ECO397A Assignment: Special

Economic Zones in India

A Special Economic Zone (SEZ) is a geographical region that has economic laws
that are more liberal than a country's domestic economic laws. India has specific
laws for its SEZs. The category 'SEZ' covers a broad range of more specific zone
types, including Free Trade Zones (FTZ), Export processing zones (EPZ), Free
Zones (FZ), Industrial Estates (IE), Free ports, Urban Enterprise Zones and others.
Usually the goal of a structure is to increase foreign direct investment by foreign
investors, typically an international business or a Multi National Corporation
(MNC).
In order to overcome the shortcomings experienced on account of the multiplicity
of controls and clearances; absence of world-class infrastructure, and an unstable
fiscal regime and with a view to attract larger foreign investments in India, the
Special Economic Zones (SEZs) Policy was announced in April 2000. The prime
objective was to enhance foreign investment and provide an internationally
competitive and hassle free environment for exports. The idea was to promote
exports from the country and realising the need that level playing field must be
made available to the domestic enterprises and manufacturers to be competitive
globally.
Indias SEZ Act 2005 further amended the countrys foreign investment policy and
converted its EPZs to SEZs, with notable zones including Nodia, Chennai, Cochin,
and Falta. Since the acts promulgation, the Indian government has also been
accepting proposals for additional, far smaller SEZs, which must be proposed by
developers to the Indian Board of Approval. As of August this year, almost 200
SEZs are in operation and a massive 565 have already been formally approved for
operation. The bill came into effect on 10 February 2006, providing for drastic
simplification of procedures and for single window clearance on matters relating to
central as well as state governments. The remaining part of India, not covered by
the SEZ Rules, is known as the Domestic tariff area. Exports from Indian SEZ
totaled INR 2.2 Trillion in 2009-10 fiscal. It grew by 43% to reach INR 3.16
Trillion in 2010-11 fiscal. Indian SEZs have created over 840,000 jobs as of 201011. Exports through Indian SEZs grew further by 15.4% to reach INR 3.64 Trillion

(roughly US$66 billion). As of 2011-12 fiscal, investments worth over US$36.5

billion (INR 2.02 Trillion) have been made in these tax-free enclaves. Exports of
Indian SEZs have experienced a growth of 50.5% for the past eight fiscals from
US$2.5 billion in 2003-04 to about US$65 billion in 2011-12 (accounting for 23%
of India's total exports).
State governments will have a very important role to play in the establishment of
SEZs. Representative of the state government, who is a member of the interministerial committee on private SEZ, is consulted while considering the proposal.
Before recommending any proposals to the ministry of commerce and industry
(department of commerce), the states must satisfy themselves that they are in a
position to supply basic inputs like water, electricity, etc. In all SEZs the statutory
functions are controlled by the government. Government also controls the
operation and maintenance function in the seven central government controlled
SEZs. The rest of the operations and maintenance are privatised. The performance
of the SEZ units are monitored by a unit approval committee consisting of
development commissioner, custom and representative of state government on an
annual basis.
The modern day SEZs came into existence because the economic reforms
incorporated in to 1990s did not result in the overall growth of Indian economy.
The Indian manufacturing sector witnessed a sudden dip in the overall growth of
the industry, during the second-half of 1990s. The History of SEZs in India
suggests that red tape, lengthy administrative procedures, rigid labor laws and poor
physical infrastructural facilities were the main cause of deterioration of Foreign
Direct Investments (FDI) inflow in to India. Thus, the lack of investor friendly
environment in India prevented growth of Indian industry, in spite of
implementation of liberal economic policy by the central government. This
resulted in the formation of a much larger and more efficient form of their
predecessors with world-class infrastructural facility.
Indias Foreign Direct investment is mostly restricted to the field of services. This
is evident from the fact that most of Indias FDI of USD5.3 billion was in services.
In contrast, China attracted FDI of around USD 27 billion in manufacturing alone.
However, Indian exports of manufactured products were only 10% of that of
China. This is, in spite of India having lower laboring costs. The Global
Competitiveness Report2005 identified poor infrastructural facility as the main
reason for the bad performance. Where China stood at a healthy rank of 62 with
respect to infrastructural facility, India was at the 76th position. Global
competitiveness also received a setback as a result of the high cost of doing

business according to World Bank reports. Thus, to solve this problem the
government has come up with the policy of Special Economic Zones.
Since 2005, India has attracted Rs.2000 crores as investment and generated
around1.25 lac jobs. The IT and ITES units have also provided an impetus to the
real estate industry by giving them access to the non- processing areas. According
to the laws, there have to be residential complexes, malls, recreation centres, etc. to
cater to the needs of the workforce. The Special Economic Zones are expected to
attract investment worth USD 30 billion and provide employment to around 2
million people.
But there has also been a negative aspect because of the establishment of these
SEZs. According to Bloombergs Andy Mukherjee, As many as 267 zones have
already been cleared in principle by the government; out of these, 150 proposals
have won final approval. But theres a down side to having so many SEZs: Critics
are angry, saying that Indian peasants are getting robbed, losing their farmland to
the industrial zones. Farmer activists have gone to the Supreme Court to stop
things. In the name of free trade and inviting global investors, we are going to
experience the meager benefits rather than mega profits to our nation, as SEZs are
meant to create incentives for exports through huge tax-breaks. SEZ tax
concessions are handsome, a 100 percent tax holiday for exporters for five years, a
50 percent tax-break for five more years, and a further five-year tax-break on
production based on reinvested profits. Besides, SEZ developers will enjoy a tax
holiday for 10 years. Large amounts of speculative capital drawn in by the lure of
quick profits can suddenly leave the country, causing serious disruptions in the
economy, including the collapse of financial markets. As for the quality of
employment, no labor laws apply to SEZs. SEZs will be exempt even from
environmental impact assessment. They will be under no obligation to employ
local people. Rather, they will have a largely predatory relationship with them.
So in conclusion it can be said that, the SEZs could drastically improve the
economic activity in the country, make the countrys export competitive and
globally noticeable, be net foreign exchange earner and provide immense
employment opportunity. But this should not be done at the cost of bringing down
the agricultural activities. Land grabbing and real estate mafia should be properly
regulated so that the common man is not the net sufferer to get the net foreign
exchange earner up and running. As compared to China where majority of the

SEZs were setup by the government, similar should be adopted in India, if not
fully it should be a public-private partnership and regulatory bodies should be
properly managed to weed out fallacies. To be economically viable SEZs should
be approved over a particular land area (greater than 1000 acres) for rapid
economic growth in the area and for it to be profitable and self -sustainable.
Relaxed Tax norms, Labor laws and DTA regulations will surely attract foreign
investment and major industries to setup industries in the SEZs making it
profitable and meeting its desired results. SEZs can act as a catalyst to industrial
growth provided that theyre implemented effectively.

Sources:
What is Special Economic Zone?,Economic Times;
Development of Special Economic Zones in India: Policies and issues by Mookkiah
Soundarapandian;
Study lists why Indias special economic zones policy didnt work,Livemint;
A Guide to Indias Special Economic Zones, India Briefing