Economics Affairs: Vol-54 No.3 & 4 (2009) Page No.

171 to 177

Special Economic Zones: An Overview
A. Abdul Raheem, C. Prabu and H. Yasmeen Sultana

ISS Lecturer and Research Supervisor, Department of Economics, The New College ,Chennai , Tamil Nadu 'Research Scholars, Dept. of Economic, The New College, Chennai Tamil Nadu

A Special Economic Zone (SEZ) is a geographical region that has economic laws that are more liberal than a country's typical economic laws. 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, and other. Usually the goal of an SEZ is to increase foreign investment. Special economic zones (SEZs) as conceived by the government will be a powerful instrument to achieve rapid growth in manufacturing, employment and exports. Investments so for in SEZs, in India is around $700 million and within five years this is expected to grow to $306 billion. Over five lakh additional employment would be created with in SEZs and 15 lakh jobs out side, while the additional employment in the construction stage is expected to be 2.56 million man days. Therefore this paper examines an overviews of Special Economic Zones in India.

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In the Globalisation process, the world is moving towards the concept ofa global village. India is no exception to the changes taking place the entire world over. In view of the Globalisation process which is taking place with an astonishing speed in the various parts of the world, the question of openness in trade and capital for economic development in the emerging economic development in the emerging economies has come into sharper forces. India has opted for a policy of import substitution or inward orientation approach to export promotion or outward orientation approach. This paradigm shift is an important change aspect. Thus, 'Trade or Perish' is the new mantra for policy makers. Special economic zones (SEZs) as conceived by the government will be a powerful instrument to achieve rapid growth in manufacturing, employment and exports. The government has provided a concrete shape to SEZs through the SEZsAct of2005, assuming SEZs, are crucial for generating employment, boosting manufacturing and allowing India to complete with countries such as China. There has been an unprecedented flood ofSEZs while the entire world has 400 SEZs and China only six and India has crossed 267 SEZs approval with in a year. Investments so for in SEZs, in India is around $700 million and within five years this is expected to grow to $306 billion. Over five lakh additional employment would be created with in SEZs and 15 lakh jobs out side, while the additional employment in the construction stage is expected to be 2.56millionman days. India was one ofthe first in Asia to recognize the effectiveness of the Export Procession Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965, with a view to overcome the shortcomings expressed on account of multiplicity of controls and clearances, absence of world-class infrastructure and an


IndianJournals. Not for Commercial Sale www. the Philippines. Free Ports.7% 52. The Act became operative in February 2006 after the SEZ rules were framed and The SEZs are expected to give a big push to exports.314 Downloaded From IP . strategic tool for speeding up the process of industrialization.sezindia.unstable fiscal regime and with a view to attract larger foreign investment in India the Special Economic Zone policy was announced in April 2000. including Free Trade Zones (FTZ) Export Processing Zones (EPZ) Free Zones (FZ) Industrial Estates (IE). trade fiscal. 1. One of the earliest and the most famous Special Economic Zones were founded by the government of the peoples Republic of China under Xiaping in the early 1980s. 67088 crores Source: www.67 on dated 13-Nov-2010 Members Copy. Table 1: Export from the Functioning of SEZs during Last 3 Years Year 2003-04 2004-05 2005-06 2006-07 Value(Rs. The most successful Special Economic zone in China. Pakistan. bureaucratic hassles and barriers created by monetary. and other. Usually the goal of an SEZ is to increase foreign investment.00. taxation. Kazakhistan. The Special Economic Zones in India closely follow the model of the Peoples Republic of Chine. India. Special Economic zones have been established in several countries including Brazil. Poland.000 direct jobs are expected to be created by December 2007. The benefits delivered from the multiplier effect of the investment and additional economic activity in the SEZs and the employment generated thus will far outweigh the tax exemption and the losses on account of land acquisition. Shenzhen has developed from a small village into a city with a population of over 10 million within 20 years. The main difference between an SEZ and an EPZ is that the former is an integrated township with fully developed infrastructure where as an EPZ is just an industrial enclave.115. In order to provide a significant thrust to the policy. Jordan. in crores) 13. the establishment of SEZs in an important.nic. tariff and labour policies. More than 5. 1. Since country-wide infrastructure is expensive and implementation of structural reform would required time. The category 'SEZ' covers a broad range of more specific zone types. Following the China experiment.840 34. Russia and Ukrain. Iran.854 18. employment and investment. the government enacted the SEZ Act 2005. A Special Economic Zone (SEZ) is a geographical region that has economic laws that are more liberal than a country's typical economic laws. The SEZs offer positive signals for domestic and foreign investors.2 BENEFITS OF SEZs: SEZs is a novel attempt to overcome the infrastructural bottlenecks.000 crores including FDI of US $ 5-6 billion is expected by the end of December 2007.00.3 CHALLENGES AND ISSUES The special economic zone Act 2005 basically violates the right to life and livelihood of the people who are .787 Growth Rate over Previous year 29% 32% 24. Investment of the order of Note: Project exports from all SEZs for 2007-08 is Rs. 1. These measures are likely to create a conductive business environment to attract local and foreign investment in a sizeable amount (See Table 1). procedural delays.

