Special Economic Zones (SEZs)

Following the independence of India, leaders have made continuous attempts to adopt and implement numerous policies having the potential to lift the nation off a deprived and unjust past. One such policy introduced in the 1960s, now in its present state, is known as Special Economic Zones (SEZs). SEZs are special zones that have liberal economic laws different from the rest of the country designed to accelerate economic growth by attracting domestic and foreign investment. They are seen as foreign territory for the purpose of trade where they can import duty-free raw materials and capital goods required for the manufacturing process (TK & Arul, 2016). These further boost employment opportunities giving a push to the export sector while facilitating infrastructural development. 

Background:

SEZs are a key component of the economic development of a nation. The establishment of SEZ in China and its success encouraged India towards establishing Export Processing Zones (EPZs)  which offered similar benefits in addition to concessions. At present, 378 SEZs in India are notified out of which only 265 are functional. These zones become a host to multiple business units which are accredited to a whole lot of incentives and a business-friendly environment with no licensing requirement for imports and second-hand machinery (Ministry of Commerce & Industry, 2021).

Features of the Act, 2005:

The Government of India announced the Special Economic Zone Act, 2005, and Special Economic Zones, 2006 with a purview to enhance the export sector of the country. Initially, the SEZs were subject to Foreign Trade Policy provisions and were entitled to fiscal incentives in accordance with the laws. However, the SEZ Act of 2005, provided a legal framework for the establishment of SEZs and also for units operating in such zones (TaxGuru Consultancy & Online Publication LLP, 2009). There are several takeaways from this act, some of which are mentioned below-

• generation of additional economic activity,

• promotion of exports of goods & services,

• promotion of investment from domestic & foreign services,

• creation of employment opportunities, and

• development of infrastructure facilities

Analysis:

1. Successes:

SEZs facilitate duty-free import/domestic procurement of products for the development, operation, and maintenance of SEZ units and an exemption from various taxes such as income tax and alternative minimum tax. Furthermore, it incentivizes external commercial borrowing up to the US $500 million by SEZ entities annually, with no maturity restrictions, through approved banking channels and single window spacing for central, and state approval. Other benefits that include being SEZ units are permission to achieve the full export value of goods within 12 months from the date of export, realized export "depreciation" invoices are allowed up to an annual limit of 5% of the average annual realized amount, and also offshore banking unit (OBU) in the SEZ Establishment is permitted(Advantages and Disadvantages of SEZ., 2021). In addition, the government exempts SEZ units from stamp duty and registration fees for land leases/licenses. So far the performance of SEZs has multiplied manifolds from 2005 to 2021 through the increase in exports by 736,684 crores, investments by 613,194 crores, and employment generation by 2,223,432 persons (Special Economic Zones, n.d.). 

2. Failures:

Even though the Act led to diverse benefits for the whole country, like any other policy it is faced with challenges as well. Special Economic Zones are huge areas, but there is a lot of unutilized lands which is further aggravated by economic slack down during the pandemic. One of the major drawbacks of SEZ establishment is the compulsory land acquisition and forced displacement of minority and disadvantaged communities. The poor have to pay the brunt of economic development at the cost of the loss of their own livelihood as the compensation paid by the government is meager (TK & Arul, 2016). Further, there are several models of SEZs, such as Special Economic Zone, Coastal Economic Zone, Delhi Mumbai Industrial Corridor, National Investment Manufacturing Zone, Food Park, Textile Park, etc., which advances to challenges in integrating the various models. In addition to these, in recent years, many ASEAN countries have adopted policies to attract players from around the world to invest in SEZs, and have also undertaken several qualification initiatives. As a result, India's special economic zones around the world have lost some of their competitive advantages and therefore need newer guidelines in accordance with changing scenarios (Special Economic Zones, n.d.). 

Comparison With China’s Success: 

Although India modeled its conceptual base of SEZs to replicate the highly successful ones in China, it still did not prove to bear much success. India’s SEZs suffered from major structural problems which prevented them from achieving their expected outcomes. An important parameter before the establishment of an SEZ is the expected performance, but India did not take into account the identification and implementation of supportive factors, which are bound to vary across different regions and countries. China’s strategic attempt to run just four SEZs, in the beginning, has probably given them some upper hand in the efficient acquisition and management of resources. They began experimenting with SEZs with Shenzhen, Shantou, Xiamen, and Zhuhai but at the same time, India began with too many small SEZs which led to inefficiency. While the Shenzhen SEZ alone spreads over 2,000 square kilometers, all of India’s SEZs together occupy less than 500 square kilometers (Abraham, 2020). Large SEZs attract clusters of business, effectively manage operational costs, provide more employment opportunities, and spread to neighboring regions, which Indian SEZs have not been able to fully utilize owing to their small capacity and infrastructural capabilities. At the same time, a significant number of SEZs in India have been concentrated in certain states whereas states in coastal areas fail to enjoy greater benefits available to them in the form of ports (TK & Arul, 2016). Contrary to India’s strategies, China has been successful in leveraging its resources and unlocking its potential to make its Shenzhen SEZ one of the most successful SEZs in the world. India needs to evaluate the possible opportunities and challenges that exist for its SEZs and should make certain plans to ensure that they yield benefits and are not just a fiscal burden to the government.

Conclusion:

Although India has achieved much-needed success and advancement through the establishment of SEZs, there is still a long way to go. Regional and sectoral concentration limits the ability of these zones to fulfill their objectives of employment generation and development.  Other loopholes such as improper implementation, ineffective targeting of regions, or proper utilization of resources need to be reconsidered so as to serve the purpose of these special zones dedicated to exceptional economic growth. India has an untapped potential of numerous resources, but they need to manage effectively to ensure international competition and balanced growth. 

References:

1. TK, A. R., & Arul, P. G. (2016). An Evaluation of Special Economic Zones (SEZs) Performance Post SEZs Act 2005. Universal Journal of Industrial and Business Management, 4(2), 44–52. https://doi.org/10.13189/ujibm.2016.040202

2. Abraham, R. (2020). India needs to copy China better when it comes to running successful SEZs. Business Standard. https://www.business-standard.com/article/economy-policy/india-needs-to-copy-china-better-when-it-comes-to-running-successful-sezs-120092600157_1.html

3. Ministry of Commerce & Industry. (2021, March 10). PIB GOV. https://pib.gov.in/PressReleasePage.aspx?PRID=1703791

4. vikashsaini78. (n.d.). Special economic zones (sezs) act 2005. SEZs Act, 2005. https://www.slideshare.net/vikashsaini78/special-economic-zones-sezs-act-2005

5. TaxGuru Consultancy & Online Publication LLP. (2009, September 20). Special Economic Zones Act, 2005: An overview. TaxGuru. https://taxguru.in/corporate-law/special-economic-zones-act-2005-an-overview.html

6. Special Economic Zones. (n.d.). Drishti IAS. https://www.drishtiias.com/daily-updates/daily-news-analysis/special-economic-zones

7. Advantages and Disadvantages of SEZ. (2021, November 22). InfodriveIndia. http://www.eximguru.com/exim/special_economic_zone_sez/ch_4_advantages_disadvantages_sez.aspx#advantages_