Trade Policy & Import Management

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

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Fortune Institute of International Business

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 The Key Issues  Performance Analysis  Comparative Study – India & China  Conclusion  Bibliography  Annexure

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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

the government is taking concrete steps to transform current SEZs into new age Indian factories. being islands of opportunity. tax breaks and hassle-free environment are much needed to attract investors in the infrastructure and industrial development. the three pillars of the SEZ Act are fiscal incentives. and world-class infrastructure. However. Attractiveness of these SEZs would depend on products that have low import tariff and high volume products that have a domestic and international market. 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. SEZs. They are said to be the engine of the economic growth. In the latest SEZ Bill. Not only are the big industrial houses and real estate developers taking part. The act facilitates single-window clearance. state governments have been Fortune Institute of International Business Page 4 . announced in May 2005. is a right move in this direction. With Asian economies competing for a pie in the international capital flows. The Indian SEZ Act. regulatory freedom. Learning lessons from the past failures of SEZs. India is gearing up with the new act that aims at attracting FDI and domestic investments. timely disposal of applications. and tax break for 15 years (instead of the previous 10 years). government has not talked about the much awaited flexible labor laws. FDI in SEZs is set to rise rapidly once the development completes.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. but state government bodies are also a part in the current SEZs wave. Like anywhere else in the world. are offering business opportunity across the sectors. to corner benefits of new business opportunities.

it needs to set-up the right infrastructure. If SEZs are to bring desired benefits to the country. global textiles and auto component firms could set-up their facilities in Indian SEZs. Indian SEZs should aim at emulating favorable investment destinations such as China. Indian SEZs can attract investments from foreign SEZs too. Competition is heating up among states to attract investments into SEZs. Fortune Institute of International Business Page 5 . to pave way for building competitive advantages gradually. Malaysia. As part of the de-risking strategies. even after the end of tax breaks. Singapore.granted permission to adopt flexible labor laws. if necessary. It will help in retaining the industries. and Dubai.

The concept of SEZs -. forestry.Special Economic Zones -. Many economies including India have used the concept of SEZ in one or the other form to promote exports and boost economic growth. With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances. At the same time the government also claims to follow a policy of economic growth that enhances both equity and efficiency. did spur the flow of FDI and FII investments into Indian infra structure and manufacture industry. SEZs in India seek to promote the value addition component in exports. to attract domestic and foreign investment and also for the opening up of the economy. and an unstable fiscal regime and with a view to attract larger foreign investments in India. the Special Economic Fortune Institute of International Business Page 6 . 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. Growth of employment opportunities are growing. SEZs are viewed as instruments to enhance the acceptability and the credibility of the transformation policies. food security. absence of world-class infrastructure. India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports.Introduction Special Economic Zones (SEZs) have been established in many countries as testing grounds for the implementation of liberal market economy principles. complemented by new policies regarding exports. The Indian experiment began in 1965. to generate employment as well as to mobilize foreign exchange. with Asia's first EPZ set up in Kandla in 1965. 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). Some of the economic issues raised about the SEZ policy have been improper usage of arable land. FDI etc to attract investments and boost special engines of rapid economic prosperity and all round societal development. Despite the opposition the government is determined to go ahead with rapid creation of new SEZs. and small scale industries. In light of these issues. Markets showed growth and the economy was buoyant. 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. loss of low skilled jobs in agriculture.

02. This policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package. 2005.2000 to 09. leading to generation of additional economic activity and creation of employment opportunities. both at the Centre and the State level.Zones (SEZs) Policy was announced in April 2000.11. providing for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments. came into effect on 10th February. 2006. 2005. After extensive consultations. the SEZ Act. SEZs in India functioned from 1. in infrastructure and productive capacity. 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 Special Economic Zones Act. 2005.2006 under the provisions of the Foreign Trade Policy and fiscal incentives were made effective through the provisions of relevant statutes. It is expected that this will trigger a large flow of foreign and domestic investment in SEZs. with the minimum possible regulations. 2005 which received Presidential assent on the 23rd of June. Around 800 suggestions were received on the draft rules. 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. supported by SEZ Rules. was passed by Parliament in May. Fortune Institute of International Business Page 7 . a comprehensive draft SEZ Bill prepared after extensive discussions with the stakeholders. The draft SEZ Rules were widely discussed and put on the website of the Department of Commerce offering suggestions/comments.

economic regulations and administrative frameworks. It can be located anywhere. Incentives – Duty-free imports. Philippines (Subic Bay). export processing zone (EPZ). municipality) and is more than 100 sq km in size. geographically delimited ‘enclaves’ within their sovereign territories. domestic sales are permitted but foreign markets and exports are thrust areas. benefits offered. enterprise zone. Depending upon their specific purposes. deregulated economic conditions for encouraging private enterprise. 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.g. Ukraine (Donetsk) Fortune Institute of International Business Page 8 . These zones are distinguished from the rest of the land in the terms of their specific administrative authority. Being ‘foreign’ also implies that zones are different customs areas.Economic Zones Countries all over the world create fenced-in. the zones are called industrial zones (or estate). free trade zone (FTZ). province. liberal labour laws and limited foreign exchange controls. special economic zone (SEZ) or free economic zone (FEZ). Example – China (Shenzhen). India (Surat). Objectives – Integrated development. It is resident Population. includes all industries and services. Poland (Kotawicka). Such enclaves have become known as ‘zones’ in economic and business parlances. lower business taxes compared with other parts of the country. 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. benefits enjoyed by industries located in them and availability of better business facilities.

usually less than 200 hectares in size. export profits are tax exempted. Fortune Institute of International Business Page 9 . export profits are tax exempted. Incentives – Duty free imports are not allowed. Jamaica (Kingston). infrastructure development can also be a priority. The main incentives include zoning relief. However. Objectives – Increasing of manufacturing exports. Activities – Producing for domestic market as well as exports. broader range of products usually includes light industry and manufacturing. Incentives – Duty-free imports of imported inputs particularly raw materials and capital goods. US. usually targeted at small and medium manufacturing enterprises. Example – Bulgaria (Rakovski). Activities – Manufacturing. 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. But might be for promoting local area development also through private participation. liberal foreign exchange rules and labour laws. Example – Bangladesh (Chittagong). Incentives – Duty-free imports of imported inputs particularly raw materials and capital goods. The size is usually up to 100 hectares. Objectives – They are meant for urban area renewal (US). Objectives – Industrial development. labour laws are flexible. liberal foreign exchange rules and labour laws. trading and various other commercial activities. Example – Japan (Kobe). China (Xinzhuang in Shanghai) Enterprise Zone Enterprise zone is usually found in inner city areas. reduced local taxes and relief from licensing. Activities – Main emphasis on exports with units having minimum export obligations. Vietnam (Quang Phu).Export Processing Zone / Free Trade Zone (EPZ/FTZ) The export processing zone or free trade zone is an enclave or park. It might be an entire city as well. UK (Tyne Riverside). restricted sales in domestic markets. India (Kandla).

Its size is usually less than 50 hectares. Activities – Data processing. software development and computer graphics. easy access to telecom and other communication services and labour laws are flexible. Objectives – Development of information processing and IT. Example – IT parks in India. distribution and transshipment. UAE (Dubai Technology.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. Example – Bahrain. Activities – Financial services. Incentives – Relief from local taxes. UAE (Dubai – Jabel Ali Free Zone). UAE (Dubai). packaging. Activities – Warehousing. US (Miami Free Zone) Fortune Institute of International Business Page 10 . Currency laws are liberal and there are no restrictions on profit repatriation. Objectives – Facilitate exports and imports of goods. Incentives – Duty-free imports for re-export tax relief on reinvested profits and no restriction on domestic sales. 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. Turkey Commercial Free Zone Commercial free zone is usually meant for warehousing and is located close to air/sea ports. Objectives – Developing as a financial hub. Example – Iran (Kish Island).