The status of “deemed foreign territory” being granted to the SEZs.00. On land grabbing the principle of “Eminent domain” which is the basis of “Land Acquisition act of 1894” is being misused and even given priority over the principles in the 73rd and 74th amendments of the Constitution that gave primacy to Gramasabhas as autonomous decision making entities. Not for Commercial Sale www. However manufacturing had been hampered by the burden of “embedded taxation” lack of infrastructure and enormous procedural issues “all of which added to costs and thus rendered industries uncompetitive to that extent that the concept of SEZs was intended to address these issues and “bangon” it was most relevant. Ironically the SEZs are being granted approvals with no single mention of studies being carried out on social environmental impact and damage. 1.73.000 crore rupees concession were given to SEZs in India as against an investment of Rs. will further undermine the sovereignty of the local governance system.67 on dated 13-Nov-2010 Members Copy.forcibly displaced for the implementation of the project. 1.4 SEZs PROSPECTS The SEZs offer the only way forward in bridging the gap between India and South Asia (including China) in terms of Manufacturing and employment. dalits. individuals. Talks should be held with people's groups communities and Panchayat representatives to seek their opinion on strengthening local economics. The SEZs projects promoted by the government in the name of creating jobs in reality depriving the people of existing means of livelihood. adivasis. It has been repeatedly high lighted that very legislative frame work of SEZs is problematic. what is really challenging the governance system is the concentration of power in the hands of commissioner at the state level and in the Board of approval at the centre. In the current frame work of economic development. The Industries coming up in SEZs were technology intensive and did not create jobs to justify concessions. It raises the issue of land based livelihood of the farmers.248.000 crore. making it a draconian act. How can one set of people be rendered landless to provide more lands to rich with bonus of tax holidays and free resources? The concession given to SEZs far out weighed the claims of investment and employment generation. large scale exploitation of water resources. Incentives for developers and industrial units were necessary Downloaded From IP . coastal land and environmental pollution are not being computed. environmental concerns labour exploitation. the costs of loss of forests and other common lands. The RBI statistics shows that 1. The empowered groups of ministers on SEZs and Board of approvals is severely criticized for this by civil society groups and sought repeal of the act and cancellation of the approved and notified SEZs. The SEZs and town ships strike at the root of constitutional guarantee of social and economic equality by creating “isolated islands of comforts” for the rich and powerful. and return of the land.75.IndianJournals. (The Board of approval under the commerce ministry has already granted formal approval for 237 projects of which 63 have been notified while hundreds are still awaiting for approval) India is already going through a crisis in terms of water scarcity as well as loss of forests and . This is a new form of colonization (the sorry state of people uprooted by the grand projects of the past such as sea-bird at Karwar of Karnataka were the proof of the failure of rehabilitation packages). The focus of SEZs should be on manufacturing. These observations have been endorsed by eminent farmers. Indian economic growth so far fuelled by service and domestic demand.115. that promotes large scale privatization and monopoly of resources in the hands of a few private developers at huge costs to the exchequer as well as economy and environment. fisher workers and women's rights groups non-government organizations researchers and intellectuals.

