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A Project Report on
“Efficacy of SEZs on Promoting Export from India – A Comprehensive Evaluation of Provisions”
By:Manoj Kumar Singh
Acknowledgement Executive Summary Introduction Economic Zones o Types of Economic Zones o Regional Distribution of Zones Special Economic Zones o History & Evolution of SEZ o International Experiences SEZ in India Facts about SEZ in India Objectives of SEZ Genesis & Distinguishing Features SEZ Approval Process SEZ Act 2005 Foreign Investment & Finance
02 03 04 06 06 08 10 13 14 18 20 21 22 26 33 37
Fortune Institute of International Business
The Key Issues Performance Analysis Comparative Study – India & China Conclusion Bibliography Annexure
38 40 44 53 55 56
It gives us immense pleasure to express our deepest gratitude towards Dr. Rajiv Arora for providing us with the opportunity to undertake this project, which helped us to learn so much about the real world situations happening in different economies related to the economic zones. Words are insufficient to express our gratitude toward Dr. Sridhar Panda, without whom our project could not have got completed. We would also like to give our heartily thanks to Mr. Anuppam Bhaskar, who coordinated with us wherever required. We would also like to express our sincere thanks to all other faculty members as well as the staff at library and computer lab who has helped us on the project work with the necessary inputs. Their constant support has been the key to our achievements on the projects. We would also like to thanks our parents, fellow colleagues and friends for helping out in timely completion of the project report and for providing for their moral support, suggestions and encouragement. However, we accept the sole responsibility for any possible error of omission and would be extremely grateful to the readers of this project report if they bring such mistakes to our notice. Anand Mallick Fortune Institute of International Business Page 3
to corner benefits of new business opportunities. Not only are the big industrial houses and real estate developers taking part. being islands of opportunity. SEZs. Attractiveness of these SEZs would depend on products that have low import tariff and high volume products that have a domestic and international market. and world-class infrastructure. The recent rush to set-up SEZs could fuel the economic growth and provide the cost advantage to industry in the rapidly changing global market. regulatory freedom.Anant Kumar Sushree Sangita Mohapatra Manoj Kumar Singh Prashant Babu Suman Bhattacharyya Executive Summary Special Economic Zones (SEZs) are set to change the entire Indian economic landscape. state governments have been Fortune Institute of International Business Page 4 . India is gearing up with the new act that aims at attracting FDI and domestic investments. The Indian SEZ Act. Like anywhere else in the world. the government is taking concrete steps to transform current SEZs into new age Indian factories. is a right move in this direction. The act facilitates single-window clearance. but state government bodies are also a part in the current SEZs wave. They are said to be the engine of the economic growth. However. With Asian economies competing for a pie in the international capital flows. the three pillars of the SEZ Act are fiscal incentives. tax breaks and hassle-free environment are much needed to attract investors in the infrastructure and industrial development. are offering business opportunity across the sectors. FDI in SEZs is set to rise rapidly once the development completes. and tax break for 15 years (instead of the previous 10 years). government has not talked about the much awaited flexible labor laws. Learning lessons from the past failures of SEZs. timely disposal of applications. announced in May 2005. In the latest SEZ Bill.
granted permission to adopt flexible labor laws. and Dubai. Singapore. Competition is heating up among states to attract investments into SEZs. Fortune Institute of International Business Page 5 . it needs to set-up the right infrastructure. It will help in retaining the industries. to pave way for building competitive advantages gradually. As part of the de-risking strategies. global textiles and auto component firms could set-up their facilities in Indian SEZs. if necessary. Indian SEZs should aim at emulating favorable investment destinations such as China. Malaysia. even after the end of tax breaks. Indian SEZs can attract investments from foreign SEZs too. If SEZs are to bring desired benefits to the country.
with Asia's first EPZ set up in Kandla in 1965. loss of low skilled jobs in agriculture. food security. Markets showed growth and the economy was buoyant. complemented by new policies regarding exports.as special engines of rapid economic prosperity and all round societal development. Since the implementation of these reforms began there has been a spate of criticisms from a number of quarters on different aspects of the SEZ policy. to attract domestic and foreign investment and also for the opening up of the economy. FDI etc to attract investments and boost exports. The concept of SEZs -.Introduction Special Economic Zones (SEZs) have been established in many countries as testing grounds for the implementation of liberal market economy principles. did spur the flow of FDI and FII investments into Indian infra structure and manufacture industry. Special Economic Zones (SEZ) have occupied a center stage in the national consciousness for the past few months due to the events unfolding in Singur and subsequently the occurrences in Nandigram (a proposed SEZ). In light of these issues. and small scale industries. absence of world-class infrastructure. With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances. forestry. At the same time the government also claims to follow a policy of economic growth that enhances both equity and efficiency. Growth of employment opportunities are growing. and an unstable fiscal regime and with a view to attract larger foreign investments in India. India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports. Many economies including India have used the concept of SEZ in one or the other form to promote exports and boost economic growth. SEZs in India seek to promote the value addition component in exports. SEZs are viewed as instruments to enhance the acceptability and the credibility of the transformation policies. to generate employment as well as to mobilize foreign exchange. the Special Economic Fortune Institute of International Business Page 6 .Special Economic Zones -. The Indian experiment began in 1965. Some of the economic issues raised about the SEZ policy have been improper usage of arable land. Despite the opposition the government is determined to go ahead with rapid creation of new SEZs. this paper tries to analyse some economic facts related to the creation and working of the SEZs in order to arrive at the ground realities which would help in effective decision making about SEZs.
02. supported by SEZ Rules. came into effect on 10th February. with the minimum possible regulations. After extensive consultations. a comprehensive draft SEZ Bill prepared after extensive discussions with the stakeholders. A number of meetings were held in various parts of the country both by the Minister for Commerce and Industry as well as senior officials for this purpose. The draft SEZ Rules were widely discussed and put on the website of the Department of Commerce offering suggestions/comments. in infrastructure and productive capacity. SEZs in India functioned from 1.2006 under the provisions of the Foreign Trade Policy and fiscal incentives were made effective through the provisions of relevant statutes. both at the Centre and the State level.Zones (SEZs) Policy was announced in April 2000. 2005. The Special Economic Zones Act.2000 to 09. Fortune Institute of International Business Page 7 . 2005. Around 800 suggestions were received on the draft rules. the SEZ Act. leading to generation of additional economic activity and creation of employment opportunities.11. providing for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments. It is expected that this will trigger a large flow of foreign and domestic investment in SEZs. 2005 which received Presidential assent on the 23rd of June. To instill confidence in investors and signal the Government's commitment to a stable SEZ policy regime and with a view to impart stability to the SEZ regime thereby generating greater economic activity and employment through the establishment of SEZs. 2006. This policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package. was passed by Parliament in May. 2005.
domestic sales are permitted but foreign markets and exports are thrust areas. enterprise zone. economic regulations and administrative frameworks. Example – China (Shenzhen).Economic Zones Countries all over the world create fenced-in. India (Surat). free trade zone (FTZ). municipality) and is more than 100 sq km in size. Some of the zones are often deliberately conceived as ‘foreign’ territories functioning with a different set of economic laws compared with those applicable to the rest of the country. Activities – Multi-purpose. These zones are distinguished from the rest of the land in the terms of their specific administrative authority. It is resident Population. Depending upon their specific purposes. Philippines (Subic Bay).g. lower business taxes compared with other parts of the country. geographically delimited ‘enclaves’ within their sovereign territories. Types of Zones The different types of economic zones found around the globe are:- Special Economic Zone (SEZ) A special economic zone usually covers a distinct administrative region (e. Being ‘foreign’ also implies that zones are different customs areas. deregulated economic conditions for encouraging private enterprise. Incentives – Duty-free imports. export processing zone (EPZ). the zones are called industrial zones (or estate). Poland (Kotawicka). special economic zone (SEZ) or free economic zone (FEZ). Objectives – Integrated development. includes all industries and services. benefits offered. Such enclaves have become known as ‘zones’ in economic and business parlances. liberal labour laws and limited foreign exchange controls. It can be located anywhere. province. Ukraine (Donetsk) Fortune Institute of International Business Page 8 . benefits enjoyed by industries located in them and availability of better business facilities.
labour laws are flexible. restricted sales in domestic markets. Example – Bulgaria (Rakovski). Objectives – They are meant for urban area renewal (US). Activities – Manufacturing. infrastructure development can also be a priority. India (Kandla). trading and various other commercial activities. usually targeted at small and medium manufacturing enterprises. It might be an entire city as well. Incentives – Duty-free imports of imported inputs particularly raw materials and capital goods. The size is usually up to 100 hectares. Incentives – Duty-free imports of imported inputs particularly raw materials and capital goods. export profits are tax exempted. The main incentives include zoning relief. liberal foreign exchange rules and labour laws. usually less than 200 hectares in size. liberal foreign exchange rules and labour laws. Vietnam (Quang Phu). Example – Bangladesh (Chittagong). Activities – Producing for domestic market as well as exports. Activities – Main emphasis on exports with units having minimum export obligations. export profits are tax exempted. Objectives – Industrial development. reduced local taxes and relief from licensing. It is usually located close to seaports and airports. Kenya (Athi River) Industrial Zone Industrial zone is an enclave or industrial park which can be located anywhere. broader range of products usually includes light industry and manufacturing. But might be for promoting local area development also through private participation. US. Incentives – Duty free imports are not allowed. Example – Japan (Kobe).Export Processing Zone / Free Trade Zone (EPZ/FTZ) The export processing zone or free trade zone is an enclave or park. However. Fortune Institute of International Business Page 9 . UK (Tyne Riverside). China (Xinzhuang in Shanghai) Enterprise Zone Enterprise zone is usually found in inner city areas. Objectives – Increasing of manufacturing exports. Jamaica (Kingston).