3. the regional distributions of zones were as follows. During the financial year 2005-2006. East and South-East) Transition Economies North America Central America and Mexico South America Caribbean Pacific Europe TOTAL Region EPZ/FTZ (Nos. 11. Morocco (Tangier). 2. 5. 6. 4.) 49 13 3 10 631 332 Not Available 170 Not Available 160 13 1 1382 Fortune Institute of International Business Page 11 . It can be part of a city or more commonly part of international airports. 8. Incentives – No customs duties. 12. 10. Objectives – Facilitate export and import. 7. Mauritius (Port Louis). 9. There are several new zones coming up in different parts of the world. labour laws are very flexible and utilities are deregulated. Example – South Korea (Incheon). No. Japan (Nagasaki). the number of zones at any point of time keeps changing. Venezuela (Isla Margarita) Regional Distribution of Zones Zones abound all over the world in various forms and classification. Activities – All activities are permitted. 1. So. S.Fee Port / Zone Free port/zone is an island/province city or even a country. North Africa Sub-Saharan Africa Indian Ocean Middle East Asia (South. The areas have resident population.) 18 77 1 41 173 69 272 72 43 89 3 45 903 Other Zones (Nos.

Iran. Jordan. the goal of a structure is to increase foreign direct investment by foreign investors. including Brazil. Urban Enterprise Zones and others. the Aqaba Special Economic Zone Authority in Jordan. Shenzhen. Sricity Multi product SEZ and Mundra SEZ in India and According to the World Bank estimates. Usually. Ukraine. Poland. The category “SEZ” covers a broad range of more specific zone types. Export Processing Zones (EPZ). Free Zones (FZ). typically an international business or a multinational corporation (MNC). SEZs are often Fortune Institute of International Business Page 12 . Peru has been slated to become a “Zone Economica” BY ITS President Alan Garcia. Following the Chinese examples. public regulator). as of 2007 there are more than 3000 projects taking place in SEZs in 120 countries. The most prominent examples of this layered are approach are Subic Bay Freeport Zone in the Philippines. United Arab Emirates. private developer. There is empirical evidence to show the positive influence of SEZs in reducing the gap between developing and developed countries. Pakistan. SEZs have been implemented using a variety of institutional structures across the world ranging from fully public (government operator. the Philippines. The most successful Special Economic Zone in China. Kazakhstan. Industrial Estates (IE). In many cases. Special Economic Zones have been established in several countries. government developer. Republic of Korea. Russia. including Free Trade Zones (FTZ). public sector operators and developers act as quasi-government agencies in that they have pseudo-corporate institutional structure and have a budgetary autonomy. Free Ports.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. Special Economic Zones were founded by the central government under Deng Xiaoping in the early 1980s. government regulator) to fully private (private operator. has developed from a small village into a city with a population over 10 million within 20 years. Currently. A single SEZ can contain multiple ‘specific’ zones within its boundaries. 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.  Objectives. Puno.

Russia. export processing zones (EPZs).  Large zones with a resident population such as Chinese Special Economic Zones or new cities. China and Brazil). soft loans. 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. free trade zones. equity investment. Duty-free treatment is accorded items that are reexported and duty payment is deferred on items sold in the U. market . bond issues. USG Special Economic Zone (Poland) An administratively separate part of Polish territory. nor isolated in any physical way. 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 . 1995 Types of SEZ Wide Area Zone The focus of Wide Area Zone is on scale predominantly in government domain. industrial tourist/recreational.S. These procedures allow domestic activity involving foreign items to take place prior to formal customs entry. in which the public sector provides some level of support (provision of off-site infrastructure.Dept of Commerce. and tourist/recreational centers . commercial.developed under a public-private partnership arrangement.WEPZA Foreign Trade Zone (USA) A designated site licensed by the Foreign-Trade Zones (FTZ) Board at which special customs procedures may be used.Philippines SEZ Act. banking. nor fenced. A SEZ offers preferential tax conditions. investment and financial centers. the zones are neither ex-territorial.  12 countries have adopted this Wide Area Zone concept (Notably Singapore. in which a more favourable business climate is created. etc) to enable a private sector developer to obtain a reasonable rate of return on the project (typically 10-20% depending on risk levels). may contain any or all of the following: industrial estates (IEs). However. Fortune Institute of International Business Page 13 .

 133 countries have adopted the Small Area Zone Concept. etc.  Zones that are generally smaller than 1000 Ha.  Zones that are created to support the needs of a specific industry such as banking.  17 countries have experimented with Industry Specific Zone Concept (Notably USA. size of investment. electronics. Taiwan. jewellery. Companies can be located anywhere. Industry Specific Zones The focus of Industry Specific Zones is to create or exploit industry competitiveness. France and Germany) Performance Specific Zones  Zones that admit only investors that meet certain performance criteria such as degree of exports. level of technology. Companies invested in zone may be located anywhere and receive the benefits. normally surrounded by a fence. etc.Small Area Zone The focus of small area zone is on private participation. Hong Kong. Fortune Institute of International Business Page 14 . oil and gas. tourism. textiles.  Only 4 countries have adopted Performance Specific Zone concept (notably Mexico and Mauritius). Japan.

China’s first Special Economic Zones. Jebel Ali Free Zone. set up by royal decree on 100 sq km.History and Evolution of SEZ 1947 Puerto Rico. employing 40 million people. Puerto Rico. US seeks to industrialize.  In 1947. attracting investments from the US mainland and hefty tax breaks. The WEPZA estimates >1000 zones worldwide. Shantou and Xiamenm set up. Passage of India’s SEZ Act. via industrial parks focused on import substitution. 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. across 120 countries. Zhuhai. Taiwan designated as for new EPZ. India announces its SEZ policy – focus on export promotion. 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 . 1960 1965 1966 1980 1985 2000 2005 Today Puerto Rico World’s first Special Economic Zone came up in Puerto Rico in 1947. UAE. Asia’s first EPZ created at Kandla. Shenzhen. The world’s first EPZ is set up near Shannon Airport. Ireland – duty free production zone for high value-added goods. decided to attract firms from the mainland USA to invest  In 1951. Kaohsiung.

Mauritus: 1970s & 1980s . marking. the Chinese success SEZ – International Experiences The aim of creating special economic zones (SEZ) is to promote economic development in depressed regions.UAE . Kaohsiung. SEZ can be used to facilitate the process of attracting modern technologies into the national economy. These areas are used for storing and primary processing of imported commodities (packaging. Investors usually receive custom and tax privileges. Access to higher education went up from 2% to 60% in 40 years More notable examples are . Fortune Institute of International Business Page 16 .EPZA. Porto Franco) ports. SEZ are divided into the following groups.). business incubators).g.Mexico: One million jobs in 10 years in “Maquiladoras” . according to their economic specialization:  Free Trade Zones: Such SEZ are established to ensure free goods turnover and develop customs free trade.Shannon. expand exports. rights for simplified registration and customs procedures.. Such zones include both international and free (e.  Technological Zones: These SEZ include areas where domestic or foreign firms conducting research and development or innovative activities are concentrated (techno parks. assembling. etc.Dubai . Taiwan: 1960s . and right for priority use of the SEZ infrastructure. Commonly.Korea .And of course.Singapore . and create new job opportunities. Ireland: 1960 . promote competitiveness of goods and services. Creation and Operation of SEZ in the World SEZ are established through granting privileges to companies investing in particular activities in specific regions.