The SEZ Act of 2005 was the result of various efforts at honing the concept to suit local needs. The SEZ Act was officially passed in 2005 but operationalised in February 2006 i. for manufacture of goods and rendering of services. 2007 the Board of Approval (BOA) for SEZs has formally cleared 212 proposals have . A survey of farmers opinion about farming on such barren land show that many farmers did not want to continue with farming on their land. However there has arisen a need for diversification employment both on farm and nonfarm sectors and this called for judicious utilization of available land. The mapping would help in finding true biological potential of particular area and based on that the development process should be taken up. On the same day the Ministry of Commerce and Industry notified the SEZ Rule 2006.e. There is a sizeable barren land in the country that could be chosen for development of SEZs.initial distortions. All the import / export operations of the SEZ units will be on self-certification basis. Considering the need to enhance foreign investment and promote exports from the country and realizing the need that level playing field must be made available to the domestic enterprises and manufactures to be competitive globally. This indicates that farmers would shift to non-agricultural sectors that would have to be encouraged and encouraging industrialization and service sector must aim at accommodating farmers for employment in these sectors through proper education and training. it came into force with effect from 20th February 2006. With a view to augmenting infrastructure facilities for export production.115.248. Since with zero distortions there will be no mobility. Selecting locations for SEZs would not affect productive agricultural land of farmer's lively hood.67 on dated 13-Nov-2010 Members Copy. the Govt. Further offshore banking units may be set up in SEZs. private. Downloaded From IP . As per the policy. The vision of the programme of SEZs. the then Commerce minister who. Till May 9. Lands should be acquired at close to market rates and also land owners be given a share of 15% in the post facto appreciation of land values in the future promise of development augments land value and when development does happen the value exalted further The setting up of SEZs should not be done in an ad-hoc manner but should be based on solid scientific facts. It is for the states to decided where to locate zones which ideally should not be too close to urban centers and at the same time not in the deep agricultural regions. joint sector or by the State Governments. SEZs are deemed to be foreign territory for the purposes of trade operations. inspired by Guangdong SEZs made the concept a central part of the 2000 EXIM Special economic zones (SEZs) should be set up on barren lands.. was the creation of 500 industrial townships and large zones with adequate infrastructures. Units may be set up in SEZ. Not for Commercial Sale www. The units in the zone have to be a net foreign exchange earner but they shall not be subjected to any pre-determined value addition or minimum export performance requirements. it has been decided to permit the setting up of SEZs in the public. The unemployed youth farmers would get on jobs skills development. The minimum size of the SEZ shall not be less than 1000 hectares.IndianJournals. The SEZs in India closely follow the PRC model. duties and tariffs. this calls for mapping of the areas through remote sensing. The gap in the fiscal incentives applicable to manufacturing inside and out side SEZs should not be more than reasonable. The risk of abuse of incentives for the banks and state governments should exercise vigilance over individual zones to see whether they are representing a “land grab game” or “infrastructural game”. Sales in the Domestic Tariff Area by SEZ in the Domestic Tariff Area by SEZ units shall be subject to payment of full customs duty and import policy in force.73. training through industries associations by paying stipend for trainees with varying durations depending up on the nature of sector. Farmers with little land holdings are struggling on their own with out any advice. The SEZ Policy of 2000 was the work of Murasoli Maran. of India in April 2000 announced the introduction of SEZs policy in the country.

. (xviii) Income Tax exemption to investor's in SEZs under section 10 (23 G) of Income Tax Act. All these SEZs are in various parts of the country (spread over 17 states and 2 Union Territories) in the private / joint sectors or by the State Govt. (xiii) 100% Foreign Direct Investment in manufacturing sector allowed through automatic route barring a few sectors. (ix) (x) (xi) Exemption from industrial licensing requirement for items reserved for small scale industries (SSI) sector. spares. (xvii) SEZ units to be positive net foreign exchange earners within three years. raw materials.115. consumables.67 on dated 13-Nov-2010 A designated duty free enclave and to be treated as foreign territory for trade operations and duties and tariffs. However there is no minimum limit on the foreign exchange required to be earned by them.5 INDIAN SEZs SPECIAL FEATURES AND CONCESSIONS An SEZ is a specific zone in India deemed to be a foreign territory for the purpose of the trade operations and duties / tariff. (xiv) In house customs clearance. (xv) No routine examination by customs of export and import cargo. Reimbursement of central sales tax paid on domestic purchases.248. etc. No license required for import. raw materials. 100% of Income Tax exemption for a block of five years. 50% of tax exemption for 2 years and up to 50% of the profits ploughed back for next 3 years under sec 10-A of Income Tax (vii) 100% of Income Tax exemption for 3 years and 50% for 2 years under section 80 LA of the Income Tax Act for offshore banking units. Exemption from customs duty on import of capital goods. (xii) No fixed wastage norms. 9-5-2007).been given to 152 (The Economic Times dt. Not for Commercial Sale www. The key objective of the SEZ scheme is to attract investments into India by providing fiscal incentives to units located in an SEZ. consumable spares. (xvi) Supplies from Domestic Trade Areas (DTAs) to SEZ units to be treated as deemed exports. Accordingly the following concessions and incentives are made available to them: (i) (ii) (iii) (iv) Downloaded From IP . etc. Facility to retain 100% foreign exchange receipts in EEFC (Exchange Earners Foreign Currency) account. No cap on foreign investment for SSI reserved items. Exemption from central excise duty on procurement of capital goods. (viii) Profits allowed to be repatriated freely without any dividend balancing requirement. 1. (v) (vi) Members Copy.73. from the domestic market.

