Revealing the Concept and History of SEZs in India
In the dynamic landscape of economic development, Special Economic Zones (SEZs) have emerged as catalysts for growth, shaping the destiny of nations worldwide. India, with its vast and diverse economy, is no exception. Let’s delve into the intriguing concept and rich history of SEZ in the Indian context.
After the Government of India adopted the SEZ Act 2005, and expressed its commitment to the setting up of Special Economic Zones, a lot of controversy has been generated on the issue.
The concept of SEZ would be clear from the following description given by Arvind Panagariya, “Conceptually, SEZ operate like foreign entities within the territory of a country. They are usually separated by physical barriers from each other and from the rest of the country. They have no trade barriers. The country’s trade barriers apply strictly within the area excluding the SEZ which is called the domestic tariff area (DTA).
Any goods sold by agents within the DTA to agents inside the SEZ are treated as exports of the country, and those purchased by agents in the DTA from those in the SEZ, as imports subject to customs duty. Any trade between the SEZ and the outside world is allowed to bypass all custom requirements applicable to the DTA. That is, foreign goods enter the SEZ free of custom duty, and exit abroad without being subject to any domestic taxes or customs regulations.”
Table of Contents
Understanding SEZs:
Special Economic Zones are designated geographical regions with unique economic regulations to attract foreign direct investment (FDI), boost exports, and catalyze economic activities. These zones provide a platform for businesses to thrive, offering a conducive environment marked by tax incentives, simplified customs procedures, and streamlined regulatory frameworks.
India was one of the first countries in Asia to recognise the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia’s first EPZ set up in Kandla in 1965. Seven more zones were set up thereafter. However, the zones were not able to emerge as effective instruments for export promotion on account of the multiplicity of controls and clearances, the absence of world-class infrastructure, and an unstable fiscal regime.
With a view to overcoming the above shortcomings and attract larger foreign investments in India, the Special Economic Zone (SEZ) policy was announced in April 2000. The major difference between an SEZ and EPZ is that the former is an integrated township with fully developed infrastructure, whereas an EPZ is just an industrial enclave.
The SEZ policy, 2000, was intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at the Centre and the State level, with minimum possible regulations. Under the new scheme, all the eight existing EPZs located at Kandla and Surat (Gujarat), Santa Cruz (Maharashtra), Cochin (Kerala), Chennai (Tamil Nadu), Vishakhapatnam (Andhra Pradesh), Falta (West Bengal) and Noida (UP) have been converted into SEZs.
A Glimpse into History:
The genesis of SEZs in India can be traced back to the 1960s, but it wasn’t until the early 2000s that they gained prominence. The Special Economic Zones Act was introduced in 2005, laying the foundation for the establishment and operation of these zones across the country. The primary objective was to enhance industrialization, promote exports, and generate employment on a large scale.
Evolution of SEZs in India:
The initial phase witnessed a surge in the establishment of SEZ, reflecting the government’s commitment to economic reforms. These zones were strategically located near ports, fostering international trade and making it easier for businesses to connect with global markets. However, the success of SEZ was not without challenges.
SEZ Act, 2005
To instil confidence in investors and signal the government’s commitment to a stable SEZ policy regime, the Special Economic Zones Act, 2005, supported by SEZ rules, came into effect on February 10, 2006. The main objectives of the SEZ Act are generation of additional economic activity, promotion of exports of goods and services, promotion of investment from domestic and foreign sources, creation of employment opportunities and development of infrastructure facilities.
Challenges and Reforms:
As SEZs proliferated, concerns arose regarding land acquisition, displacement of local communities, and diversion of agricultural land. To address these issues, the government introduced reforms to strike a balance between economic growth and social equity. Stringent guidelines were implemented to ensure sustainable development and responsible business practices within the zones.
Success Stories:
Several SEZs in India have become success stories, contributing significantly to the country’s economic progress. The IT SEZs in cities like Bengaluru and Hyderabad have played a pivotal role in transforming these cities into global IT hubs. The manufacturing SEZs, particularly those focused on automobiles and textiles, have propelled India’s exports to new high.