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.  Industrial Zone: These SEZ include areas where customs and tax privileges are granted to industrial companies producing export or import substituting products. for development of priority sectors In creating SEZ. One sector of specialisation is chosen in each zone (except for combination zones). Fortune Institute of International Business Page 17 . food. Mostly. offshore. and wood processing industries. Eastern European countries.  Combination Zones: These zones. Brazil. governments usually seek to attract foreign investment. investments are channelled into electronics. combine the features of the previous types of SEZ (common in China. with broad specialisation. where output is oriented at the final consumer and has high added value. and CIS). light. and recreation zones). including foreign one. 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.

social. namely: a. 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. export oriented. International experience indicates that SEZ are not always effective. and 10 research and development zones were established. Poor Selection of SEZ Location – Area with underdeveloped infrastructure. insufficient amounts of natural and labour resources. and privilege abuse for money laundering purposes 2. and 2. 14 open cities. environmental. in China 5 combination zones. 3. if it is properly planned. and other criteria. Moreover. experts use economic. and free trade zones). Unstable and non transparent legislative regulation of SEZ. corruption. In the Philippines. These zones generate almost 40% of total exports and show an annual industrial production growth of 70%. b. resulting in low levels of investment. this factor is very important for countries establishing SEZ for the first time and having no experience in their management. Malaysia. Improperly Determined Zone Size – For instance. Fortune Institute of International Business Page 18 . In this case.000 jobs). Improper planning of SEZ.8 times increase in exports. however. During 1994–1999. and Singapore large areas of SEZ turned to be the main source of industrial development. leading to unjustified expansion of privileges for practically all activities in the zone. in China. namely: 1. 19 SEZ were introduced (including industrial. This is mainly caused by incoherent government policy. tourist recreation. organisation of proper management in these zones is quite complicated. large zones require enormous initial investment into developing their infrastructure. For example. SEZ is not attractive for investors.In order to evaluate SEZ performance. these zones achieved almost 5.7 times increase in employment (388. Lack of strict requirements concerning SEZ specialisation. Operation of SEZ can give positive results. or insufficiently large market.

In Mauritius. SEZ performance was poor. In India. improper planning was the source of the SEZ not accomplishing its predetermined objectives. Thus. the SEZ were given too many objectives. Fortune Institute of International Business Page 19 . consequently privileges were extended to almost all activities in the zones. expenditures on the development of SEZ infrastructure ($15 million) significantly exceeded the amount of investment attracted ($60 thousand). In Liberia.

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. 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. In terms of purchasing power parity (PPP). China will have the world’s largest economy. even today India’s GDP is already the third largest in the world after the U. and India. followed by the U. By the year 2032.S. However. Europe and the rest of the industrialized world. adult literacy rates. quality of infrastructure endowment and volume of foreign trade and investment. other parts have the potential to grow as fast as China or other East Asian economies. public education and research institutions coupled with various forms of collaboration between Indian and foreign partners. Fortune Institute of International Business Page 20 . There is considerable scope for more effective absorption of existing knowledge by expansion of foreign investments and trade. While much of the country is likely to remain poor and industrially backward. The Indian economy is expected to grow at a rapid rate of 6–10 percent between 2007 and 2012 and beyond. It also increases the need for proper knowledge about India’s corporate environment – its strengths. constraints and the implications for Sweden. It lags behind China and other emerging East Asian economies in key indicators such as per capita income. and China.SEZ in India India is predicted to become one of the world’s leading economic powers. but it accounts for less than two percent of the global GDP and only one percent of world trade. This poses new challenges for international firms and others willing to take advantage of India’s development. building effective capacity among Indian corporations. India’s share of the world’s population is 17 percent.S.

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.76 Crore  Operational SEZs are 98 as on 30th June. km 1620388 sq.122% of the total Argi land in India.5%) Total area for the proposed SEZ (FA + IP) = 1985 sq. 114640. km  Formal Approvals (FA) incl. + 12 State/Pvt. SEZs)  Number of valid In-Principle Approvals is 147 Land Requirements Ground Realities: Total Land in India Total Agri Land in India : : 2973190 sq.53 crore as on 30th June 2009  Total Employment is 387439 persons as on 31st March 2009  Total Exports in 2008-2009 was Rs. Land Area  Notified SEZs : 39144 ha 73191 ha 125263 ha 1985 sq. 42501. km which would not be more than 0.066% of the total land area and not be more than 0. 99689 Crore  Exports in 2009-2010 as on 30th June 2009 is Rs. notified SEZs :  Valid In-Principle Approvals (IP)  Total Area for Proposed SEZs : :  Total investment is Rs. km (54. 2009  2301 Units approved in SEZs as on 30th June 2009 Fortune Institute of International Business Page 21 .

2005'. The economic reforms incorporated during the 1990s did not produce the desired results. the legal framework of Indian economy was not strong enough to prevent misuse of Indian markets by the foreign investors. 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. Several other Export Processing Zones were set up at various parts of India in the subsequent years. which was subsequently passed by Parliament in May 2005. A number of meetings were held across India for the formulation of . the lack of investor friendly environment in India prevented growth of Indian industry.'The Special Economic Zones Act. 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. in spite of implementation of liberal economic policy by the central government. rigid labor laws and poor physical infrastructural facilities were the main cause of deterioration of Foreign Direct Investments (FDI) inflow in to India. 2005 and SEZ Rules became effective on and from 10th February 2006. The SEZ Act. Furthermore. The SEZ policy of India was devised to act as a catalyst to promote the economic growth attained in the early 1990.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. Thus. the performance of these Export Processing Zones of India fell short of expectations. The Indian manufacturing sector witnessed a sudden dip in the overall growth of the industry. 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. Further. during the second-half of 1990s. lengthy administrative procedures. The History of SEZs in India suggests that red tape. Further. The SEZ Fortune Institute of International Business Page 22 . Thus. 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 lack of good Government of India economic policy and inefficient management soon became the detrimental factors for the success of these Export Processing Zones.

 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.e. India is the poorer cousin of China. the International Monetary Fund (IMF) reported India’s GDP to be US$3.63 trillion in terms of purchasing power parity.Act 2005 defines the key role for the State Governments in Export Promotion and creation of infrastructural facilities. As is well-known.400. A Single Window SEZ approval mechanism has been facilitated through a 19 member inter-ministerial SEZ Board of Approval or BOA. In 2005. Hence. India may have excelled in BPO. but when it comes to export manufacturing. the country is still wrestling with high poverty and unemployment rates. And the decision of the SEZ Board of Approval is binding and final. India’s Economic Potential and SEZ With a population of 1. India’s middle class consists of 300 million people and its expansion will raise consumption and make economic growth faster and more sustainable. 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. By some definitions. there is great interest within India to promote the exportoriented manufacturing sector through Special Economic Zones or SEZs.. India has developed a world-class information technology and business process outsourcing (“BPO”) sector that exports its services globally.1 billion and a GDP per capita of US$3. India is a rising power that no international company can afford to ignore. ranking fourth in the world. Yet for all of India’s achievements. Objectives of SEZ  The primary objective of SEZ is to facilitate exports.

Heavy investments are expected in sectors like IT.100.  A framework is being developed by creating special windows under existing rules and regulations of the Central Govt. Autocomponents. private or joint sector. boosting economic growth. Private sector is also invited to develop infrastructure facilities in the existing SEZs. the Indian SEZ policy provides for development of these zones in the government. Investment of the order of Rs. single window clearance for setting up of an SEZ. The SEZ Rules provides the simplification of procedures for development. Textiles.. Bio-technology. 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). no requirement for providing bank guarantees. Petro-chemicals. contract manufacturing for foreign principals with option to obtain sub-contracting permission at the initial approval stage. Pharma. This includes simplified compliance procedures and documentation with an emphasis on self certification. Fortune Institute of International Business Page 24 . for SEZ. exports and employment. Indian SEZ policy has following distinguishing features:  The zones are proposed to setup by private sector or by state Govt. etc.  State Governments have a lead role in the setting up of SEZ. and ImportExport of all items through personal baggage. in association with Private sector. setting up a unit in SEZs and clearance on matters relating to Central as well as State Governments. This is meant to offer equal opportunities to both Indian and international private developers. 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. 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. and State Govt. operation. and maintenance of the Special Economic Zones and for setting up and conducting business in SEZs.

