Earthquakes deeply affect social and economic development. So I was surprised when journalists and businessmen told me during a recent Gujarat visit that the Kutch earthquake of 2001 was a blessing in disguise. They claimed that the five-year exemption from excise duty and sales tax, announced by the Central and State governments for new industrial investments in Kutch commencing production by July 2003, had sparked massive industrialisation. This, they claimed, had yielded once-unimaginable gains in income and employment.
I was initially skeptical. But I heard so much anecdotal evidence that this thesis clearly merits major research. It suggests a totally new approach—tax breaks for new industries– to combat natural disasters.
The Kutch quake killed perhaps 15,000 people, injured 167,000, caused asset losses of $ 2.1 billion (of which half was housing), destroyed 12,000 schools and 2,000 health clinics, and left huge numbers homeless and unemployed. The Indian public donated massively for relief. Railway Minister Mamata Bannerjee donated six months’ salary. Global aid poured in, and allocations for relief and rehabilitation exceeded $ 1,800 million (of which foreign donors pledged $ 1,147, the government of India $ 146 million, and the state government $ 507 million). Seasoned NGOs like SEWA and Abhiyan moved in quickly.
The media gave much prominence to these conventional responses, but largely ignored the excise and sales tax breaks. The media viewed these as peripheral or irrelevant sops.
Several studies reviewed R&R (relief and rehabilitation) efforts in Kutch. These include studies of the Gujarat State Disaster Management Agency, Gujarat Institute of Development Research, and the World Bank. They depict several problems and flaws in the R&R response. A World Bank study (Beck and Bhatt, 2004) reviewing the first 18 months of R&R found many shortcomings. Affected people had reduced consumption, become indebted, and migrated for work. Rehabilitation and recovery of livelihoods was slow. Dissemination of relief information was weak, especially to the illiterate poor.
Criticism also came from industrial houses that wanted to rehabilitate towns. Reliance had pledged to rehabilitate Anjar, but later withdrew. It said that the state government vacillated and equivocated for so long on the action plan that the company lost interest.
A recent review by the World Bank (Hazards of Nature, Risks to Development, 2006) is much more positive about R&R. It says NGOs persuaded most villagers to opt for rebuilding on the spot instead of relocating (as in the 1993 Maharashtra quake). The Maharashtra rebuilding was government-driven but the Kutch project was owner-driven. House-owners did the rebuilding in accordance with quake-proof norms evolved after the Maharashtra quake by Prof. Anand Arya, National Seismic Advisor. The norms provided simple instructions on steel reinforcement that could be followed by villagers. Owner-driven construction provided better motivation and design flexibility than contractor construction after other quakes. The project failed to quickly rebuild market centres, which were critical for livelihoods. New markets arose spontaneously on the outskirts of towns like Bhuj.
Overall, the Bank rates the project a clear success. The project won the UN Sasakawa Award for Disaster Prevention, and was placed in a list of the 100 best projects by the United Nations Center for Human Settlements.
Strikingly, none of these reviews mentions the impact of tax breaks for Kutch. This reveals a major blind spot. That, anyway, is what local businessmen believe.
The state government initially claimed that the tax breaks could bring in Rs 25,000 crore ($ 5.5 billion) of investment. This was dismissed by the media as propagandist wishful thinking. Yet businessmen say today that fresh investment may indeed have crossed Rs 20,000 crore.
Out of the blue, Anjar has emerged as a global pipeline hub, with five big companies—Welspun Gujarat, Jindal Saw, PSL, Man Industries and Ratnamani– creating pipe capacity of 1.5 million tones/year, now being doubled. Cement plants are coming up, using Kutch’s plentiful limestone and lignite. Steel mills and plate mills are coming up, catering to the pipe industry. Welspun India has built one of the biggest export-oriented home furnishing factories in India. Adani Ports is building a huge Special Economic Zone at Mundra. Caveat: some of this would have come up even without tax breaks.
R&R has sparked a construction boom. Excellent roads have come up. Bhuj finally has a railway station. Mundra and Kandla ports have been linked by broad gauge rail to the Delhi-Mumbai line. The construction boom has brought in hordes of migrant workers, a sign of rising local wage rates. Shops, restaurants and service industries have come up to serve the new industries.
Arid Kutch has a low population and large landholdings. A family of six owning 50 acres can fall below the poverty line whenever the rains fail. But industries are now buying land frantically from peasants. Land prices have shot up from Rs 60,000/acre to Rs 30 lakh/acre in some cases. Once-impoverished sellers of land have become millionaires. Many have invested their new wealth in shops and other services.
Hence, say local businessmen and journalists, the quake have been a blessing in disguise. Kutch has become unimaginably prosperous.
Does this hold lessons for future natural disasters? Tax breaks will not always work: not all areas are primed for an industrial push, as Kutch was before the quake. Economists will tell you that area-specific tax breaks are a bad idea: they are temporary and unsustainable sops, they divert rather than create industry, and lose revenue for state governments that are already in financial straits. Yet Kutch suggests that tax breaks for a disaster-hit district can catalyse a virtuous cycle of investment and growth that is sustainable, that gains rather than loses revenue in the long run, and not only rehabilitates victims but raises them to new heights.
Has industrialisation transformed the whole of Kutch or just a few parts of it? We urgently need research on the full impact on incomes and assets. If this confirms that tax breaks have been a major form of R&R in Kutch, that lesson needs incorporation into future disaster planning.