Since the SEZ Act and Rules were notified in February 2006, formal approvals have been granted for setting up of 412 SEZs out of which 329 have been notified. A total of 4,102 units have been setup in SEZs. Total employment in SEZs is 15,04,597 persons. Of this, an incremental employment of 13,69,893 persons was generated after February 2006 when the SEZ Act came into force.
Total investment in SEZ till June 30, 2015 was RS 3,48,983 crore while exports were of RS 4,63,770 crore in 2014-15. A total of 202 SEZs are exporting at present. Out of this, 114 are IT/ITES, 20 multi-product and 68 other sector specific SEZs. As per the provisions of the SEZ Act 2005, 100 per cent FDI is allowed in SEZ through the automatic route.
Impact on Employment:
One of the noteworthy outcomes of SEZs has been the creation of employment opportunities. The zones have become magnets for talent, drawing skilled individuals seeking diverse job prospects. As industries within SEZs flourish, the positive impact on employment extends beyond the confines of the zones, influencing the surrounding regions.
Global Integration:
SEZs in India have not only attracted domestic businesses but have also become magnets for international investors. Foreign companies have established their presence within these zones, leveraging the benefits of a business-friendly environment. This global integration has contributed to the diversification and sophistication of India’s industrial landscape.
Benefits of SEZs
The main arguments in favour of SEZs are as follows:
- According to Arvind Panagariya, “international trade in India remains subject to substantial bureaucratic red tape. Goods move into and out of the country at a slow pace. Faster movement is particularly important for exports that involve bringing components from abroad for assembly and re-export. Domestic indirect taxes that must be reimbursed when goods are exported, are not always fully reimbursed. The SEZs help overcome these inefficiencies “.
- The organised sector in India has been hamstrung by stringent labour market laws which do not allow the firms to hire and fire workers as they desire. According to Panagariya, this has hampered the emergence of large-scale manufacturing in the labour -intensive sectors. Through the instrumentality of SEZs, some of the most burdensome provisions in the labour laws can be relaxed with the result that such firms can emerge.
- Through the promotion of SEZs it would become possible to provide world -class infrastructure which is necessary to ensure unhindered production. Moreover, since country-wide development of infrastructure is expensive and implementation of structural reforms would require time, the establishment of SEZs is an important strategic tool for expediting the process of industrialization.
- SEZs can reduce procedural complexities, bureaucratic hassles and barriers raised by monetary, trade, fiscal, taxation, tariff and labour policies.
- SEZs offer numerous benefits like: (a) tax incentives, (b) provision of standard factories/plots at low rents with extended lease period, (c) provision of infrastructure and utilities, (d) single window clearance, (e) simplified procedures, and (f) exemption from various restrictions that characterize the investment climate in the domestic economy. These benefits foster a conducive business environment to attract local and foreign investment which would not otherwise be forthcoming.
- SEZs are expected to give a big push to exports, employment and investment. In fact, the Government of India has been systematically projecting SEZs as “carriers of economic prosperity “ that would: (a) boost economic growth at an extremely fast rate, (b) usher in affluence in rural areas, (c) provide large number of jobs in manufacturing and other services, (d) attract global manufacturing and technological skills, (e) bring in private and public sector investment from both home and abroad, (f) develop infrastructural facilities, (g) make Indian firms more Competitive, and (h) help slow down rural -urban migration.
In short, “ they are the officially acclaimed carriers of India’s modern industrialization that would create all-round transformation and lead the country towards a modern mode of living.”
The logic of establishing SEZs rests on the concepts of ‘growth’ and ‘competition’ and the supposed economic magic they can achieve. It is now widely accepted in official circles that to succeed in the global market a country must have competitive advantage and this competitive advantage can be achieved through the setting up of SEZs.
The Road Ahead:
While SEZs have undeniably played a pivotal role in India’s economic journey, the landscape continues to evolve. The government remains committed to refining policies and addressing challenges to ensure the sustained success of these zones. In a world grappling with economic uncertainties, SEZs stand as beacons of innovation and resilience.
Conclusion:
Special Economic Zones in India have evolved from a mere concept to powerful engines driving economic growth. The journey has been marked by challenges, reforms, and success stories that collectively contribute to the nation’s progress. As SEZs continue to evolve, their impact on employment, exports, and global integration reaffirms their significance in shaping India’s economic destiny.