             Fortune Institute of International Business Page 25 . At least 50 per cent of the area of multi-product or sector-specific SEZs must be used for export purposes. well-trained and skilled workforce. Exemption from Central Excise duties on procurement of capital goods. Exemption from industrial licensing requirements for items reserved for the smallscale-industries sector. etc. The rest can include malls. etc. Exemption from Central Sales Tax and Service Tax. the SEZ policy also provides enterprises and developers with a favorable and attractive range of incentives. Besides providing state-of the-art infrastructure and access to a large. except for activities included in the negative list. 100 per cent FDI is permitted for SEZ franchisees in providing basic telephone services in SEZs. Facility to realize and repatriate export proceeds within 12 months. hotels. No import license requirements. raw materials. 100 per cent FDI is permitted for all investments in SEZs. raw materials. In addition to the duty exemptions. No routine examinations by Customs for export and import cargo. spares. Profits allowed to be repatriated without any dividend-balancing requirement. and consumable spares. SEZ developers also enjoy a 10-year “tax holiday”. etc. Exemption from customs duties on the import of capital goods. Facilities in the SEZ may retain 100 per cent foreign-exchange receipts inv Exchange Earners’ Foreign Currency Accounts. The size of an SEZ varies depending on the nature of the SEZ. from the domestic market. No cap on foreign investment for small-scale-sector reserved items which are otherwise restricted. while goods coming from the SEZ into a DTA are treated as imports. educational institutions. Goods flowing into the SEZ area from a domestic tariff area (DTA) are treated as exports. 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. consumables. SEZ units are required to be positive net foreign-exchange earners and are not subject to any minimum value addition norms or export obligations.

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.

multiproduct or product specific. Land / built-up space in the processing area to be leased:  To entrepreneurs holding valid letters of approval.e. residential and business complexes. recreation and entertainment facilities. hospitals. Non – Processing Area – Non-processing area is intended to provide support facilities to SEZ processing area and may include educational institutions. Processing Area 2. Minimum processing area has been uniformly fixed depending upon the type of SEZ i. with lease period co-terminus with LOA Fortune Institute of International Business Page 27 . Facilities such as Free Trade & Warehousing Zones. International Financial Services Centre may be approved for establishment within the Processing Area. 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. hotels.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.

In such cases. the states need to ensure that some key facilities will be available for developers and units in the proposed zone. Then. They also provide certificated from state governments saying that land is free from encumbrances. public telephone booths.  To a person desiring to create infrastructure facilities for use by prospective Units SEZ Approval Process Developers and units have different approval processes. developers are handed over a letter of approval (LoA) by the Central Government. Developers have to fill the specific form for applying and submit it to the state government depending upon the location of the planned zone. So. etc. first aid centres. Thereafter. Within a month of receiving the formal go ahead from the BoA. The DC has the responsibility of demarcating processing and non-processing areas within zones. states have a maximum time of 45 days for forwarding the application with their recommendation to the board. the developers can also send their proposals directly to the Board. the developers move ahead for acquiring land. the developer needs to obtain the state government’s nod within six months. Armed with the LoA. The main work of the zone begins only after notification. either through the state government or otherwise. developers submit to the Central Government evidence of legal right over the land along with other particulars. as does the setting of Approvals Committees for judging the proposals from units keen on moving in the SEZs. the Central Government notifies the areas as SEZs. And while recommending the states must clarify to the Board whether the area required by the zone is reserved or ecologically fragile. The states have to also equip the prospective Development Commissioners of the zone with powers. Such land can be either freehold or leasehold. following the Board’s decision to approve the proposal with or without modification. Following land acquisition. For facilities for exclusive use of the Units such as canteens. Appointing Development commissioners (DC) for the zones follows immediately. Before giving the recommendation. The LoA allows developers three years for carrying out their plans. the BoA has the final say in deciding the SEZs in the country. Operations commence in the Fortune Institute of International Business Page 28 . crèches. However.

The approvals issued by the Board are of two categories. 2) Approve authorized operations to be carried out in SEZs. Beginning from 17th March 2006. 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. developers are to take approvals from various statutory authorities in Central. 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. 4) Approve. till 11th August 2009. 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. developers enjoy exemption from all possible taxes that businesses in India attract otherwise. The Board is empowered to carry out the following functions:1) Approve. the Board has met on 35 occasions for considering SEZ proposals. It is chaired by Special Secretary. 3) Approve Developers or Units in SEZs for foreign collaborations for developing and maintaining the Special Economic Zone. provide for rehabilitation of displaced persons. satisfy environmental requirements and mobilize funds for the project.processing zone after demarcation. Among the others. During this time. The other three members include a nominee from the concerned state government. 6) Suspend approval of a Developer and appoint an Administrator for discharging functions in an appropriate manner. For building SEZs. Government of India. reject or modify proposals for creating infrastructure in SEZs. The Board has 19 members. 14 members are from the Government of India. Department of Commerce. Formal approvals are granted only after Fortune Institute of International Business Page 29 . Ministry of Industry. State and local governments. 5) Grant a license to industries for being set up in SEZs. reject or modify proposals for setting up SEZs. 7) Dispose of appeals and perform any other functions as may be assigned to it by the Central Government. The Director or Deputy Secretary from the same department or ministry is the Member-Secretary of the Board.

Swimming pool. 15. Recreational facilities including clubhouse. 4. Water treatment plant. 10. 17. Fortune Institute of International Business Page 30 . Authorized Operations in SEZs The different operations which are authorized in SEZs depend on the nature of SEZ. Telecom and other communication facilities including Internet connectivity. etc. Gems and Jewellery SEZs 1. Employee welfare facilities like automated teller machines. 12. gymnasium. Biotechnology. 16. 11. Fire protection system with sprinklers. Office space. 8. 14. sewage lines. signals and signage. Roads with street lighting. 7. Business and / or convention centre. 20. gas and petroleum natural gas. Distribution network for electricity. Common data centre with inter-connectivity. Rain water harvesting plant. 18. sewage treatment plants. Shopping arcade and/ or retail space. IT / ITES. The Board also grants co-developer approvals for building infrastructure facilities in SEZs. 6. Air conditioning. 9. Sewage and garbage disposal plant. etc. Housing or service apartments. pipeline network. exit and other points within and along the periphery of the site. pipelines and other infrastructure for effluent treatment. Electricity generation. 2. fire and smoke detectors.providing documentary evidence of rights over land and satisfying other requirements. medical centres. Effluent treatment plant. 5. including necessary substations of appropriate capacity. Security offices and police posts at entry. 3. indoor and outdoor games. crèche. Parking including multi-level car parking. pipelines and other necessary infrastructure for sewage and garbage disposal. water supply lines. storm water drains and water channels of appropriate capacity. 13. 19.

Rain water harvesting plant. pipelines and other infrastructure for effluent treatment. 23. coffee shops. 2. including necessary substations of appropriate capacity. Sector Specific SEZs 1. 5. fire and smoke detectors. 28. 26. 10. Security offices and police posts at entry. canteens and catering facilities. 9. 8. pipelines and other necessary infrastructure for sewage and garbage disposal. Parking including multi-level car parking. Fortune Institute of International Business Page 31 . 13. Office space. etc. Food services including cafeteria. 14. indoor and outdoor games. pipeline network. Recreational facilities including clubhouse. Bus bay. Effluent treatment plant. 3. 22. medical centres. 4. 12.21. 15. Employee welfare facilities like automated teller machines. Wi Fi and / or Wi Max Services. 24. Water treatment plant. 11. 27. Distribution network for electricity. 6. water supply lines. sewage lines. Swimming pool. construction of multiplexes. Electricity generation. crèche. exit and other points within and along the periphery of the site. restaurants. gas and petroleum natural gas. Landscaping and water bodies. storm water drains and water channels of appropriate capacity. Such other operation(s) specified above from 1 to 27 which the BoA may authorize from time to time. food court(s). Shopping arcade and/ or retail space. Fire protection system with sprinklers. 7. Clinic and medical centres. sewage treatment plants. Playground. 16. signals and signage. Drip or micro-irrigation systems. gymnasium. Roads with street lighting. 25. etc. Telecom and other communication facilities including Internet connectivity. Sewage and garbage disposal plant.