the poor and downtrodden.IndianJournals. Dr. accusing the government of forcibly snatching fertile land from them at heavily discounted prices as against the prevailing prices in the commercial real estate industry. no duty. Specifically the states in which the SEZs have been approved are facing intense protests from the farming community. Professor of Economics. not income tax.67 on dated 13-Nov-2010 Members Copy.(xix) Investments made by individuals etc in SEZ developing companies eligible for exemption under the then section 88 of the Income Tax Act. So the success of a development strategy would depend on how the displaced people are rehabilated.e. economists. When the economy is opened up these sort of zones have to be allowed.248. ready built sheds. air and sea linkages. water.75 lakh crores to the state exchequer after 5 years. hotels and golf courses Efficient and reliable power. The authorities before clearing any SEZ proposal should address the issue of rehabilitation of displaced people. Throughout the country the creation of SEZs has created a big fervor among politicians. already established and to be established would give more than this to the country and its stakeholders? No clear cut answer one could give for this though the commerce ministry is optimistic that these zones could make the exchequer richer by Rs.6 CONCLUSION Though theoretically. . rail. financially and operationally SEZs appear to be a blessing actually it is not so. it is estimated. Not for Commercial Sale This is an era of opening up of economy worldwide. restaurants. will mean a revenue loss of more than Rs. economically. This means displacing people. 45.115. Indian Statistical Institute. institutions and centers of excellence Adequate focus on security and disaster management systems Specialized and primary healthcare facilities Theme parks. Facilities and opportunities created by developers of SEZs Usually any SEZ includes and provides the following facilities: Business Living Learning Safety and security Health care Recreation Utilities Logistics Industrial land on lease. colleges. farming community. It should give an economic opening to the major stakeholder of this country i. commercial offices and buildings Residential and social areas Schools. This staggering amount is enough to feed the country's 320 million people who go to bed hungry stomach for a number of years or provide guaranteed employment to at least two members each of the rural families for the next 5 years. Kolkata rightly highlighted the problem: The problem is one of development versus displacement. 1. Downloaded From IP . Another issue to be given a serious concern in this regard is the huge loss of tax revenue to be suffered by the exchequer in view of the plethora of exemptions to be given to these SEZs.000 crores annually. land is needed. Abhirup Sarkar. For the development process to take off. waste management and technology facilities A comprehensive logistics system encompassing road. 1. conceptually. Whether the SEZs. All these exemptions (tax cut.73. etc). But the opening up of economy should not open further and further the floodgates of the few abundantly affluent people only. tax people and social workers.

3132. 2008 . 53-63. Not for Commercial Sale www.most of whom belong to the farming community. 2008. 'Special Economic Zones: Problems and Prospects'. Puja Mehra.K.67 on dated 13-Nov-2010 Aravanan. PP. 'SEZ Controversy: Course Correction. That is the real opening up of the economy.2006 Members Copy.. 2006 .com . 5. Prabhudev. 2007 .IndianJournals. 47(2). 18. M. 'Special Economic Zones A Review'. PP. 4.. 'Special Economic Zones: A Myth or Reality. 64-65. Economic Survey 2006-07.12. K. Southern Economist. PP. PP.248. The Hindu Business Line dt. REFERENCES 1. Downloaded From IP . 2007. 43-44. 15-16.. Shankar Aiyar. M.73. 'SEZ Good. Indian Economic Panorama.115. 2. 46(2). New Delhi. 6. 18(2). and Vennila. Ugly' India Today. Southern Economist. Government of India. Bad. Maria John Kennady. S. India Today. 7. PP. 3.

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