Example – IT parks in India. Electronic Commerce and Media Free Zone) Financial Services Zone Financial services zone can be either part of a city or part of any other zone. Its size is usually less than 50 hectares.Information Processing Zone Information processing zone can either be part of a city or part of any other zone. Incentives – Duty-free capital goods imports. distribution and transshipment. UAE (Dubai Technology. Incentives – Duty-free imports for re-export tax relief on reinvested profits and no restriction on domestic sales. Currency laws are liberal and there are no restrictions on profit repatriation. Incentives – Relief from local taxes. Objectives – Development of information processing and IT. Example – Iran (Kish Island). Activities – Data processing. Example – Bahrain. Objectives – Developing as a financial hub. Activities – Financial services. UAE (Dubai). packaging. Objectives – Facilitate exports and imports of goods. UAE (Dubai – Jabel Ali Free Zone). Activities – Warehousing. easy access to telecom and other communication services and labour laws are flexible. US (Miami Free Zone) Fortune Institute of International Business Page 10 . Turkey Commercial Free Zone Commercial free zone is usually meant for warehousing and is located close to air/sea ports. software development and computer graphics.
Incentives – No customs duties. There are several new zones coming up in different parts of the world. North Africa Sub-Saharan Africa Indian Ocean Middle East Asia (South. Morocco (Tangier). Example – South Korea (Incheon). S. labour laws are very flexible and utilities are deregulated. 1. 9. 4. Activities – All activities are permitted. 11. East and South-East) Transition Economies North America Central America and Mexico South America Caribbean Pacific Europe TOTAL Region EPZ/FTZ (Nos. Objectives – Facilitate export and import. Venezuela (Isla Margarita) Regional Distribution of Zones Zones abound all over the world in various forms and classification. 2. 5. 8.) 49 13 3 10 631 332 Not Available 170 Not Available 160 13 1 1382 Fortune Institute of International Business Page 11 .) 18 77 1 41 173 69 272 72 43 89 3 45 903 Other Zones (Nos. 6. It can be part of a city or more commonly part of international airports. During the financial year 2005-2006. The areas have resident population. 7. the number of zones at any point of time keeps changing. 10. So. 3. No. the regional distributions of zones were as follows. 12. Japan (Nagasaki). Mauritius (Port Louis).Fee Port / Zone Free port/zone is an island/province city or even a country.
as of 2007 there are more than 3000 projects taking place in SEZs in 120 countries. The most successful Special Economic Zone in China. including Free Trade Zones (FTZ). Jordan. There is empirical evidence to show the positive influence of SEZs in reducing the gap between developing and developed countries. Export Processing Zones (EPZ). the Philippines. Special Economic Zones were founded by the central government under Deng Xiaoping in the early 1980s. The category “SEZ” covers a broad range of more specific zone types. Shenzhen. public regulator). SEZs have been implemented using a variety of institutional structures across the world ranging from fully public (government operator. features and benefits offered differ from country-to-country Administrative mechanism and Regulatory framework also vary from country-tocountry In the People’s Republic of China. including Brazil. government regulator) to fully private (private operator. the goal of a structure is to increase foreign direct investment by foreign investors. The most prominent examples of this layered are approach are Subic Bay Freeport Zone in the Philippines. Peru has been slated to become a “Zone Economica” BY ITS President Alan Garcia. Free Zones (FZ). Urban Enterprise Zones and others. has developed from a small village into a city with a population over 10 million within 20 years. Usually. government developer. Free Ports. Iran. Currently. Republic of Korea. Kazakhstan. Sricity Multi product SEZ and Mundra SEZ in India and According to the World Bank estimates. A single SEZ can contain multiple ‘specific’ zones within its boundaries.Special Economic Zones A Special Economic Zone (SEZ) is a geographical region that has economic laws that are more liberal than a country’s typical economic laws. SEZs are often Fortune Institute of International Business Page 12 . private developer. In many cases. typically an international business or a multinational corporation (MNC). Objectives. public sector operators and developers act as quasi-government agencies in that they have pseudo-corporate institutional structure and have a budgetary autonomy. United Arab Emirates. Special Economic Zones have been established in several countries. the Aqaba Special Economic Zone Authority in Jordan. Pakistan. Industrial Estates (IE). Puno. Ukraine. Russia. Poland. Following the Chinese examples.
Russia. A SEZ offers preferential tax conditions. Export Processing Zone A clearly demarcated industrial zone which constitutes a free trade enclave outside a country's normal customs and trading system where foreign enterprises produce principally for export and benefit from certain tax and financial incentives . However.developed under a public-private partnership arrangement.S. free trade zones. commercial. and tourist/recreational centers . the zones are neither ex-territorial. USG Special Economic Zone (Poland) An administratively separate part of Polish territory. in which the public sector provides some level of support (provision of off-site infrastructure. etc) to enable a private sector developer to obtain a reasonable rate of return on the project (typically 10-20% depending on risk levels). 12 countries have adopted this Wide Area Zone concept (Notably Singapore. industrial tourist/recreational. soft loans. may contain any or all of the following: industrial estates (IEs). investment and financial centers.Dept of Commerce.Philippines SEZ Act. These procedures allow domestic activity involving foreign items to take place prior to formal customs entry. export processing zones (EPZs).WEPZA Foreign Trade Zone (USA) A designated site licensed by the Foreign-Trade Zones (FTZ) Board at which special customs procedures may be used. bond issues. equity investment. Large zones with a resident population such as Chinese Special Economic Zones or new cities. market . Fortune Institute of International Business Page 13 . nor fenced. 1995 Types of SEZ Wide Area Zone The focus of Wide Area Zone is on scale predominantly in government domain. as well as special premises on which entrepreneurs may conduct business activities without being subject to the payment of income taxes Special Economic Zone (Philippines) Selected areas … to be developed into agro-industrial. in which a more favourable business climate is created. China and Brazil). Duty-free treatment is accorded items that are reexported and duty payment is deferred on items sold in the U. nor isolated in any physical way. banking.
France and Germany) Performance Specific Zones Zones that admit only investors that meet certain performance criteria such as degree of exports. Taiwan. etc. Fortune Institute of International Business Page 14 . Industry Specific Zones The focus of Industry Specific Zones is to create or exploit industry competitiveness. Hong Kong. 133 countries have adopted the Small Area Zone Concept. Companies can be located anywhere. etc. jewellery. tourism. Zones that are created to support the needs of a specific industry such as banking. normally surrounded by a fence. level of technology. Companies invested in zone may be located anywhere and receive the benefits. textiles. oil and gas. size of investment. Zones that are generally smaller than 1000 Ha. 17 countries have experimented with Industry Specific Zone Concept (Notably USA. electronics. Japan.Small Area Zone The focus of small area zone is on private participation. Only 4 countries have adopted Performance Specific Zone concept (notably Mexico and Mauritius).
Shantou and Xiamenm set up. across 120 countries. decided to attract firms from the mainland USA to invest In 1951. it passed a tax exemption law as an incentive to foreign and mainland investors It also created the Economic Development Administration (Fomento) and the Puerto Rican Industrial Development Company (PRIDCO) to build infrastructure By 1963 it had attracted 480 manufacturing firms to its 30 industrial parks. set up by royal decree on 100 sq km. UAE. Taiwan designated as for new EPZ. US seeks to industrialize. attracting investments from the US mainland and hefty tax breaks. In 1947. Jebel Ali Free Zone. Puerto Rico. 1960 1965 1966 1980 1985 2000 2005 Today Puerto Rico World’s first Special Economic Zone came up in Puerto Rico in 1947. The WEPZA estimates >1000 zones worldwide. via industrial parks focused on import substitution. The world’s first EPZ is set up near Shannon Airport. employing 40 million people. Kaohsiung.History and Evolution of SEZ 1947 Puerto Rico. China’s first Special Economic Zones. Passage of India’s SEZ Act. Zhuhai. Asia’s first EPZ created at Kandla. Impact of SEZ in Puerto Rico Per capita GNP grew over 45 times in 40 years Employment grew by 9% per annum for 40 years Life expectancy went up from 37 years to 75 years Fortune Institute of International Business Page 15 . India announces its SEZ policy – focus on export promotion. Shenzhen. Ireland – duty free production zone for high value-added goods.
promote competitiveness of goods and services. Ireland: 1960 . the Chinese success SEZ – International Experiences The aim of creating special economic zones (SEZ) is to promote economic development in depressed regions.And of course. Kaohsiung. etc. rights for simplified registration and customs procedures. Investors usually receive custom and tax privileges. Porto Franco) ports. and right for priority use of the SEZ infrastructure..UAE . Technological Zones: These SEZ include areas where domestic or foreign firms conducting research and development or innovative activities are concentrated (techno parks.Shannon.Korea .). Creation and Operation of SEZ in the World SEZ are established through granting privileges to companies investing in particular activities in specific regions.Mexico: One million jobs in 10 years in “Maquiladoras” . expand exports. marking. Commonly.g. These areas are used for storing and primary processing of imported commodities (packaging. Such zones include both international and free (e. SEZ can be used to facilitate the process of attracting modern technologies into the national economy. Fortune Institute of International Business Page 16 . Access to higher education went up from 2% to 60% in 40 years More notable examples are . and create new job opportunities.EPZA.Singapore . Taiwan: 1960s . SEZ are divided into the following groups. according to their economic specialization: Free Trade Zones: Such SEZ are established to ensure free goods turnover and develop customs free trade. assembling.Mauritus: 1970s & 1980s .Dubai . business incubators).
light. Industrial Zone: These SEZ include areas where customs and tax privileges are granted to industrial companies producing export or import substituting products. where output is oriented at the final consumer and has high added value. Goals of SEZ Creation Economic Goals: Enhancement and expansion of foreign economic and foreign trade activity Attraction of foreign and national investments Promotion of export of industrial products Increasing of competitiveness of national production and its economic efficiency Social Goals: Creation of new work places and increasing employment Training and increasing of qualification of employees Scientific and Technical Goals: Active using of modern foreign and domestic technologies Concentration of scientific and technical personnel. and recreation zones). offshore. and CIS). Mostly. Fortune Institute of International Business Page 17 . investments are channelled into electronics. combine the features of the previous types of SEZ (common in China. Service Zones: These SEZ are located in areas with preferential treatment of companies providing financial or non financial services (zones for banking and insurance services. Brazil. One sector of specialisation is chosen in each zone (except for combination zones). Combination Zones: These zones. and wood processing industries. food. with broad specialisation. for development of priority sectors In creating SEZ. governments usually seek to attract foreign investment. Eastern European countries. including foreign one.