School and / or technical institution and / or educational institution. Playground. sewage lines. Fortune Institute of International Business Page 32 . 13. 7. 12. Multi – Product SEZs 1. Rain water harvesting plant. 2. 25. Clinic. Landscaping and water bodies. 4. pipelines and other infrastructure for effluent treatment. Recreational facilities including clubhouse. Telecom and other communication facilities including Internet connectivity. Rail head 26. restaurants. coffee shops. exit and other points within and along the periphery of the site. etc. Roads with street lighting. 8. Fire protection system with sprinklers. signals and signage. Security offices and police posts at entry. 11.17. 27. Water treatment plant. Sewage and garbage disposal plant. 6. 18. Wi Fi and / or Wi Max Services. food court(s). pipelines and other necessary infrastructure for sewage and garbage disposal. Food services including cafeteria. Office space. Electricity generation. including necessary substations of appropriate capacity. sewage treatment plants. Access control and monitoring system. 24. pipeline network. 21. medical centres and building hospitals. 3. 19. 10. Bus bay. Distribution network for electricity. 9. Swimming pool. canteens and catering facilities. storm water drains and water channels of appropriate capacity. water supply lines. 22. 5. gymnasium. 20. Drip or micro-irrigation systems. gas and petroleum natural gas. 14. Such other operation(s) specified above from 1 to 27 which the BoA may authorize from time to time. Parking including multi-level car parking. fire and smoke detectors. indoor and outdoor games. 23. Effluent treatment plant.

Tripura. Clinic. 22. food court(s). Landscaping and water bodies. Such other operation(s) specified above from 1 to 24 which the BoA may authorize from time to time. 18. Mizoram. coffee shops. medical centres and building of hospitals. Inland container depot.15. crèche. Rail head 23. 24. restaurants. Bus bay. in the states of Assam. 17. 20. iii. However. Land Rules The minimum land requirement for the SEZ depends upon the nature of the SEZ. construction of multiplexes. School and / or technical institution and / or educational institution. 30. Playground. Airport and / or air cargo complex. Uttaranchal. it can be 200 ha. Banks. Arunanchal Pradesh. 19. The land rules for different SEZs are:Multi-Product SEZ For a multi-product SEZ. Food services including cafeteria. etc. 32. Wi Fi and / or Wi Max Services. 21. iv. Access control and monitoring system. a contiguous area of 1000 ha is the minimum requirement. medical centres. 16. Manipur. 29. ii. Jammu & Kashmir. canteens and catering facilities. Housing or service apartments and construction of hotels. Meghalaya. Goa and in a Union territory. Shopping arcade and/ or retail space. Nagaland. Additional activities which are allowed are:i. Port. Sikkim. Employee welfare facilities like automated teller machines. Drip or micro-irrigation systems. 31. Fortune Institute of International Business Page 33 . Himachal Pradesh.

a contiguous area of 100 ha is required. However. Meghalaya. Processing Area – A FTWZ must have a minimum built-up area of 1 lakh sq m. In standalone FTWZs. ii. the minimum built-up processing area will be 50000 sq m. Himachal Pradesh. the minimum built up area will be 40000 sq m. For biotechnology and non-conventional energy sectors. Nagaland.Processing Area – At least 35% of the total area will be earmarked for developing the processing area. Uttaranchal. Uttaranchal. Goa and in a Union territory. at least 50% of the area will be earmarked for processing area. For gems and jewellery. the minimum area will be 40 ha. Jammu & Kashmir. Goa and in a Union territory. the maximum area of such FTWZ will not be more than 25% of the processing area of the SEZ. Arunanchal Pradesh. However. unless they belong to specific sectors mentioned above. Himachal Pradesh. Manipur. Free Trade and Warehousing Zone (FTWZ) For free trade and warehousing zone. Jammu & Kashmir. iv. a standalone FTWZ can also be set up as a part of multi-product SEZ. The minimum area will be 50 ha in Assam. Tripura. 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. i. However. Processing Area i. at least 50% will be earmarked for processing area unless they figure in sectors mentioned above. The minimum area will be 10 ha foe electronics hardware and software including IT enabled services. biotechnology and non-conventional energy sectors (including solar energy equipments/ cells but excluding non-conventional energy production and manufacturing) and gems and jewellery. Tripura. iii. as well as that of a sector-specific zone with no minimum area requirement. Mizoram. For electronic hardware and software. including IT-enabled services. Mizoram. Fortune Institute of International Business Page 34 . Sikkim. this may be relaxed by the Central Government up to 25% if recommended by the Board of Approvals. Sikkim. Arunanchal Pradesh. Meghalaya. In Assam. Nagaland. However. ii. Manipur. the minimum built-up processing area will be 1 lakh sq m.

2006. apart from indirect employment during construction period of the SEZs. In 2005. Investment of the order of Rs 100. the SEZ Act was enacted.000 crore over the next three years with an employment potential of over 500. Fortune Institute of International Business Page 35 .000 was also expected from the new SEZs. Appointment of the Developer. a comprehensive Special Economic Zones Act 2005 was passed by Parliament in May 2005. The SEZ Act 2005 and the rules of the SEZ Act came into force from February 10. 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. to give a long term and stable policy framework with minimal regulation. The SEZ Act 2005 is mainly divided into 7 different chapters and 3 schedules. Co-developers and approval for units to be located in the notified area. 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. However.Special Economic Zones Act 2005 The policy relating to SEZs was earlier contained in Foreign Trade Policy.

Setting up of offshore banking units / International Financial Services Centre in SEZs. securities transaction tax. Another major feature of the Act is that it claims to provide expeditious and single window clearance mechanisms. approval committees are constituted to approve/reject/modify proposals for setting up SEZ units. sales tax and income tax. service tax. Fortune Institute of International Business Page 36 . 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. The responsibility for promoting and ensuring orderly development of SEZs is assigned to the board of approval. Earlier. 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. drawbacks and concessions including exemptions from customs duty (on goods brought into or exported from the SEZ). • Single Window clearance on matters relating to Central as well as State Governments. out zone supplier and residents. • Single window clearance for setting up a unit in a Special Economic Zone. 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. • Simplified compliance procedures and documentation with an emphasis on self certification. 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.* Exemptions. occupant enterprise. Notified Offences & Civil Suits. Salient Features of SEZ Act The SEZ Rules provide for: • Single window clearance for setting up of an SEZ. excise. It is to be constituted by the central government. While the central government may suo motu set up a zone. * * Offshore Banking Unit & International Financial Services Centre. proposals of the state governments and private developers are to be screened and approved by the board.

 Exemption from payment of service tax on taxable services provided to a developer. Entire profits from developing SEZs are eligible for tax concession. Fiscal Benefits Chapter 6 of the SEZ Act of 2005 deals with the special fiscal provisions for SEZs.  Sales taxes are not charged on sale or purchase of goods (other than newspapers) by developers. 4. 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. 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. Infrastructure Provisions have been made for:1. 3. The setting up of a “SEZ authority” in each central government SEZ for developing new infrastructure and strengthening the existing one. 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.  Developers are exempted from paying taxes on dividend declared out of the current income. Fortune Institute of International Business Page 37 . Finally.In addition. Affected parties may appeal to high courts against the orders of the designated courts. On the basis of this chapter.  Exemption from payment of Minimum Alternate Tax (MAT). The setting up of offshore banking units and units in an international financial service centre in SEZs. 2. The developers have to choose their block period of 10 years. The public private participation in infrastructure development. the Development Commissioner (DC) and his/her office is responsible for exercising administrative control over a zone. The labour commissioner’s powers are also delegated to the DC.

