SPECIAL ECONOMIC ZONES (SEZ)

SYLLABUS: GS 3> Industry and infrastructure   >   Infrastructure & Investment models > SEZ

REFERENCE NEWS:

• Recently, the Commerce Secretary said that the government is actively working on reforms in the Special Economic Zone (SEZ) sector.

MORE ON NEWS:

• These reforms are intended to facilitate the smooth movement of goods between the domestic tariff area (DTA) and SEZ spaces, without compromising the competitiveness of goods in export markets. 
• The need for such reforms became apparent during the pandemic two years ago, when a shift to 'work from home' practices led to a significant number of office spaces in SEZs being left unused. This shift in working patterns contributed to a more pronounced division between SEZ and DTA spaces.
• Furthermore, the proposed reforms aim to support the foreign trade policy (FTP) 2023, which has been designed with the global value chain in mind. The government has set a goal of reaching $2 trillion in exports by 2030, anticipating equal contributions from both merchandise exports and services.

SPECIAL ECONOMIC ZONES:

• “A SEZ is a designated duty-free enclave to be treated as foreign territory for the purpose of trade operations and duties and tariffs.”
• It is a geographical region that has economic laws that are more liberal than a country’s usual economic laws.

HISTORY:

• India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965.
• With a view to overcome the shortcomings and to make SEZs an engine for economic growth, the Special Economic Zones (SEZs) Policy was announced in April 2000.
• To instill confidence in investors and to impart stability to the SEZ regime, the Special Economic Zones Act, 2005 was enacted.
• As of 2023, India has 272 operational SEZs with a combined employment of 2.8 million people. These SEZs generated approximately USD 133 billion in exports, with service exports making up around 60 percent of this total.

NEED OF SEZs:

SPECIAL ECONOMIC ZONES ACT, 2005:

• The SEZ Rules provide for:
  • Simplified procedures for development, operation and maintenance of SEZs and units within them.
  • Single window clearance for setting up of an SEZ and a unit in a SEZ
  • Simplified compliance procedures and documentation with an emphasis on self-certification
• The Act was amended in 2019 to pave way for trusts to set up units in SEZs.

POSITIVE IMPACTS OF SPECIAL ECONOMIC ZONES (SEZS) IN INDIA:

• Economic Growth:
  • Example: The Jawaharlal Nehru Port Special Economic Zone (JNPT SEZ) in Maharashtra has witnessed significant economic growth. It has attracted investments from major companies like Reliance Industries and Bharat Petroleum, contributing to the state's economic development.
• Employment Generation:
  • Example: The Sri City SEZ in Andhra Pradesh has generated thousands of jobs across various industries, including manufacturing, automotive, and electronics. This has had a positive impact on the livelihoods of local residents.
• Global Market Integration:
  • Example: The Gujarat International Finance Tec-City (GIFT City) SEZ in Gandhinagar has attracted financial institutions and companies, helping India integrate with global financial markets and adhere to international financial standards.
• Export Promotion:
  • Example: The Electronics City SEZ in Bangalore has been instrumental in promoting the export of IT and electronic products. Companies like Infosys and Wipro have set up their facilities here, contributing to India's IT exports.
• Technology Transfer and Skill Development:
  • Example: The Mahindra World City SEZ near Chennai has attracted automotive giants like BMW and Ford. These companies have not only brought advanced manufacturing technologies but also provided training and skill development opportunities to the local workforce.
• Infrastructure Development:
  • Example: The Kandla Special Economic Zone in Gujarat has led to the development of a modern port and transportation infrastructure. It has improved connectivity and logistics not only for businesses within the SEZ but also for the entire region.
• Balanced Regional Development:
  • Example: The Manesar-Bawal Industrial Complex in Haryana has spurred industrial growth in an otherwise less-developed region. 
• Boost to Small and Medium Enterprises (SMEs):
  • Example: The Adani Mundra SEZ in Gujarat has facilitated the growth of SMEs in the vicinity by providing them with access to a larger market and opportunities to collaborate with larger companies within the SEZ.

ISSUES SURROUNDING INDIAN SEZs:

LAND RELATED:

• Unutilized land:
  • There is lack of flexibility to utilise land for different sectors within SEZs. Presently, 10 crore square feet of built-up space is idle in over 250 SEZs. In money terms, at Rs. 3,000 per square foot, that is Rs.30,000 crore of built-up area idle.
• Misuse of benefits:
  • Developers have been misusing the SEZ policy by buying land in such zones and later de-notifying these for gaining from the price appreciation. Also, there have been several instances of companies operating in these zones misusing import tariff exemptions for tax evasion.
• Land acquisition:
  • Land acquisition for SEZs in India has sparked controversies, often displacing local communities. For instance, in Nandigram in 2007, a proposal to acquire 10,000 acres for a chemical industry SEZ led to massive protests and violent clashes, affecting thousands of villagers and ultimately resulting in the project's cancellation.