b. export oriented. Poor Selection of SEZ Location – Area with underdeveloped infrastructure. International experience indicates that SEZ are not always effective. environmental. Improperly Determined Zone Size – For instance. Lack of strict requirements concerning SEZ specialisation. experts use economic.000 jobs). Malaysia. For example. Fortune Institute of International Business Page 18 . In this case. These zones generate almost 40% of total exports and show an annual industrial production growth of 70%. corruption. however. and 10 research and development zones were established. in China 5 combination zones.In order to evaluate SEZ performance. in China. 3. and 2. SEZ is not attractive for investors. In the Philippines. insufficient amounts of natural and labour resources. organisation of proper management in these zones is quite complicated. and other criteria. namely: 1. large zones require enormous initial investment into developing their infrastructure. or insufficiently large market.7 times increase in employment (388. and privilege abuse for money laundering purposes 2. Improper planning of SEZ. tourist recreation. social. This is mainly caused by incoherent government policy. if it is properly planned. and Singapore large areas of SEZ turned to be the main source of industrial development.8 times increase in exports. this factor is very important for countries establishing SEZ for the first time and having no experience in their management. leading to unjustified expansion of privileges for practically all activities in the zone. Operation of SEZ can give positive results. During 1994–1999. Unstable and non transparent legislative regulation of SEZ. these zones achieved almost 5. resulting in low levels of investment. 14 open cities. particularly: * * * * * * * ROI The amounts of investment attracted Production capacity and potential increase in the competitiveness of the products Application of high technologies export volumes and changes in its structure Level of employment in the region Living standards of the population in the region Level of environmental pollution in the region. and free trade zones). namely: a. 19 SEZ were introduced (including industrial. Moreover.
In India. Fortune Institute of International Business Page 19 . improper planning was the source of the SEZ not accomplishing its predetermined objectives. SEZ performance was poor. In Liberia.In Mauritius. the SEZ were given too many objectives. expenditures on the development of SEZ infrastructure ($15 million) significantly exceeded the amount of investment attracted ($60 thousand). Thus. consequently privileges were extended to almost all activities in the zones.
It also increases the need for proper knowledge about India’s corporate environment – its strengths. other parts have the potential to grow as fast as China or other East Asian economies. but it accounts for less than two percent of the global GDP and only one percent of world trade. even today India’s GDP is already the third largest in the world after the U. quality of infrastructure endowment and volume of foreign trade and investment. Europe and the rest of the industrialized world. China will have the world’s largest economy. This poses new challenges for international firms and others willing to take advantage of India’s development.S. public education and research institutions coupled with various forms of collaboration between Indian and foreign partners. constraints and the implications for Sweden. and China. The Indian economy is expected to grow at a rapid rate of 6–10 percent between 2007 and 2012 and beyond. It lags behind China and other emerging East Asian economies in key indicators such as per capita income. building effective capacity among Indian corporations. followed by the U. There is considerable scope for more effective absorption of existing knowledge by expansion of foreign investments and trade. Fortune Institute of International Business Page 20 .S. it must be noted that India’s economy predominantly continues to concentrate on absorption of existing technology rather than development of new R&D or innovation at the global knowledge frontier. However. While much of the country is likely to remain poor and industrially backward. adult literacy rates. The country has much to gain from increased absorption of existing knowledge by promoting economy wide transfer and diffusion of local and internationally available technology. By the year 2032. In terms of purchasing power parity (PPP). India’s share of the world’s population is 17 percent.SEZ in India India is predicted to become one of the world’s leading economic powers. and India.
066% of the total land area and not be more than 0. km 1620388 sq. km Formal Approvals (FA) incl. notified SEZs : Valid In-Principle Approvals (IP) Total Area for Proposed SEZs : : Total investment is Rs. km (54. km which would not be more than 0.122% of the total Argi land in India. SEZs) Number of valid In-Principle Approvals is 147 Land Requirements Ground Realities: Total Land in India Total Agri Land in India : : 2973190 sq. + 12 State/Pvt.76 Crore Operational SEZs are 98 as on 30th June.53 crore as on 30th June 2009 Total Employment is 387439 persons as on 31st March 2009 Total Exports in 2008-2009 was Rs. 114640. 99689 Crore Exports in 2009-2010 as on 30th June 2009 is Rs.Facts about Special Economic Zones in India Number of Formal Approvals is 579 Number of notified SEZs is 327 (out of 579) + (7 Central Govt. Land Area Notified SEZs : 39144 ha 73191 ha 125263 ha 1985 sq.5%) Total area for the proposed SEZ (FA + IP) = 1985 sq. 2009 2301 Units approved in SEZs as on 30th June 2009 Fortune Institute of International Business Page 21 . 42501.
2005'. The SEZ Fortune Institute of International Business Page 22 . The Indian manufacturing sector witnessed a sudden dip in the overall growth of the industry. 2005 and SEZ Rules became effective on and from 10th February 2006. the performance of these Export Processing Zones of India fell short of expectations. Thus. Further. The History of SEZs in India suggests that red tape. Thus. The SEZ policy of India was devised to act as a catalyst to promote the economic growth attained in the early 1990. The History of SEZs in India suggests that the present day Special Economic Zone policies of India are well complimented by the provisions of the Acts and Rules of Special Economic Zone. during the second-half of 1990s. which was subsequently passed by Parliament in May 2005. The lack of good Government of India economic policy and inefficient management soon became the detrimental factors for the success of these Export Processing Zones. A number of meetings were held across India for the formulation of . Further. the legal framework of Indian economy was not strong enough to prevent misuse of Indian markets by the foreign investors. the lack of investor friendly environment in India prevented growth of Indian industry.'The Special Economic Zones Act. the Indian markets were not mature enough to facilitate easy entry of Foreign Institutional Investors (FIIs) in to the Indian economic system. This resulted in the formation of a much larger and more efficient form of their predecessors with world-class infrastructural facility. lengthy administrative procedures. Furthermore. the History of SEZs in India suggests that the basic model of the present day Indian Special Economic Zone was structured with the establishment of the first Export Processing Zone (EPZ) at Kandla in the year 1965. The SEZ Act. The economic reforms incorporated during the 1990s did not produce the desired results. Several other Export Processing Zones were set up at various parts of India in the subsequent years.History of SEZ in India The History of SEZs in India suggests that the seeds of the basic concept of Special Economic Zone (SEZ) were sown in the mid sixties. The modern day Special Economic Zone came in to existence because the economic reforms incorporated in the early 1990s did not resulted in the overall growth of the Indian economy. rigid labor laws and poor physical infrastructural facilities were the main cause of deterioration of Foreign Direct Investments (FDI) inflow in to India. in spite of implementation of liberal economic policy by the central government.
In 2005. Hence. And the decision of the SEZ Board of Approval is binding and final. India may have excelled in BPO. India’s middle class consists of 300 million people and its expansion will raise consumption and make economic growth faster and more sustainable.e. As is well-known. there is great interest within India to promote the exportoriented manufacturing sector through Special Economic Zones or SEZs. Objectives of SEZ The primary objective of SEZ is to facilitate exports. India is the poorer cousin of China. world class infrastructure facilities The tertiary objective includes creation of global industries and practices which would eventually spill over to the mainland through backward linkages and generation of employment Fortune Institute of International Business Page 23 . i.63 trillion in terms of purchasing power parity. but when it comes to export manufacturing. the International Monetary Fund (IMF) reported India’s GDP to be US$3. India has developed a world-class information technology and business process outsourcing (“BPO”) sector that exports its services globally. India is a rising power that no international company can afford to ignore. A Single Window SEZ approval mechanism has been facilitated through a 19 member inter-ministerial SEZ Board of Approval or BOA.. Yet for all of India’s achievements. By some definitions.1 billion and a GDP per capita of US$3. India’s Economic Potential and SEZ With a population of 1.400. ranking fourth in the world. the country is still wrestling with high poverty and unemployment rates. The secondary objective is to o Attract export-oriented Foreign Direct Investment o Transfer of state-of-art technology o Enable Indian entrepreneurs to operate under international conditions.Act 2005 defines the key role for the State Governments in Export Promotion and creation of infrastructural facilities.
in association with Private sector. Bio-technology. Private sector is also invited to develop infrastructure facilities in the existing SEZs. and ImportExport of all items through personal baggage. setting up a unit in SEZs and clearance on matters relating to Central as well as State Governments. The salient features of the Indian SEZ initiative further include the following points: Unlike most of the international instances where zones are primarily developed by governments. etc. single window clearance for setting up of an SEZ. Fortune Institute of International Business Page 24 . 000 crores over the next 3 years with an employment potential of over 5 lakh is expected from the new SEZs apart from indirect employment during the construction period of the SEZs. Genesis and Distinguishing Features The new law is aimed at encouraging public-private partnership to develop world-class infrastructure and attract private investment (domestic and foreign). Textiles. Pharma.100. Heavy investments are expected in sectors like IT. A framework is being developed by creating special windows under existing rules and regulations of the Central Govt. operation. This includes simplified compliance procedures and documentation with an emphasis on self certification. for SEZ. the Indian SEZ policy provides for development of these zones in the government. Indian SEZ policy has following distinguishing features: The zones are proposed to setup by private sector or by state Govt. State Governments have a lead role in the setting up of SEZ. exports and employment. contract manufacturing for foreign principals with option to obtain sub-contracting permission at the initial approval stage.. and maintenance of the Special Economic Zones and for setting up and conducting business in SEZs. Petro-chemicals. and State Govt. private or joint sector. Autocomponents. no requirement for providing bank guarantees. This is meant to offer equal opportunities to both Indian and international private developers. The SEZ Rules provides the simplification of procedures for development. boosting economic growth. Investment of the order of Rs.