100% exemption is permitted for the first five years and 50% for the next five years. deduction up to 50% of the ploughed back export profits for another five years.  Exemption from customs duty on goods imported by units for authorized operations. and finally. as well as on those for borrowings by non-residents.  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.  No taxes are imposed on interest income received by a non-resident on a deposit made in an OBU situated in an SEZ. However.  Exemption from payment of central excise on goods brought from outside the SEZ (that is Domestic Tariff Area) by developers for authorized operations. Exemption from customs duty on goods imported by developers for carrying on authorized operations. Fortune Institute of International Business Page 38 .  Exemption from payment of sales taxes.  Exemption from payment of central excise on all goods purchased from the DTA. 50% of profits for the next five years.  Offshore banking units (OBUs) in the SEZs are allowed complete tax holidays.  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.  Exemption from securities transaction tax (STT) on transaction of taxable securities entered into by non-residents through the International Financial Services Centre.  Units are exempt from payment of taxes on capital gains during transfer of assets involved in shifting from urban areas to SEZs.  No taxes are imposed on OBU for interest paid on deposits to non-residents. such exemption requires that one year or before.

on 3 March 2005. they have been permitted to issue equity shares to non-residents against import of capital goods. As a result. 2 issued by Department of Industrial Policy and Promotion (DIPP). There are two main restrictive provisions on the operations of the account. no foreign exchange purchased in India against Rupees can be credited to the account without the approval of the RBI. that is. Fortune Institute of International Business Page 39 . the route which does not require foreign investors to take prior permission for investing in India. hold and maintain foreign currency accounts with authorized dealers (AD) of foreign exchange. unless they attract compulsory licensing or are incompatible with the location norms. Government of India. is allowed up to 100% for developing SEZs and FTWZs. these are likely to qualify under the automatic approval route. it is not necessary for foreign investors to take prior permission.Foreign Investments & Finance Attracting FDI is also one of the objectives of the SEZ policy. As far as units in SEZs are concerned. absence of world class infrastructure and an unstable fiscal regime. and with a view to attract larger foreign investments in India. In most cases. The guidelines for FDI in townships. the appeal of SEZs has increased that much more for prospective investors. SEZ units can open. foreign investors are eyeing these needs to apply to the Development Commissioner of the concerned zone. On a purely ‘stand alone’ basis these units can enter into contracts in commodity exchange markets with the objective of hedging against price risks. On 2nd July 2007. In a decision that enables SEZ units to dig into capital markets for mobilizing resources. the Special Economic Zones (SEZ) Policy was announced in April 2000’. FDI under the ‘automated’ route. housing and construction-development projects in India are prescribed in Press Note no. Second. 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. ministry of Commerce and Industry. the funds will not be lent to any equity resident in India that is not a unit in SEZ. First. The RBI has come out with clear instructions mentioning that for setting up branch offices or new units in SEZs. And according to regulation 6A of the Foreign Exchange Management Act (FEMA).

Creating Real Estate Zones The SEZs are but creation of –‘Real Estate Zones’ to compliment the rich and elite in country. 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. Dalits and other marginalized will remain untouched by all new employment opportunities arising out of the SEZs. 4. This would increase the Fortune Institute of International Business Page 40 . 3. 2. th Under the SEZ Act (Section 26 to 30) and SEZ rules. women. 25 August 2006). (TOI. excessive Tax and Tariff concessions are being given to companies for a consecutive period of 15 years. landless labourers.000 Crore due to tax sops offered to SEZs. farmers. Therefore the communities such as those of the fisher folks. 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. only 35% land would be for industrial set up while the remaining would be for other non-industrial purposes. As per the SEZ Act. There are no provisions for monitoring of the cumulative environmental impacts of all the units coming under one SEZ.The Key Issues 1. 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). Rest of the land could be left to develop recreation centers and housing etc. 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. 00.

the most critical being land acquisition in the name of ‘public purpose’. 5. manufacturers and entrepreneurs in the long run. security arrangements. 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’. Liberalizing of labour laws under SEZ Act (Section Sec. small scale industries. Adverse Impact on Labour Conditions In India 93. Once given the status of SEZs private industries will simply reap the benefits of all leverages provided by the government. 6. This would only worsen the condition of labour in our country further. the most powerful in SEZs). which actually means that they would be ‘self contained privatized autonomous entities’. The fact that the SEZs would have their own regulations. the accountability of whose is not certain. The disproportionate growth as a result of SEZs will adversely hit the farming sector. 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.49) would adversely impact the social security and livelihoods of this large labour force.2% of total work force still comes under the unorganized sector.burden of taxation on the common people. This is against the Indian Constitution and nationhood. Fortune Institute of International Business Page 41 .

e.e. The most important fact to notice is that the export from SEZs grew by 381% from 2003-2004 to 2007-2008. in the year 2007-2008. As Indian SEZ policy has been introduced in 2001. Trend in Export Performance of SEZs The export from SEZs in the year 2003-2004 was Rs. it grew at 92% from the previous year. The exports from SEZ grew by 16.1%. 18314 crore i. 13854 Crore and in the 2004-2005. it grew at 39%.4% from 2001-2004. Fortune Institute of International Business Page 42 .Performance Analysis The performance of SEZs is improving a lot as from the past. the potential of SEZs in India is still to be discovered. In the same period the total exports in India grew by 12. the export went to Rs. 34615 in 2006-2007 i. 66638 crore from Rs. Interestingly. it went up to Rs.

it just increased to 4.7% 52% 92% Contribution of SEZs in Country’s Total Export In the year 2003 – 2004. Year Export from Total Export Contribution of Page 43 Fortune Institute of International Business .16%.Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 Export (Rs.72% and in the next year.88%. which shows that the contributions of SEZs are increasing. The biggest increment was seen in the 2007 – 2008. In that year the contributions of SEZs were around 10. the contribution of SEZs in country’s total export was 4. Crore) 13854 18314 22840 34615 66638 Growth Rate(Over Previous Year) 39% 32% 24.

87 3.05 30.61 18.48 849. 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.SEZs 2003 – 2004 2004 – 2005 2005 – 2006 2006 – 2007 2007 – 2008 (In Rs.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.05 10.89 25358.49 393.53 456417.22 168.68 23006.84 1106.47 22.17 16068.78 573.26 11121. 2006 is 214499 Fortune Institute of International Business Page 44 .45 Export in 200708 (In Rs.29 6.26 655863.17 4701.682 Employment Generation The total direct employment in Special Economic Zones as of 30th June 2008 is 349203 lakh persons.71 1651. Crore) 159.72 4.48 66637.342 0.02 24 645.74 375339.0 6.4 1854.97 1316.01 20866.46 3846.66 237.58 126.86 571779. Crore) 293366. The total incremental employment generated in SEZs since Feb. Crore) 33.88 5.327 518.065 1423..08 ----------------133.13 1389.33 657. Crore) 13854 18314 22840 34615 66638 (In Rs.45 3985.52 SEZs (%) 4.

199330 persons is the direct employment in 7 SEZs established by the Central Government. 4043.28 crore is the investment in 7 SEZs established by the Central Government. 81093 crore out of which Rs. 73348 crore and the investment in private/ state government SEZs which came into force prior to SEZ Act.. Private Investment in Special Economic Zones The total private investment in Special Economic Zones as of 30th June 2008 is 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.91 crore whereas Rs.persons. 3701. 77058 crore is the incremental investment since Feb. Comparative study – India and China SEZs in China Fortune Institute of International Business Page 45 . 2005 is Rs. The investment in notified SEZs is Rs. 2006.

to cleanse the Maoist influence in Guangdong. bringing much need jobs. These provinces had a long recent history of foreign economic contact and domestic commerce. Second. Guangdong was close to Hong Kong and Fujian to Taiwan. They also wanted to sum up useful lessons from these experiments. Deng sent Xi Zhongxun. As the cleanup mission ended.Special Economic Zones (SEZ's) are development zones established by the PRC to encourage foreign investment in China. Between late 1978 and late 1980. Fortune Institute of International Business Page 46 . careful personnel and economic arrangements. especially Guangdong. They made careful location. and social backings. and future tax revenues in return for significant tax concessions at start-up of the operations and over a number of years. an outspoken and liberal veteran. Finally. personnel. national reformists headed by Deng shrewdly staffed Guangdong with committed liberals and experienced politicians for distinct purposes. They understood that if a major area or SEZ conducting experimental reforms succeeded. economic. technical knowledge. Deng replaced Xi with the moderate. First. local reform initiatives and leadership helped ensure the success of these SEZs. they picked the provinces and areas with the strongest local political. Between the two provinces that hosted the earliest SEZs. the two provinces. It’s prudent choice of location. They are not unlike SEZs in other part of the world. 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. and policy arrangements. a premium geographic location and the best external economic links to start the reform experiment. 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. had open-minded local leaders and population who would be receptive to opening up and commerce. Both provinces had a large number of families whose relatives lived and worked overseas.

