination is between the policy regimes that apply to producing units within the domestic tariff area and those within the SEZs. The discretion lies in the case-by-case approval of proposals to set up these SEZs. Both of these involve a significant departure from a market-friendly system.

Sooner or later they degenerate into what we politely call rent-seeking by politicians, bureaucrats and their business cronies. In some ways the SEZ policy marks a reversal of a trend towards non-discriminatory and non-discretionary regulatory regimes that started in 1991. 

The SEZs are meant to drive rapid export expansion. But export production and production for the domestic market should not be separated in a sensibly-run economy. In an open trade regime with low tariffs there is no essential distinction between the two.

Hence isolating export production in some policy-privileged enclave makes little sense if our goal is an open market economy. The SEZs will drive investment and production away from the domestic tariff area and lead to significant revenue losses, which some estimates put at Rs 1.75 trillion (Rs 175,000 crore).

The Indian policy on SEZs is clearly imitative of the Chinese policy that has led to the boom in places like Shenzen and Shanghai. But the motivation behind the Chinese policy has not been well understood.

China went in for a policy based on SEZs to promote exports and economic growth because they followed a dual-track policy of a liberalised regime in a few cordoned areas in order to protect their public sector-dominated economy. Our reform path is not dual-track but gradualist -- liberalising throughout the economy at a pace that is politically palatable.

The Chinese started with four SEZs and have six now. We are going in for SEZs on a cottage industry basis. As against Shenzen, which is nearly 50,000 hectares in size, the Indian guidelines envisage SEZs starting at 40 hectares (for warehouses). The largest ones contemplated are of 10,000-15,000 hectares in size.

According to the Web site of the Ministry of Commerce, there are 14 functional SEZs at present and a further 61 approved and under establishment. Several hundred are under consideration. Each one of these will have a Development Commissioner and an Authority.

Incidentally any person moving in or out of an SEZ will require a special photo ID card. Can you imagine the proliferation of bureaucracy, the barriers and toll gates impeding movement, the customs, excise and sales tax officers who will be employed to police all of them and the confusion and corruption that will ensue?

Much of the public criticism of SEZs has centred on the land acquisition processes. This is part of a broader issue of the misuse of the right of eminent domain embodied in the Land Acquisition Acts, which has been the theme in two earlier columns in this paper.

The central issue here is not the quantum of compensation or rehabilitation and resettlement. The real issue is whether state power should be used to promote private profit. But in all fairness some of the big players are relying on commercial acquisition, giving the land holders an equity stake in the project and ensuring jobs for the displaced persons.

The concerns about land acquisition have been made more acute because the SEZs on the outskirts of major towns seem very much like standard urban development schemes with none of the constraints of existing rights or municipal democracy. That is why some critics have described them as new zamindaris. They may well work but at the expense of the established urban areas nearby like Mumbai, Delhi, Kolkata, Chennai and Hyderabad.

In fact, by driving commercial investments away they will make the problems of these metropolises worse. We may have a few shining new urban enclaves with thousands, maybe tens of thousands, living a Singaporean lifestyle alongside tens of millions condemned to live in continuing squalor.

The bottom line is that the SEZs do not address and in fact work against what is really needed -- an economic policy that promotes competition, innovation and growth throughout the economy, an urban policy that focuses on affordable housing and services for all, a social policy that actively expands opportunities for all regions and classes and a political policy that bridges the divide between those who support continuing reform in the role of government and those who fear the rigours of liberal capitalism.

• India's great rush for SEZs: Complete Coverage