100 per cent FDI is permitted for SEZ franchisees in providing basic telephone services in SEZs. 100 per cent FDI is permitted for all investments in SEZs. Exemption from Central Excise duties on procurement of capital goods. educational institutions. the SEZ policy also provides enterprises and developers with a favorable and attractive range of incentives. etc. raw materials. etc. well-trained and skilled workforce. Facility to realize and repatriate export proceeds within 12 months. the units in the Indian SEZs do not have to pay any income tax for the first five years and only pay half their tax liability for the next two. Exemption from Central Sales Tax and Service Tax. raw materials. Besides providing state-of the-art infrastructure and access to a large. Facilities in the SEZ may retain 100 per cent foreign-exchange receipts inv Exchange Earners’ Foreign Currency Accounts. SEZ developers also enjoy a 10-year “tax holiday”. hotels. Fortune Institute of International Business Page 25 . Exemption from industrial licensing requirements for items reserved for the smallscale-industries sector. In addition to the duty exemptions. spares. except for activities included in the negative list. Goods flowing into the SEZ area from a domestic tariff area (DTA) are treated as exports. SEZ units are required to be positive net foreign-exchange earners and are not subject to any minimum value addition norms or export obligations. The size of an SEZ varies depending on the nature of the SEZ. and consumable spares. No import license requirements. from the domestic market. The rest can include malls. At least 50 per cent of the area of multi-product or sector-specific SEZs must be used for export purposes. consumables. while goods coming from the SEZ into a DTA are treated as imports. Profits allowed to be repatriated without any dividend-balancing requirement. etc. Exemption from customs duties on the import of capital goods. No cap on foreign investment for small-scale-sector reserved items which are otherwise restricted. No routine examinations by Customs for export and import cargo.
Fortune Institute of International Business Page 26 .Types of SEZ The Special Economic Zones in India can be categorized into three main types: Sector – Specific SEZ o Manufacture one or more goods in a particular sector o Render one or more services in a particular sector Multi – Product SEZ o Manufacture multiple goods in one sector or across multiple sectors Trading & Warehousing o Render two or more services in a sector or multiple sectors SEZ in a Port or Airport o SEZ in an existing port or airport for manufacture of goods falling in two or more sectors or for trading and warehousing or rendering of services.
Layout of SEZ Notified Area of SEZ Area Processing Entry/ Exit Points FTWZ IFSC Non-Processing Area The whole SEZ Area may be divided into two parts:1. hotels. multiproduct or product specific. with lease period co-terminus with LOA Fortune Institute of International Business Page 27 .e. recreation and entertainment facilities. Facilities such as Free Trade & Warehousing Zones. Land / built-up space in the processing area to be leased: To entrepreneurs holding valid letters of approval. Processing Area 2. Non – Processing Area – Non-processing area is intended to provide support facilities to SEZ processing area and may include educational institutions. International Financial Services Centre may be approved for establishment within the Processing Area. Minimum processing area has been uniformly fixed depending upon the type of SEZ i. Non-Processing Area Processing Area – Processing area is the demarcated area in SEZ where units can be located for manufacture of goods or rendering of services. hospitals. residential and business complexes.
Developers have to fill the specific form for applying and submit it to the state government depending upon the location of the planned zone. either through the state government or otherwise. So. They also provide certificated from state governments saying that land is free from encumbrances. following the Board’s decision to approve the proposal with or without modification. To a person desiring to create infrastructure facilities for use by prospective Units SEZ Approval Process Developers and units have different approval processes. crèches. For facilities for exclusive use of the Units such as canteens. The main work of the zone begins only after notification. Thereafter. public telephone booths. Following land acquisition. Then. the BoA has the final say in deciding the SEZs in the country. developers submit to the Central Government evidence of legal right over the land along with other particulars. In such cases. Armed with the LoA. states have a maximum time of 45 days for forwarding the application with their recommendation to the board. Such land can be either freehold or leasehold. etc. the Central Government notifies the areas as SEZs. first aid centres. the states need to ensure that some key facilities will be available for developers and units in the proposed zone. And while recommending the states must clarify to the Board whether the area required by the zone is reserved or ecologically fragile. The LoA allows developers three years for carrying out their plans. the developers move ahead for acquiring land. Before giving the recommendation. Operations commence in the Fortune Institute of International Business Page 28 . developers are handed over a letter of approval (LoA) by the Central Government. The DC has the responsibility of demarcating processing and non-processing areas within zones. However. the developers can also send their proposals directly to the Board. the developer needs to obtain the state government’s nod within six months. The states have to also equip the prospective Development Commissioners of the zone with powers. Within a month of receiving the formal go ahead from the BoA. as does the setting of Approvals Committees for judging the proposals from units keen on moving in the SEZs. Appointing Development commissioners (DC) for the zones follows immediately.
Department of Commerce. Ministry of Industry. The other three members include a nominee from the concerned state government. 4) Approve. reject or modify proposals for setting up SEZs. The approvals issued by the Board are of two categories. For building SEZs. Inprinciple approval is granted for one year during which the developer is allowed to obtain legal rights over the proposed land in which the zone will be set up. During this time. The Board has 19 members. satisfy environmental requirements and mobilize funds for the project. The Director or Deputy Secretary from the same department or ministry is the Member-Secretary of the Board.processing zone after demarcation. Formal approvals are granted only after Fortune Institute of International Business Page 29 . developers are to take approvals from various statutory authorities in Central. The Board is empowered to carry out the following functions:1) Approve. Beginning from 17th March 2006. 2) Approve authorized operations to be carried out in SEZs. State and local governments. 3) Approve Developers or Units in SEZs for foreign collaborations for developing and maintaining the Special Economic Zone. 6) Suspend approval of a Developer and appoint an Administrator for discharging functions in an appropriate manner. Among the others. 5) Grant a license to industries for being set up in SEZs. developers enjoy exemption from all possible taxes that businesses in India attract otherwise. till 11th August 2009. the Board has met on 35 occasions for considering SEZ proposals. 7) Dispose of appeals and perform any other functions as may be assigned to it by the Central Government. The Board of Approvals A Board of Approval (BoA) for granting formal approval to proposals for setting up SEZs was constituted by the Government of India. 14 members are from the Government of India. reject or modify proposals for creating infrastructure in SEZs. provide for rehabilitation of displaced persons. It is chaired by Special Secretary. Government of India. the concerned development commissioner and a professor from Indian Institute of Management (IIM) or the Indian Institute of Foreign Trade (IIFT). The Board can co-opt other members if it feels so.
Fortune Institute of International Business Page 30 . etc. including necessary substations of appropriate capacity. 11. Shopping arcade and/ or retail space. Swimming pool. Employee welfare facilities like automated teller machines. IT / ITES. Housing or service apartments. signals and signage. Roads with street lighting. 4. Parking including multi-level car parking. 16. storm water drains and water channels of appropriate capacity. sewage treatment plants. Recreational facilities including clubhouse. medical centres. Electricity generation. sewage lines. Air conditioning. 14. fire and smoke detectors. Gems and Jewellery SEZs 1. 19.providing documentary evidence of rights over land and satisfying other requirements. etc. Common data centre with inter-connectivity. Business and / or convention centre. 17. Biotechnology. 7. 12. Water treatment plant. 8. Office space. indoor and outdoor games. gymnasium. exit and other points within and along the periphery of the site. 9. 5. 15. gas and petroleum natural gas. 13. pipelines and other necessary infrastructure for sewage and garbage disposal. Telecom and other communication facilities including Internet connectivity. 3. 10. The Board also grants co-developer approvals for building infrastructure facilities in SEZs. 6. 2. 20. Authorized Operations in SEZs The different operations which are authorized in SEZs depend on the nature of SEZ. Distribution network for electricity. Effluent treatment plant. pipeline network. Security offices and police posts at entry. 18. Rain water harvesting plant. water supply lines. Fire protection system with sprinklers. pipelines and other infrastructure for effluent treatment. Sewage and garbage disposal plant. crèche.
7. pipeline network. Swimming pool. Sewage and garbage disposal plant. 15. 4. Recreational facilities including clubhouse. Employee welfare facilities like automated teller machines. etc. sewage treatment plants. gymnasium. Fire protection system with sprinklers. 10. Drip or micro-irrigation systems. restaurants. pipelines and other necessary infrastructure for sewage and garbage disposal. 26. Parking including multi-level car parking. Playground. crèche. Effluent treatment plant. Office space. Shopping arcade and/ or retail space. gas and petroleum natural gas. Sector Specific SEZs 1. 12. fire and smoke detectors. Water treatment plant. 11. sewage lines. Telecom and other communication facilities including Internet connectivity. signals and signage. 8. canteens and catering facilities. storm water drains and water channels of appropriate capacity. 23. Rain water harvesting plant. Bus bay. Electricity generation. 14. 13. Fortune Institute of International Business Page 31 . exit and other points within and along the periphery of the site. Landscaping and water bodies. pipelines and other infrastructure for effluent treatment. 16. Roads with street lighting. construction of multiplexes. Clinic and medical centres. Wi Fi and / or Wi Max Services. Food services including cafeteria. 28. 5. Such other operation(s) specified above from 1 to 27 which the BoA may authorize from time to time. indoor and outdoor games. 3. Security offices and police posts at entry. water supply lines. medical centres.21. food court(s). Distribution network for electricity. 2. 6. 25. 24. 9. including necessary substations of appropriate capacity. coffee shops. 27. etc. 22.
Fortune Institute of International Business Page 32 . fire and smoke detectors. Security offices and police posts at entry. 25. 24. 13. Effluent treatment plant. 23. 3.17. pipelines and other infrastructure for effluent treatment. Rail head 26. Rain water harvesting plant. Electricity generation. Swimming pool. gas and petroleum natural gas. signals and signage. food court(s). 6. 18. 27. indoor and outdoor games. 8. water supply lines. Water treatment plant. pipeline network. sewage treatment plants. Access control and monitoring system. 9. gymnasium. 14. 12. 11. Food services including cafeteria. pipelines and other necessary infrastructure for sewage and garbage disposal. storm water drains and water channels of appropriate capacity. 22. 20. Recreational facilities including clubhouse. Fire protection system with sprinklers. exit and other points within and along the periphery of the site. Landscaping and water bodies. 7. Telecom and other communication facilities including Internet connectivity. 21. Parking including multi-level car parking. School and / or technical institution and / or educational institution. sewage lines. etc. Drip or micro-irrigation systems. Bus bay. Such other operation(s) specified above from 1 to 27 which the BoA may authorize from time to time. 2. 19. 4. Roads with street lighting. Clinic. restaurants. 10. coffee shops. Sewage and garbage disposal plant. including necessary substations of appropriate capacity. medical centres and building hospitals. canteens and catering facilities. Multi – Product SEZs 1. 5. Playground. Office space. Distribution network for electricity. Wi Fi and / or Wi Max Services.