It also wisely used bank loans to rapidly develop urban infrastructure in the largely rural city. Liang Xiang. The meteoric rise of Guangdong and Shenzhen demonstrated to all the other provinces that reform and opening did pay off. and domestic entrepreneurs to the SEZ. employment. whereas Shenzhen emerged as the most dynamic metropolis with the highest per capita GDP and the largest foreign trade volume in China. It improved governmental efficiency. decisive. with the backing of national reformists. the central government also granted Guangdong and Fujian privileges in economic reform. and circulation of goods. and insurance for reform experiments in the two provinces. yet politically skilful Ren Zhongyi. 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. various preferential treatments for foreign enterprises. and free market prices. Wu Nansheng. reformed political and economic institutions. A bold and liberal leader. foreign capital. As stated. briefly served as the leader of Shenzhen SEZ. and helped foreign investors to make high profits. Until April 1984 the four SEZs enjoyed the exclusive right to host foreign enterprises. These “particularistic concessions” provided policy space. Liang Guangda. and generated rapid development. succeeded him. from the early years on. This set off their demands for their own SEZs and reform experiments. Fortune Institute of International Business Page 47 . the Shenzhen authority eagerly attracted talented people by offering high pay and good welfare.consultative. Economic reforms thus spread across the provinces. Guangdong became the largest provincial economy. These clever arrangements helped reforms and the Open Policy to take off in Guangdong and Shenzhen. fiscal incentives. The Guangdong leaders. also headed the Zhuhai SEZ. Through these measures the city attracted talent. a Guangdong native with high seniority in the province and strong ties with Premier Zhao. Third. Fourth. local initiatives helped stimulate local growth in SEZs. Similarly. His determined. Ren stimulated and protected reform initiatives in Guangdong until 1985. an open-minded provincial party secretary. also picked able reformists to lead the major SEZs. In fifteen years. SEZs enjoyed a low fiscal remittance rate and unparalleled leeway in reforming systems of prices.

Deng favoured those who had a good record of stimulating reform and generating economic development. In promoting young leaders. 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. along with other SEZs. the State Council under Zhao’s leadership created a Special Economic Zones Affairs Office (SEZAO). while providing considerable economic incentives and leeway for local authorities to press ahead with experimentation in local reform and development. The office was led by Premier Zhao and Vice Premier Gu Mu. the government of Shenzhen was downsized and its structure and organization streamlined.The Chinese Communist Party also used its power of appointing officials as a lever to push forth reforms. In June 1982. oversized bureaucracy was trimmed. This centralized and efficient Fortune Institute of International Business Page 48 . As a result. 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. and development. the SEZ and non-SEZ portion of Shenzhen were clearly distinguished. local officials invested their energy in attracting foreign and domestic investment in order to generate economic and fiscal growth. First. National administrative and economic arrangements helped lay an institutional foundation for the operation and development of SEZs. In November both cities were made municipalities under the direct jurisdiction of the province (MDJP). These changes installed the predominant control of the mayor (who was also the party secretary) over the course of the city’s development. Third. and the SEZ Construction Company. Institutional Arrangements and Local Initiatives in SEZs Only proper arrangements could motivate local efforts to promote reform. Hence Shenzhen. opening. Second. the Chinese did a good job of sustaining national institutional linkages with SEZs. the SEZ Development Company. During 1981 and 1982. 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. The party’s nomenclature was turned into a powerful growth machine. Given the institutional structure. could communicate directly with the office while also earning the support of leaders of their home province.

Fortune Institute of International Business Page 49 . He sent head hunters around the nation to recruit qualified professionals and workers. In Shenzhen. even lower than the 18. For example. Fiscal autonomy generated tremendous fiscal incentives and exerted heavy pressure for Shenzhen to reform and develops. Local Initiatives in Shenzhen SEZ SEZs also undertook initiatives to prepare the zones for operation and for investors. but by central plans outside the zones. the corporate income tax at the SEZs was set at a preferential rate of 15 percent. Meanwhile. as well as a freer play of markets in SEZs. To overcome the problem. This was not surprising as the city was largely rural when an area inside the city was designated as the first SEZ in China. joint ventures and foreignowned enterprises were allowed in the SEZs. Fourth. according to national and provincial provisions. but needed special approval outside them. and easy urban residency to attract talent. SEZs had jurisdiction in approving much larger investment projects than non-zone localities. prices and distribution of goods were regulated by the market within the SEZs. the number of engineers grew from two to 732. For example. SEZs enjoyed preferential treatment in tax and tariff reductions and exemptions. First. From 1979 to 1983. generous wages. Finally. SEZs were granted preferential fiscal arrangements. Liang promised spacious apartments. Third.economic decision process in the hand of local leaders paved the way for rapid formation and operation of the SEZ. and the share of college-educated cadres rose from 8 percent to 21 percent. Shenzhen did not have to remit revenue to the national and provincial governments until 1989. Liang confronted a severe shortage in qualified talent and office floor space. These privileges enabled investors to enjoy the lowest corporate income tax rates and tariffs on imports and exports. SEZs become the premier place in China for attracting FDI. Economic Arrangements SEZs enjoyed a number of special policies until April 1984.5 percent in Hong Kong. which was much needed for the newly established zone in its very early years. the average age of cadres declined from 43 to 37. nor would the province and Beijing provide subsidies. Second.

the wage reform also covered employees of governmental agencies and public institutions. For this aim. Some forty-five Nationally-known construction firms set up branches in the city. Within four years. Shenzhen’s investment environment impressed Fortune Institute of International Business Page 50 . Shenzhen was short of funds necessary for building streets and urban infrastructure. the city started to attract technologyand knowledge-intensive foreign businesses. It also reinvested earnings and loans in new urban developmental projects. telephone. In the first couple of years of the SEZ. and sewage in new districts. In 1983 the Shenzhen SEZ introduced social labour insurance for employees in labour contracts as well as a wage reform. mainly in processing. 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.000.000 soldiers from the PLA Construction Corps to be demobilized and employed as construction workers in the city. Liang also tried to help foreign firms in Shenzhen SEZ reap high profits. In addition. in 1985 China’s first foreign exchange redistribution centre opened there. The city also arranged for 20. lowered wage standards. the governmental agency reduced taxes and land use fees. the first foreign bank in China was set up in Shenzhen. water. and compensatory trade. It implemented the first labour contract system among all enterprises and public and social institutions in 1982. power. Active recruitment allowed the number of construction workers to grow from several hundreds to 100.Building office space was another top priority for the city. thereby attracting more foreign enterprises to the SEZ. A few years later. More importantly. Liang also tried to expand the level of technology and the scale of production of foreign enterprises. It built two industrial districts as well as fifty-five streets of a total length of 100 kilometres. and streamlined administrative approval procedures for foreign enterprises. investing in urban infrastructure such as roads. the city accomplished urban development worth 100 million Yuan with only 18 million Yuan of loans. The city solved the problem by borrowing bank loans. These measures helped satisfy the thirst for floor space in the city. the city had only been able to attract small and medium size foreign businesses. The city carried out the nation’s first price reform in 1981. Shenzhen became the experimental zone with the earliest and boldest economic reforms in the nation. In 1984. In 1982. and charging rental on land use. assembly.