INSTITUTIONAL:

• Multiple models:
  • In India, there exist multiple models of economic zones, resulting in multiplicity of legislations and regulators.
  • Eg: SEZ, coastal economic zone, Delhi-Mumbai Industrial Corridor, National Investment and Manufacturing Zone, food park and textile park. 
• Constrains in ensuring credit:
  • The lack of infrastructure status for SEZs, NPA crisis and the weakness of long-term lending institutions in India have been major hinderances to securing credit for SEZs.
• Legal hurdles:
  • Judicial process in India is complex and long. Also, dispute resolution through arbitration is still in the nascent stage in India. This affects the ease of doing business in the country. For example, the World Bank's Ease of Doing Business Report has often highlighted the length of time it takes to enforce contracts and resolve insolvency in India.

POLITICAL:

• Influence of vested interests:
  • Site selection for SEZs has been guided by self-serving agendas rather than development. Local politicians often influence bureaucrats to secure land for personal or political gains. As such, sites for SEZs are selected based on real estate speculation rather than the economic potential of a region.
• Lack of support from state government:
  • Several state governments are lagging in promoting ease of doing business, through faster land acquisition, developing effective single-window system for clearances and resolving contracts. 

FINANCIAL:

• Restrictions on domestic trade:
  • SEZ products in local markets are treated as imports. Also, SEZ units are not allowed to do “job work” for Domestic Tariff Area (DTA) units.
• Unpredictable tax regime:
  • There has been uncertainty regarding the tax regime in India. Taxes are changed without prior consultation with the industry.
  • Eg: While SEZs were first described as duty free enclaves, they were later brought under the purview of Minimum Alternative Tax (MAT).

OTHERS:

• Dominance of service sector industries:
  • About 70% of the country’s SEZs cater to IT/ITES sector and only 9.6% cater to the multi product manufacturing sector. Hence, SEZs contribution to manufacturing sector remains low. 
• International competition:
  • In the past few years, many countries like Vietnam and Thailand have tweaked their policies to attract investment into their SEZs. Eg: SEZs in Indonesia enjoy Income Tax exemption for 12 years. Consequently, Indian SEZs have lost some of their competitive advantages.
• Environmental impacts:
  • SEZs are often criticized for environmental impacts like pollution and depletion of natural resources due to rapid industrialization. For example, the Mundra SEZ in Gujarat has faced significant issues, including mangrove destruction and challenges in enforcing environmental regulations.

BABA KALYANI COMMITTEE:

Ministry of Commerce and Industry constituted a committee headed by Mr. Baba Kalyani in June 2018 to study the existing SEZ policy of India and prepare strategic policy measures for their development.

Some of its key recommendations were:

• Rename SEZs as 3Es- Employment and Economic Enclave, with the objective of moving from island of exports to catalyst of economic and employment growth.
• Formulate separate rules and procedures for manufacturing and service SEZs.
• Infrastructure status for SEZs to improve access to finance and enable long term borrowing.
• Promote MSME participation in 3Es and enable manufacturing enabling service players to locate in 3E.
• Dispute resolution through arbitration and commercial courts.
• Align the policy framework to avoid competition among similar schemes of industrial parks, export-oriented units, SEZ, national investment and manufacturing zones etc.
• Extend Sunset Clause and retain tax or duty benefits.
• Ease of doing business by simpler entry and exit processes.

WAY FORWARD:

• Impact assessment:
  • Government should undertake comprehensive social, environmental and economic impact studies before granting approval for SEZs.
• Optimal utilisation of land:
  • Allowing flexibility of land use and removing sector-specific constraints can help revive the SEZs.
  • There should be adequate compensation on land acquisitions and provisions for return the unutilized land back to farmers.
• Rationalize SEZ models:
  • A uniform model for economic enclaves should be established and overlapping laws must be removed. 
• Predictable policy support:
  • Taxation regime and incentives given to SEZs in India should be more predictable and in line with what is offered by competing countries in Asia.
• Performance-measuring mechanisms:
  • Performance review mechanisms should be put in place so that the promoters can be held accountable and prevent tax evasions.

PRACTICE QUESTION:

Q. Discuss the salient features of Special Economic Zones. What are the challenges faced by them in India? (15 marks, 250 words)