Shopping arcade and/ or retail space. 30. Manipur. food court(s). iv. 18. 17. crèche. coffee shops. 31. construction of multiplexes. medical centres and building of hospitals. Tripura. Food services including cafeteria. Landscaping and water bodies. Drip or micro-irrigation systems. Goa and in a Union territory. Additional activities which are allowed are:i. 16. School and / or technical institution and / or educational institution. Land Rules The minimum land requirement for the SEZ depends upon the nature of the SEZ. Port.15. in the states of Assam. Clinic. Airport and / or air cargo complex. Rail head 23. Uttaranchal. iii. restaurants. 24. Bus bay. Banks. 32. Mizoram. canteens and catering facilities. Employee welfare facilities like automated teller machines. Jammu & Kashmir. Arunanchal Pradesh. Meghalaya. Himachal Pradesh. Inland container depot. Housing or service apartments and construction of hotels. 21. Sikkim. a contiguous area of 1000 ha is the minimum requirement. The land rules for different SEZs are:Multi-Product SEZ For a multi-product SEZ. Access control and monitoring system. medical centres. it can be 200 ha. However. Such other operation(s) specified above from 1 to 24 which the BoA may authorize from time to time. Nagaland. 20. ii. Playground. Wi Fi and / or Wi Max Services. Fortune Institute of International Business Page 33 . 22. etc. 29. 19.
Goa and in a Union territory. Arunanchal Pradesh. biotechnology and non-conventional energy sectors (including solar energy equipments/ cells but excluding non-conventional energy production and manufacturing) and gems and jewellery. Uttaranchal. Nagaland. the minimum built-up processing area will be 50000 sq m. at least 50% will be earmarked for processing area unless they figure in sectors mentioned above. Arunanchal Pradesh. Himachal Pradesh. at least 50% of the area will be earmarked for processing area. this may be relaxed by the Central Government up to 25% if recommended by the Board of Approvals. iii. Sikkim. the minimum built up area will be 40000 sq m. Sikkim. Jammu & Kashmir. However. the minimum area will be 40 ha. Nagaland. the minimum built-up processing area will be 1 lakh sq m. Mizoram. Jammu & Kashmir. a standalone FTWZ can also be set up as a part of multi-product SEZ. including IT-enabled services. as well as that of a sector-specific zone with no minimum area requirement. Tripura. The minimum area will be 50 ha in Assam. i. Manipur. unless they belong to specific sectors mentioned above. However. Meghalaya. For gems and jewellery. The minimum area will be 10 ha foe electronics hardware and software including IT enabled services. Processing Area – A FTWZ must have a minimum built-up area of 1 lakh sq m. For biotechnology and non-conventional energy sectors. the maximum area of such FTWZ will not be more than 25% of the processing area of the SEZ. Meghalaya. a contiguous area of 100 ha is required. However. Processing Area i. Fortune Institute of International Business Page 34 . Tripura. Manipur. ii. Mizoram. For electronic hardware and software. Sector-Specific / For One or More Services / In a Port or Airport For a sector-specific / for one or more services / in a port or airport. Uttaranchal. However. In standalone FTWZs.Processing Area – At least 35% of the total area will be earmarked for developing the processing area. Free Trade and Warehousing Zone (FTWZ) For free trade and warehousing zone. ii. Goa and in a Union territory. iv. In Assam. Himachal Pradesh.
The SEZ Act 2005 is mainly divided into 7 different chapters and 3 schedules. the SEZ Act was enacted. Co-developers and approval for units to be located in the notified area. Chapter I Chapter II Chapter III Chapter IV Chapter V Chapter VI Chapter VII Chapter VIII Schedule I Schedule II Schedule III Preliminary Establishment of Economic Zone Constitution of Board of Approval Development Commissioner Single Window Clearance Special Fiscal Provisions for Special Economic Zones Special Economic Zone Authority Miscellaneous Enactments (See Section 7 and 54) Modifications to Income Tax Act.000 was also expected from the new SEZs. 1961 Amendment to Certain Enactments (See Section 56) Key Issues The SEZ Act deals primarily with the following matters:* * Establishment of the SEZ and the various authorities constituted in this connection. In 2005. The SEZ Act 2005 and the rules of the SEZ Act came into force from February 10.Special Economic Zones Act 2005 The policy relating to SEZs was earlier contained in Foreign Trade Policy. However. to give a long term and stable policy framework with minimal regulation. Investment of the order of Rs 100. Fortune Institute of International Business Page 35 . apart from indirect employment during construction period of the SEZs.000 crore over the next three years with an employment potential of over 500. a comprehensive Special Economic Zones Act 2005 was passed by Parliament in May 2005. 2006. Appointment of the Developer.
sales tax and income tax. proposals of the state governments and private developers are to be screened and approved by the board. • Simplified compliance procedures and documentation with an emphasis on self certification. * * Offshore Banking Unit & International Financial Services Centre. excise. the policy relating to the EPZs/ SEZs was contained in the Foreign Trade Policy while incentives and other facilities offered to the SEZ developer and units were implemented through various notifications and circulars issued by the concerned ministries/departments. out zone supplier and residents. • Single Window clearance on matters relating to Central as well as State Governments. Earlier. Salient Features of SEZ Act The SEZ Rules provide for: • Single window clearance for setting up of an SEZ. Another major feature of the Act is that it claims to provide expeditious and single window clearance mechanisms. The responsibility for promoting and ensuring orderly development of SEZs is assigned to the board of approval. Governance An important feature of the Act is that it provides a comprehensive SEZ policy framework to satisfy the requirements of all principal stakeholders in an SEZ – the developer and operator. While the central government may suo motu set up a zone. Setting up of offshore banking units / International Financial Services Centre in SEZs. occupant enterprise. securities transaction tax. service tax. approval committees are constituted to approve/reject/modify proposals for setting up SEZ units.* Exemptions. • Single window clearance for setting up a unit in a Special Economic Zone. A single enforcement agency/officer for certain notified offences as well as the designation of courts by the state governments for such offences committed in and for civil suits arising in SEZs. Fortune Institute of International Business Page 36 . At the zone level. This system did not give confidence to investors to commit substantial funds for development of infrastructure and for setting up units. drawbacks and concessions including exemptions from customs duty (on goods brought into or exported from the SEZ). It is to be constituted by the central government. Notified Offences & Civil Suits.
Sales taxes are not charged on sale or purchase of goods (other than newspapers) by developers. Infrastructure Provisions have been made for:1. Fiscal Benefits Chapter 6 of the SEZ Act of 2005 deals with the special fiscal provisions for SEZs. The public private participation in infrastructure development. 3. On the basis of this chapter. Fortune Institute of International Business Page 37 . The labour commissioner’s powers are also delegated to the DC. The developers have to choose their block period of 10 years. Exemption from payment of Minimum Alternate Tax (MAT). Affected parties may appeal to high courts against the orders of the designated courts. The setting up of a “SEZ authority” in each central government SEZ for developing new infrastructure and strengthening the existing one. clause 23 requires that designated courts will be set up by the state governments to try all suits of a civil nature and notified offences committed in the SEZs. 2. The setting up of offshore banking units and units in an international financial service centre in SEZs. Finally.In addition. Entire profits from developing SEZs are eligible for tax concession. Developers are exempted from paying taxes on dividend declared out of the current income. 4. Exemption from payment of service tax on taxable services provided to a developer. the Development Commissioner (DC) and his/her office is responsible for exercising administrative control over a zone. the available benefits are as follows:The benefits available to the Developers are: Income tax exemption for ten years (in a block of 15 years) from the date of commencement of operations. The establishment of free trade and warehousing zones to create world class traderelated infrastructure to facilitate import and export of goods aimed at making India a global trading hub.
Exemption from paying of service tax. The benefits available to the Units are: Income tax exemption on 100% export profits for the first five years from the date of commencement of production. Exemption from payment of sales taxes. No taxes are imposed on OBU for interest paid on deposits to non-residents. Offshore banking units (OBUs) in the SEZs are allowed complete tax holidays. Exemption from payment of central excise on all goods purchased from the DTA. and finally. However. No taxes are imposed on interest income received by a non-resident on a deposit made in an OBU situated in an SEZ. Exemption from customs duty on goods imported by developers for carrying on authorized operations. 100% exemption is permitted for the first five years and 50% for the next five years. 50% of profits for the next five years. such exemption requires that one year or before. Units are exempt from payment of taxes on capital gains during transfer of assets involved in shifting from urban areas to SEZs. Drawback or such other benefits on goods brought or services provided from the Domestic Tariff Area by the developer for authorized operations. or three years after the transfer o Machinery/ plant was purchased for operations in SEZ o Building or land was acquired or constructed in the SEZ o The original asset was shifted and the establishment was transferred to the SEZ o Other expenses as indicated by the Central Government were notified. deduction up to 50% of the ploughed back export profits for another five years. Exemption from securities transaction tax (STT) on transaction of taxable securities entered into by non-residents through the International Financial Services Centre. as well as on those for borrowings by non-residents. Exemption from payment of central excise on goods brought from outside the SEZ (that is Domestic Tariff Area) by developers for authorized operations. Fortune Institute of International Business Page 38 . Exemption from customs duty on goods imported by units for authorized operations.
ministry of Commerce and Industry. As far as units in SEZs are concerned. FDI under the ‘automated’ route. foreign investors are eyeing these needs to apply to the Development Commissioner of the concerned zone. no foreign exchange purchased in India against Rupees can be credited to the account without the approval of the RBI. Government of India. SEZ units can open. the Special Economic Zones (SEZ) Policy was announced in April 2000’. the funds will not be lent to any equity resident in India that is not a unit in SEZ. On a purely ‘stand alone’ basis these units can enter into contracts in commodity exchange markets with the objective of hedging against price risks. unless they attract compulsory licensing or are incompatible with the location norms. First.Foreign Investments & Finance Attracting FDI is also one of the objectives of the SEZ policy. on 3 March 2005. absence of world class infrastructure and an unstable fiscal regime. Fortune Institute of International Business Page 39 . There are two main restrictive provisions on the operations of the account. In a decision that enables SEZ units to dig into capital markets for mobilizing resources. Second. hold and maintain foreign currency accounts with authorized dealers (AD) of foreign exchange. The guidelines for FDI in townships. The RBI has come out with clear instructions mentioning that for setting up branch offices or new units in SEZs. and with a view to attract larger foreign investments in India. And according to regulation 6A of the Foreign Exchange Management Act (FEMA). 2 issued by Department of Industrial Policy and Promotion (DIPP). these are likely to qualify under the automatic approval route. housing and construction-development projects in India are prescribed in Press Note no. On 2nd July 2007. they have been permitted to issue equity shares to non-residents against import of capital goods. it is not necessary for foreign investors to take prior permission. that is. The background note on Special Economic Zones in India put up on the departmental Website of the Ministry of Commerce for SEZs mentions: ‘With a view to overcome the shortcomings experienced on account of the multiplicity on controls and clearances. the route which does not require foreign investors to take prior permission for investing in India. As a result. the appeal of SEZs has increased that much more for prospective investors. is allowed up to 100% for developing SEZs and FTWZs. In most cases.