In this period the SEZ increased its share in the city’s GVIAO from 29 percent to 83 percent. and steadfast support from local and national leaders thus helped contribute to a rapid improvement in the economic conditions of SEZs. Its exports amounted to $77. the Bataan DPZ in the Philippines attracted $128. the gross domestic product (GDP) of the city grew by 28 percent and per capita GDP by 14 percent. investors from fifty countries and areas other than Hong Kong also arrived in Shenzhen.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. The rapid development of Shenzhen continued in the following decades. Fortune Institute of International Business Page 51 . and that of the SEZ by forty-six fold from 50 million Yuan to 2. In its first four years and by 1982. bold and sound local initiatives. the economy of Shenzhen grew rapidly. the highest among the nation’s cities. domestic consumption. which grew 38 percent a year. Driven by miraculously fast expansion of investment. as retail sales grew by 30 percent a year.8 billion. Shenzhen attracted $234 million. with over 60 percent of the total from the SEZ. the city’s GDP reached Y342 billion. and exports.760 million Yuan in 1985. Each year between 1980 and 2004. Thus the SEZ had become the predominant growth engine of Shenzhen’s economy. the highest among the Chinese metropolises. Taiwan’s zones. In contrast. Meanwhile.368 million Yuan. the actual foreign investment in the city grew from $15 million to $180 million. As the favourable impression of the SEZ became known. was driven by three engines— investment. This growth. as fixed assets grew at 35 percent a year. especially in Shenzhen.8 million in foreign investment and the Masan EPZ in South Korea $88. In the first five years.5 million. and its actual FDI amounted to $2.862 million Yuan. actual foreign investment in Shenzhen grew by eleven fold in five years. Between 1979 and 1985 the gross value of industrial and agricultural output (GVIAO) of the city grew fifteen fold from 175 million Yuan to 2.271 was the highest in China. rarely saw its foreign investment double on a yearto-year basis.4 billion. By 2004. Shenzhen’s achievement in the early years stands up well against other export-processing zones (EPZs) in the region. and its GDP per capita of Y 59. The investment in infrastructure in the city grew from 50 million Yuan in 1979 to 2. Success of Shenzhen and Other SEZs Favourable institutional setups. which were regarded as among the most successful in the world. among the top tiers in the Chinese cities.

investment into manufacturing soared. exports of its three SEZs totalled $970 million. the latter went up to 44 percent.9 percent). the former SEZs and Foreign Investment in China 85 share declined to 69. In the 1980s manufactured exports of the city were mostly low-tech and labour intensive.9 billion in 1998. Shenzhen’s location and external trading environment is the most advantageous.Guangdong Province.4 billion in 1998. First. Actual utilized foreign investment of the three SEZs totalled $170 million in 1983. Among the first four SEZs. Since 1992. Even though Xiamen is the closest to Taiwan among all Chinese cities. 80 percent of the cumulative sum of foreign investment contracts went into manufacturing. It grew to $28. The amount grew to $32.5 times as large as the second-largest SEZ (Xiamen). respectively. and secondarily industry (16. The reasons are as follows. and ownership of foreign investment in Shenzhen have also changed. Third. was a key base for China’s opening.8 percent of the total). and only 12. 86. Over the years. tourism (29.2 percent). and over 20 times as large as the smallest SEZ (Zhuhai). with three of the four earliest SEZs. In 1981. increasing its share in the three SEZs from 51. as described. By 2001.6 percent of the foreign investment contracts remained in the secondary sector. leaders of Shenzhen made the best efforts to improve the investment environment and attract FDI.4 percent went into the tertiary sector. Exports of Shenzhen grew from $500 million in 1985 to $26. In 1985. Shenzhen has become the city with the largest exports in China. Hong Kong government and business also support close economic linkage with Guangdong. In 1996.2 percent whereas the latter increased to 30. In this period exports and foreign investment of the three SEZs in Guangdong grew by about 33 fold and 166 fold. the sectoral composition. Their share in Guangdong’s total exports increased from 19. Shenzhen has the largest area among the four SEZs—2. The technical content of exports in Shenzhen has also improved over the decades.5 percent to 80. the Taiwan government restricts economic integration with the mainland. As late as Fortune Institute of International Business Page 52 . In the following years. pledged foreign investment was predominantly in real estate (40. Shenzhen has been the most successful. It is located close to Hong Kong and is connected to Hong Kong by rail. Second. technical content.2 percent. an impressive record given the negligible amounts prior to the setup of the SEZs. By 2004.4 percent in 1985 to 44 percent in 1997.6 percent. By the end of 1991.4 billion in 1998.

Between 1991 and 2003. secondarily joint management. In 1983 foreign enterprises assumed the form of primarily joint equity.700 hectares) State Mostly coastal wasteland Very good (Shenzhen: Net exports 2006: $35 billion) Above 500 Mostly after 1991 India No discussion. 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. 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. Meanwhile. Parliament passed the law easily Small (3 – 14. and only a minority of them assumed the form of joint management.67 billion on customs duties was given to earn $1. instead of joint management. As years pass. a waiver of $1. becomes a more-preferred form of enterprise. In particular. The change in the ownership of foreign investment is a natural outcome of foreign business.1991. the share of electronics and information products in high-tech manufactured exports grew from 53 percent in 1997 to 98 percent in 2003. foreign investors usually seek to obtain a larger say in the operation and management of their ventures.04 billion in foreign exchange) Page 53 Fortune Institute of International Business .6 billion and accounted for 51. By 2004.2 percent of the manufactured exports. the number of foreign enterprises by contract grew from 139 in 1983 to 16. By 2004 they amounted to $30. Foreign ownership or joint equity. high-tech manufactured exports grew by 34 percent a year. foreign enterprises were primarily wholly foreign-owned and secondarily joint equity. and next wholly foreign-owned. only 2.889 in 2004.8 percent of the value of the city’s manufactured exports was high-tech.000 hectares) Private corporations Mostly fertile cultivated land Poor so far (In 1998.

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.

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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.

Bibliography Fortune Institute of International Business Page 56

pdf http://www.nic.a spx http://www.nic.reuters.htm Annexure SWOT Analysis of Indian SEZs Strengths Fortune Institute of International Business Page 57 .ppt http://www.cmdkerala. http://sezindia.aspx _hubs http://www.

 An established legal redress system. sales tax. will double up as the Labour Commissioner. which can sell up to 50 per cent of their exports in the Domestic Tariff Area (DTA) at half the rates of customs duties.  A large and growing domestic market. who is appointed by the Ministry.  Inadequate institutional support: he continuing lack of integration of the various departments involved such as customs.  India’s large English speaking workforce.  Relatively low labour costs.   Lower the high transaction /behind the border costs to exporters. giving SEZ’s no advantages on labour flexibility or addressing labour indiscipline (a.  High cost of capital. ray of hope may be that the Development Commissioner of the zone. Realistically establish competitive advantages in SEZs. Familiarity with Western concepts of business practices. A large NRI base who have traditionally invested less in Greenfield development in India. single window clearance schemes for SEZs cannot operate. The ability to sell in the DTA would be an important consideration for many Exportoriented units/EPZ/SEZ units. Opportunities    To use SEZs to catalyse infrastructure development. and environment and pollution control. Weaknesses  Indian SEZs will have to comply with all Indian labour laws.  Unlike India’s Export Processing Zones. SEZ manufactures can sell in DTA only on payment of full duties. Tap the advantages of WTO/increase India’s small share of world trade. as an insurance against downturns in international markets. Page 58 Fortune Institute of International Business .  Poor infrastructure. which could cut the time taken to settle labour disputes). Without such integration.

maximising tariff revenue for customs authorities). Annexure – 2 Fortune Institute of International Business Page 59 . 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. This could be linked to the difficulty in reaching agreement between key ministries involved. To increase investments in core strength areas like IT and software products and services. Threats o There are signs of an increasing rejection rate for proposals to establish SEZs. This could lead to waning business confidence in SEZs. But with opposing interests (reducing tariffs to enhance trade for DGFT. 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. especially those involved in export promotion or fiscal policy. “reservations” for socially disadvantaged groups in private sector jobs).

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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