2. Rest of the land could be left to develop recreation centers and housing etc. farmers. Therefore the communities such as those of the fisher folks. Dalits and other marginalized will remain untouched by all new employment opportunities arising out of the SEZs. This would increase the Fortune Institute of International Business Page 40 . 4. Loss of Livelihoods – Inadequate Employment Opportunities There has been no Cost-Benefit analysis conducted for SEZ projects or assessment of economic losses as a result of diversion of agricultural land to non-agricultural purposes and resultant impacts on local livelihoods. th Under the SEZ Act (Section 26 to 30) and SEZ rules. women. excessive Tax and Tariff concessions are being given to companies for a consecutive period of 15 years. Revenue Loss due to subsidizing SEZs The Finance Minister himself has consistently raised the issue of loss of taxes stating that we will loose almost 1.The Key Issues 1. Creating Real Estate Zones The SEZs are but creation of –‘Real Estate Zones’ to compliment the rich and elite in country. There are no provisions for monitoring of the cumulative environmental impacts of all the units coming under one SEZ. landless labourers. As per the SEZ Act. (TOI. 3. 00. SEZs will not create employment for local population but will lead to distress migration of locals since the jobs created will need education and skill levels unreachable for most of the people.000 Crore due to tax sops offered to SEZs. 25 August 2006). only 35% land would be for industrial set up while the remaining would be for other non-industrial purposes. Increasing Burden on Natural Resources and Environment The democratic spaces available to the people to voice their dissent or consent to the projects may not even be applicable to these industries under the available Environmental Clearance Regulations because of the “Single Window Clearance’ provisions of the SEZ Act (Section 13).
6. Adverse Impact on Labour Conditions In India 93. the accountability of whose is not certain. the most critical being land acquisition in the name of ‘public purpose’. Once given the status of SEZs private industries will simply reap the benefits of all leverages provided by the government. This would only worsen the condition of labour in our country further. Fortune Institute of International Business Page 41 .2% of total work force still comes under the unorganized sector. Liberalizing of labour laws under SEZ Act (Section Sec. This is against the Indian Constitution and nationhood. which actually means that they would be ‘self contained privatized autonomous entities’. manufacturers and entrepreneurs in the long run.49) would adversely impact the social security and livelihoods of this large labour force. The SEZ Act is taking away this power back to the center and bureaucracy (by creating ‘Board of Approvals’ and ‘Development Commissioner’ and ‘SEZ Authority’. Over Ruling of Local Self Governments The status of deemed foreign territory to SEZs will encroach upon the rights of the local self governments like Gram Panchayats’ and will be violation of the 73rd Constitutional Amendment. the rights for environmental and labour related clearances. small scale industries. The fact that the SEZs would have their own regulations.burden of taxation on the common people. 5. The disproportionate growth as a result of SEZs will adversely hit the farming sector. security arrangements. the most powerful in SEZs).
66638 crore from Rs. in the year 2007-2008.4% from 2001-2004. the export went to Rs. 18314 crore i.e. the potential of SEZs in India is still to be discovered. 34615 in 2006-2007 i. Trend in Export Performance of SEZs The export from SEZs in the year 2003-2004 was Rs.1%. The exports from SEZ grew by 16.Performance Analysis The performance of SEZs is improving a lot as from the past. it grew at 39%. it grew at 92% from the previous year. The most important fact to notice is that the export from SEZs grew by 381% from 2003-2004 to 2007-2008. 13854 Crore and in the 2004-2005. Interestingly. it went up to Rs. Fortune Institute of International Business Page 42 .e. As Indian SEZ policy has been introduced in 2001. In the same period the total exports in India grew by 12.
16%.Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 Export (Rs.7% 52% 92% Contribution of SEZs in Country’s Total Export In the year 2003 – 2004. the contribution of SEZs in country’s total export was 4.72% and in the next year. Year Export from Total Export Contribution of Page 43 Fortune Institute of International Business . it just increased to 4. The biggest increment was seen in the 2007 – 2008.88%. which shows that the contributions of SEZs are increasing. Crore) 13854 18314 22840 34615 66638 Growth Rate(Over Previous Year) 39% 32% 24. In that year the contributions of SEZs were around 10.
52 SEZs (%) 4.13 1389.78 573.22 168.05 10.87 3.48 66637.88 5.46 3846.33 657.682 Employment Generation The total direct employment in Special Economic Zones as of 30th June 2008 is 349203 lakh persons. Crore) 293366.16 Sector-wise Breakup of Physical Exports from SEZs Sector Export in 200607 Biotech Computer/ Electronic Software Electronics Hardware Electronics Engineering Gems and Jewellery Chemicals & Pharmaceuticals Handicrafts Plastic and Rubber Leather.08 ----------------133. Crore) 13854 18314 22840 34615 66638 (In Rs.53 456417.29 6.68 23006.48 849.05 30.47 22.065 1423.66 237.61 18. Crore) 159.01 20866. The total incremental employment generated in SEZs since Feb.327 518. 2006 is 214499 Fortune Institute of International Business Page 44 .58 126. Crore) 33.02 24 645. Footwear and Sports Good Ceramics Food and Agro Industry Non-Conventional Energy Trading and Service Textile and Garments Tobacco related Products Misc TOTAL (In Rs.26 655863.45 3985.72 4.97 1316.71 1651..89 25358.45 Export in 200708 (In Rs.0 6.49 393.84 1106.4 1854.17 16068.74 375339.SEZs 2003 – 2004 2004 – 2005 2005 – 2006 2006 – 2007 2007 – 2008 (In Rs.342 0.86 571779.17 4701.26 11121.
3701. 77058 crore is the incremental investment since Feb.. 2006.persons. Private Investment in Special Economic Zones The total private investment in Special Economic Zones as of 30th June 2008 is Rs.91 crore whereas Rs. 2005 is Rs. 4043. 81093 crore out of which Rs. whereas 48988 persons is the direct employment in private/ state government SEZs which came into force prior to SEZ Act 2005 and 100885 persons are employed in notified SEZs. 199330 persons is the direct employment in 7 SEZs established by the Central Government. Comparative study – India and China SEZs in China Fortune Institute of International Business Page 45 .28 crore is the investment in 7 SEZs established by the Central Government. 73348 crore and the investment in private/ state government SEZs which came into force prior to SEZ Act. The investment in notified SEZs is Rs.
personnel. economic. to cleanse the Maoist influence in Guangdong. Between late 1978 and late 1980. Fortune Institute of International Business Page 46 . Finally. had open-minded local leaders and population who would be receptive to opening up and commerce. national reformists headed by Deng shrewdly staffed Guangdong with committed liberals and experienced politicians for distinct purposes. These provinces had a long recent history of foreign economic contact and domestic commerce. the two provinces. they picked the provinces and areas with the strongest local political. and future tax revenues in return for significant tax concessions at start-up of the operations and over a number of years. and policy arrangements. First. It’s prudent choice of location. Current SEZ's are located in: • • • • • Guangdong Province Fujian Province Hainan Province Hunchun Pudong Development Zone(Shanghai) Lessons from China’s SEZs China’s opening has not been easy. Between the two provinces that hosted the earliest SEZs. They are not unlike SEZs in other part of the world. an outspoken and liberal veteran. Deng sent Xi Zhongxun. bringing much need jobs. a premium geographic location and the best external economic links to start the reform experiment. local reform initiatives and leadership helped ensure the success of these SEZs. Both provinces had a large number of families whose relatives lived and worked overseas. They made careful location. technical knowledge. They also wanted to sum up useful lessons from these experiments. it would encourage other provinces to follow suit. Chinese economic reformers’ key political challenge in setting up SEZs was to engineer a successful start of reform in localities.Special Economic Zones (SEZ's) are development zones established by the PRC to encourage foreign investment in China. As the cleanup mission ended. They understood that if a major area or SEZ conducting experimental reforms succeeded. especially Guangdong. Guangdong was close to Hong Kong and Fujian to Taiwan. Second. Deng replaced Xi with the moderate. careful personnel and economic arrangements. and social backings.
These clever arrangements helped reforms and the Open Policy to take off in Guangdong and Shenzhen. decisive. These “particularistic concessions” provided policy space. Until April 1984 the four SEZs enjoyed the exclusive right to host foreign enterprises. and insurance for reform experiments in the two provinces. various preferential treatments for foreign enterprises. Fourth. and circulation of goods. fiscal incentives. a Guangdong native with high seniority in the province and strong ties with Premier Zhao. Similarly. also picked able reformists to lead the major SEZs. foreign capital. with the backing of national reformists. A bold and liberal leader. whereas Shenzhen emerged as the most dynamic metropolis with the highest per capita GDP and the largest foreign trade volume in China. It also wisely used bank loans to rapidly develop urban infrastructure in the largely rural city. His determined. Third. and free market prices. This set off their demands for their own SEZs and reform experiments. briefly served as the leader of Shenzhen SEZ. local initiatives helped stimulate local growth in SEZs. Liang Guangda. It improved governmental efficiency.consultative. Ren stimulated and protected reform initiatives in Guangdong until 1985. an open-minded provincial party secretary. In fifteen years. and domestic entrepreneurs to the SEZ. reformed political and economic institutions. The meteoric rise of Guangdong and Shenzhen demonstrated to all the other provinces that reform and opening did pay off. and helped foreign investors to make high profits. Through these measures the city attracted talent. Guangdong became the largest provincial economy. SEZs enjoyed a low fiscal remittance rate and unparalleled leeway in reforming systems of prices. Liang Xiang. As stated. yet politically skilful Ren Zhongyi. succeeded him. the central government also granted Guangdong and Fujian privileges in economic reform. also headed the Zhuhai SEZ. and generated rapid development. Economic reforms thus spread across the provinces. The Guangdong leaders. effective and brisk working style proved critical in rapidly transforming Shenzhen from a rural backwater into a thriving industrial and trading base and a premier laboratory for the earliest reform in the nation. the Shenzhen authority eagerly attracted talented people by offering high pay and good welfare. Wu Nansheng. employment. Fortune Institute of International Business Page 47 . from the early years on.
In promoting young leaders. the SEZ Development Company. while providing considerable economic incentives and leeway for local authorities to press ahead with experimentation in local reform and development.The Chinese Communist Party also used its power of appointing officials as a lever to push forth reforms. the SEZ and non-SEZ portion of Shenzhen were clearly distinguished. Second. The party’s nomenclature was turned into a powerful growth machine. Given the institutional structure. In November both cities were made municipalities under the direct jurisdiction of the province (MDJP). opening. The office was led by Premier Zhao and Vice Premier Gu Mu. local officials invested their energy in attracting foreign and domestic investment in order to generate economic and fiscal growth. This centralized and efficient Fortune Institute of International Business Page 48 . Third. By early 1982 the number of party and governmental officials in the zones was cut by 65 percent and the number of vice-mayors dropped from seven to three. the Chinese did a good job of sustaining national institutional linkages with SEZs. In June 1982. could communicate directly with the office while also earning the support of leaders of their home province. the government of Shenzhen was downsized and its structure and organization streamlined. Deng favoured those who had a good record of stimulating reform and generating economic development. along with other SEZs. Institutional Arrangements and Local Initiatives in SEZs Only proper arrangements could motivate local efforts to promote reform. These changes installed the predominant control of the mayor (who was also the party secretary) over the course of the city’s development. As a result. Hence Shenzhen. the State Council under Zhao’s leadership created a Special Economic Zones Affairs Office (SEZAO). During 1981 and 1982. Administrative Arrangements In September 1979 the Guangdong Party Committee decided to upgrade the administrative rank of Shenzhen and Zhuhai from counties to cities separately listed in the province’s economic planning. National administrative and economic arrangements helped lay an institutional foundation for the operation and development of SEZs. and development. oversized bureaucracy was trimmed. three new offices responsible for economic policies in the SEZ were placed under the jurisdiction of the Mayor’s Office: the General Office of the city government. and the SEZ Construction Company. First.
This was not surprising as the city was largely rural when an area inside the city was designated as the first SEZ in China. Second.5 percent in Hong Kong. For example. according to national and provincial provisions. and the share of college-educated cadres rose from 8 percent to 21 percent. as well as a freer play of markets in SEZs. Meanwhile. SEZs had jurisdiction in approving much larger investment projects than non-zone localities. Third. Economic Arrangements SEZs enjoyed a number of special policies until April 1984. Fiscal autonomy generated tremendous fiscal incentives and exerted heavy pressure for Shenzhen to reform and develops. which was much needed for the newly established zone in its very early years. First. He sent head hunters around the nation to recruit qualified professionals and workers. In Shenzhen. To overcome the problem. SEZs were granted preferential fiscal arrangements. For example. prices and distribution of goods were regulated by the market within the SEZs. joint ventures and foreignowned enterprises were allowed in the SEZs. nor would the province and Beijing provide subsidies. generous wages. and easy urban residency to attract talent. SEZs enjoyed preferential treatment in tax and tariff reductions and exemptions. Local Initiatives in Shenzhen SEZ SEZs also undertook initiatives to prepare the zones for operation and for investors.economic decision process in the hand of local leaders paved the way for rapid formation and operation of the SEZ. the corporate income tax at the SEZs was set at a preferential rate of 15 percent. From 1979 to 1983. Shenzhen did not have to remit revenue to the national and provincial governments until 1989. the average age of cadres declined from 43 to 37. Fortune Institute of International Business Page 49 . Liang confronted a severe shortage in qualified talent and office floor space. but by central plans outside the zones. Finally. but needed special approval outside them. SEZs become the premier place in China for attracting FDI. the number of engineers grew from two to 732. Liang promised spacious apartments. Fourth. even lower than the 18. These privileges enabled investors to enjoy the lowest corporate income tax rates and tariffs on imports and exports.
the first foreign bank in China was set up in Shenzhen. and streamlined administrative approval procedures for foreign enterprises. Active recruitment allowed the number of construction workers to grow from several hundreds to 100. In the first couple of years of the SEZ. lowered wage standards. and charging rental on land use. water. The city carried out the nation’s first price reform in 1981. In the same year a survey of 148 China-foreign joint ventures and foreign owned enterprises found that 80 percent of them made a profit and that their profit rate exceeded 20 percent.000. It implemented the first labour contract system among all enterprises and public and social institutions in 1982. the wage reform also covered employees of governmental agencies and public institutions. The city also arranged for 20. investing in urban infrastructure such as roads. in 1985 China’s first foreign exchange redistribution centre opened there. mainly in processing. A few years later. power. the city had only been able to attract small and medium size foreign businesses. thereby attracting more foreign enterprises to the SEZ. The city solved the problem by borrowing bank loans. assembly. telephone. It also reinvested earnings and loans in new urban developmental projects. Shenzhen became the experimental zone with the earliest and boldest economic reforms in the nation. the governmental agency reduced taxes and land use fees. and sewage in new districts. It built two industrial districts as well as fifty-five streets of a total length of 100 kilometres. Shenzhen’s investment environment impressed Fortune Institute of International Business Page 50 . Liang also tried to expand the level of technology and the scale of production of foreign enterprises. In addition. In 1982. the city started to attract technologyand knowledge-intensive foreign businesses. and compensatory trade. These measures helped satisfy the thirst for floor space in the city.000 soldiers from the PLA Construction Corps to be demobilized and employed as construction workers in the city. Within four years. Shenzhen was short of funds necessary for building streets and urban infrastructure. More importantly. For this aim. Liang also tried to help foreign firms in Shenzhen SEZ reap high profits. In 1984. the city accomplished urban development worth 100 million Yuan with only 18 million Yuan of loans. Some forty-five Nationally-known construction firms set up branches in the city.Building office space was another top priority for the city. In 1983 the Shenzhen SEZ introduced social labour insurance for employees in labour contracts as well as a wage reform.
the actual foreign investment in the city grew from $15 million to $180 million. among the top tiers in the Chinese cities. rarely saw its foreign investment double on a yearto-year basis. and its GDP per capita of Y 59. the economy of Shenzhen grew rapidly.8 billion. In contrast. Shenzhen’s achievement in the early years stands up well against other export-processing zones (EPZs) in the region. as retail sales grew by 30 percent a year. Meanwhile. the city’s GDP reached Y342 billion.8 million in foreign investment and the Masan EPZ in South Korea $88.862 million Yuan. Fortune Institute of International Business Page 51 . and that of the SEZ by forty-six fold from 50 million Yuan to 2. bold and sound local initiatives.5 million. and its actual FDI amounted to $2.271 was the highest in China. and exports. Between 1979 and 1985 the gross value of industrial and agricultural output (GVIAO) of the city grew fifteen fold from 175 million Yuan to 2. In its first four years and by 1982. Success of Shenzhen and Other SEZs Favourable institutional setups. Thus the SEZ had become the predominant growth engine of Shenzhen’s economy. In this period the SEZ increased its share in the city’s GVIAO from 29 percent to 83 percent. This growth. was driven by three engines— investment.4 billion. Taiwan’s zones. Shenzhen attracted $234 million. as fixed assets grew at 35 percent a year. By 2004. the highest among the nation’s cities. In the first five years. the Bataan DPZ in the Philippines attracted $128. which were regarded as among the most successful in the world. and steadfast support from local and national leaders thus helped contribute to a rapid improvement in the economic conditions of SEZs. which grew 38 percent a year. As the favourable impression of the SEZ became known. The rapid development of Shenzhen continued in the following decades. the highest among the Chinese metropolises. Each year between 1980 and 2004. investors from fifty countries and areas other than Hong Kong also arrived in Shenzhen. the gross domestic product (GDP) of the city grew by 28 percent and per capita GDP by 14 percent. The investment in infrastructure in the city grew from 50 million Yuan in 1979 to 2. domestic consumption.a manager of a large Hong Kong power station company in 1982 as well as a Japanese delegation sent by the Japanese prime minister in 1984. with over 60 percent of the total from the SEZ. especially in Shenzhen. actual foreign investment in Shenzhen grew by eleven fold in five years. Its exports amounted to $77. Driven by miraculously fast expansion of investment.368 million Yuan.760 million Yuan in 1985.
In the following years.6 percent. was a key base for China’s opening. the sectoral composition. It is located close to Hong Kong and is connected to Hong Kong by rail. and only 12. respectively.8 percent of the total). Exports of Shenzhen grew from $500 million in 1985 to $26. 86. In this period exports and foreign investment of the three SEZs in Guangdong grew by about 33 fold and 166 fold. Hong Kong government and business also support close economic linkage with Guangdong.2 percent whereas the latter increased to 30.4 billion in 1998. In 1996. tourism (29. Their share in Guangdong’s total exports increased from 19.Guangdong Province. In the 1980s manufactured exports of the city were mostly low-tech and labour intensive.9 billion in 1998. Over the years. Shenzhen’s location and external trading environment is the most advantageous. exports of its three SEZs totalled $970 million.2 percent. Shenzhen has become the city with the largest exports in China. The amount grew to $32. The reasons are as follows.9 percent). the former SEZs and Foreign Investment in China 85 share declined to 69. pledged foreign investment was predominantly in real estate (40. Since 1992. as described. Second. investment into manufacturing soared. First.4 billion in 1998. and ownership of foreign investment in Shenzhen have also changed.6 percent of the foreign investment contracts remained in the secondary sector. By the end of 1991. As late as Fortune Institute of International Business Page 52 . 80 percent of the cumulative sum of foreign investment contracts went into manufacturing.5 times as large as the second-largest SEZ (Xiamen). The technical content of exports in Shenzhen has also improved over the decades. It grew to $28. Shenzhen has the largest area among the four SEZs—2. increasing its share in the three SEZs from 51.4 percent in 1985 to 44 percent in 1997. Actual utilized foreign investment of the three SEZs totalled $170 million in 1983.5 percent to 80. and secondarily industry (16. leaders of Shenzhen made the best efforts to improve the investment environment and attract FDI. and over 20 times as large as the smallest SEZ (Zhuhai). By 2004. with three of the four earliest SEZs. In 1981. an impressive record given the negligible amounts prior to the setup of the SEZs.4 percent went into the tertiary sector. Shenzhen has been the most successful. By 2001. Even though Xiamen is the closest to Taiwan among all Chinese cities.2 percent). the Taiwan government restricts economic integration with the mainland. the latter went up to 44 percent. In 1985. Among the first four SEZs. technical content. Third.
889 in 2004. Between 1991 and 2003. By 2004 they amounted to $30. As years pass. The change in the ownership of foreign investment is a natural outcome of foreign business.000 hectares) Private corporations Mostly fertile cultivated land Poor so far (In 1998.04 billion in foreign exchange) Page 53 Fortune Institute of International Business . By 2004. instead of joint management. In particular. the number of foreign enterprises by contract grew from 139 in 1983 to 16.8 percent of the value of the city’s manufactured exports was high-tech.6 billion and accounted for 51. Foreign ownership or joint equity. and next wholly foreign-owned. foreign enterprises were primarily wholly foreign-owned and secondarily joint equity. and only a minority of them assumed the form of joint management.67 billion on customs duties was given to earn $1. a waiver of $1.2 percent of the manufactured exports. The change in the sectoral composition of foreign investment and technological composition of exports result both from natural upgrading of foreign investment and government encouragement. high-tech manufactured exports grew by 34 percent a year. Comparison of SEZ of China and India China Number When Started Democratic DecisionMaking? Size Ownership Kind of Land Exports 7 1980 Lot of discussion and debate preceded setting up of SEZs Very large (Shenzhen: 32. foreign investors usually seek to obtain a larger say in the operation and management of their ventures.1991. Parliament passed the law easily Small (3 – 14. Meanwhile. secondarily joint management.700 hectares) State Mostly coastal wasteland Very good (Shenzhen: Net exports 2006: $35 billion) Above 500 Mostly after 1991 India No discussion. becomes a more-preferred form of enterprise. only 2. In 1983 foreign enterprises assumed the form of primarily joint equity. the share of electronics and information products in high-tech manufactured exports grew from 53 percent in 1997 to 98 percent in 2003.
Employment Tax Revenue Collections Overall Economic Success Ease of Land Acquisition
Substantial number of low-paid jobs Only selective tax incentives provided Shenzhen very successful, but at least 2 SEZs have failed Land battles in some areas still
Very limited so far: 100,650 in all the SEZs till March 2005 Across-the-board tax holiday given to companies Somewhat Successful Bloody, bitter resistance
Comparison of SEZ policies of China and India
China India Very big. Typically in hundreds Even 10 hectares will do. of hectares. Location Well thought out and located only Anywhere. No restriction. on coasts. To facilitate exports and imports easily. Labour laws Relaxed in the SEZs. Flexibility is totally absent. Policy regime Experimentation of liberal Based on fiscal sops. policies in the specified areas while insulating them from the rest of the country. Investors Basically foreigners who are Basically locals. Not foreign wooed with sops and promise of investor driven; which should stability in policy. have been the case. Commencement In 1979 In 1969 with the export processing zone concept. But failed to muster courage in giving these regions foreign territory status till the year 2000 when Murasoli Maran announced the SEZ policy. Number Only six: Shenzhen, Zhuhai, Anywhere and any number. So far Shantou, Xiamen, Hainan and 94 operational. About 500 Pudong received approvals. Tax holidays Present. Longer and steeper than in China. Size Issue
On the basis of economic theory and history we can conclude that absorption of agricultural labour is necessary for sustained economic development of a developing country. “Special Economic Zones” constitute a medium for such sustenance. However, the SEZ policy in India Fortune Institute of International Business Page 54
has suffered from permission being granted for far too many sub-optimized SEZs. The present ceiling on SEZ size at 5000 hectares does not facilitate the full exploitation of economies of scale in service oriented SEZs and should be scrapped. There are other ways of minimizing peasant unrest during the process of land acquisition for SEZ development. Employment generation, both direct and indirect, has thus far been the most important channel, through which SEZs have impacted on human development and poverty reduction in India. India’s SEZs are not dominated by assembly type operations. ‘Value addition’ component and hence employment generation potential of zones is rather large. Much of this will be a net addition to employment as investment relocation/diversion in export oriented production is likely to be limited. Therefore, There should be a vision in the design, establishment and operations of the SEZ. It is necessary to develop zones as industrial clusters of specific products. The backward linkages would benefit the growth of accessories units as well. The zones should specialise in terms of economic activities depending on the availability of human capital, resources and infrastructure in the region. They thus tend to transform into horizontally-integrated industrial clusters, which include industries that might share a common market for the end products, use a common technology or labor force skills, or require similar natural resources. It seems, therefore, that it would be desirable to develop zones as industrial clusters of specific products. This may encourage downstream industries also. Zones in the long run need to give way to industrial clusters of horizontally and vertically integrated industries in general, high tech industries in particular. This would not only help to jump-start the manufacturing processes but would also improve export competitiveness with greater returns. At present, there is no autonomous authority responsible for the development of zones and for providing single window clearances in India. The zone administration functions as a government department office. Ideally, the SEZs should be managed by autonomous authorities, which should be constituted under specific Acts and should be assigned the responsibilities to promote the zones.
Fortune Institute of International Business
The key elements for the success of SEZs are: Political will, better infrastructure, zero bureaucratic hassles, relaxed labour regulations, better fiscal incentives, and domestic and international linkages.
http://www.sezindia.nic.in/ http://www.nasscom.org/Nasscom/templates/NormalPage.aspx?id=6157 Fortune Institute of International Business Page 56
hku.cmdkerala.asp?id=1 http://sezindia.pdf http://www.thehindubusinessline.com/2007/11/27/stories/2007112750070900.com/article/pressRelease/idUS112860+26-Jun-2009+BW20090626 Annexure SWOT Analysis of Indian SEZs Strengths Fortune Institute of International Business Page 57 .in/HTMLS/SEZ%20Act.%202005.infodriveindia.reuters.com.indiaenvironmentportal.in/tradestats/indiatrade.com/Exim/Special_Economic_Zone_SEZ/Ch_7_SEZ_Act_2005.org.nic.http://commerce.hk/hkjo/view/50/5000243.in/content/special-economic-zones-promiseperformance-and-pending-issues http://www.htm http://www.bt.aspx http://sez.in/ http://commerce.pdf http://www.infodriveindia.nic.net/downloads/Presentation.icrindia.nic.com/Exim/Special_Economic_Zone_SEZ/Default.org/ http://www.ppt http://sunzi1.a spx http://www.lib.bn/en/spotlight/2009/08/15/special_economic_zones_indias_new_growth _hubs http://www.
High cost of capital. Unlike India’s Export Processing Zones. Realistically establish competitive advantages in SEZs. giving SEZ’s no advantages on labour flexibility or addressing labour indiscipline (a. A large and growing domestic market. and environment and pollution control. will double up as the Labour Commissioner. as an insurance against downturns in international markets. Without such integration. which could cut the time taken to settle labour disputes). single window clearance schemes for SEZs cannot operate. Relatively low labour costs. Weaknesses Indian SEZs will have to comply with all Indian labour laws. The ability to sell in the DTA would be an important consideration for many Exportoriented units/EPZ/SEZ units. Tap the advantages of WTO/increase India’s small share of world trade. India’s large English speaking workforce. Page 58 Fortune Institute of International Business . A large NRI base who have traditionally invested less in Greenfield development in India. Familiarity with Western concepts of business practices. Inadequate institutional support: he continuing lack of integration of the various departments involved such as customs. Opportunities To use SEZs to catalyse infrastructure development. who is appointed by the Ministry. ray of hope may be that the Development Commissioner of the zone. An established legal redress system. sales tax. which can sell up to 50 per cent of their exports in the Domestic Tariff Area (DTA) at half the rates of customs duties. Lower the high transaction /behind the border costs to exporters. SEZ manufactures can sell in DTA only on payment of full duties. Poor infrastructure.
But with opposing interests (reducing tariffs to enhance trade for DGFT. Threats o There are signs of an increasing rejection rate for proposals to establish SEZs. especially those involved in export promotion or fiscal policy. This could be linked to the difficulty in reaching agreement between key ministries involved. maximising tariff revenue for customs authorities). Annexure – 2 Fortune Institute of International Business Page 59 . To increase investments in core strength areas like IT and software products and services. “reservations” for socially disadvantaged groups in private sector jobs). This could lead to waning business confidence in SEZs. different tax treatment for goods specifically for export could give rise to charges of dumping) o The performance of SEZs will be monitored by a committee headed by the Development Commissioner and consisting of Director General of Foreign Trade (DGFT) officials and customs authorities will monitor the performance of SEZs. how will these 'natural adversaries' help deliver this mandate? o Prospect of even more restrictive labour laws being introduced (eg. o Sops provided to the units in the SEZ’s could be disputed in the WTO – (eg.
Annexure – 3 Fortune Institute of International Business Page 60 .
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Annexure – 4 Fortune Institute of International Business Page 66 .
Annexure – 5 Sector Wise Distribution of SEZs Fortune Institute of International Business Page 67 .
Annexure – 6 State Wise Distribution of SEZs Fortune Institute of International Business Page 68 .
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