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

02 03 04 06 06 08 10 13 14 18 20 21 22 26 33 37

Fortune Institute of International Business

Page 2

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

38 40 44 53 55 56


It gives us immense pleasure to express our deepest gratitude towards Dr. Rajiv Arora for providing us with the opportunity to undertake this project, which helped us to learn so much about the real world situations happening in different economies related to the economic zones. Words are insufficient to express our gratitude toward Dr. Sridhar Panda, without whom our project could not have got completed. We would also like to give our heartily thanks to Mr. Anuppam Bhaskar, who coordinated with us wherever required. We would also like to express our sincere thanks to all other faculty members as well as the staff at library and computer lab who has helped us on the project work with the necessary inputs. Their constant support has been the key to our achievements on the projects. We would also like to thanks our parents, fellow colleagues and friends for helping out in timely completion of the project report and for providing for their moral support, suggestions and encouragement. However, we accept the sole responsibility for any possible error of omission and would be extremely grateful to the readers of this project report if they bring such mistakes to our notice. Anand Mallick Fortune Institute of International Business Page 3

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

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

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

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. 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. both at the Centre and the State level.Zones (SEZs) Policy was announced in April 2000. providing for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments. 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.2000 to 09.2006 under the provisions of the Foreign Trade Policy and fiscal incentives were made effective through the provisions of relevant statutes. After extensive consultations. SEZs in India functioned from 1. The Special Economic Zones Act. Fortune Institute of International Business Page 7 . leading to generation of additional economic activity and creation of employment opportunities.02. It is expected that this will trigger a large flow of foreign and domestic investment in SEZs. came into effect on 10th February. the SEZ Act. 2006. 2005 which received Presidential assent on the 23rd of June. in infrastructure and productive capacity. 2005. supported by SEZ Rules. Around 800 suggestions were received on the draft rules. 2005.11. 2005. was passed by Parliament in May. with the minimum possible regulations. This policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package.

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

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

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

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

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

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

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

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

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

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

resulting in low levels of investment. and Singapore large areas of SEZ turned to be the main source of industrial development. and 2. namely: 1. Unstable and non transparent legislative regulation of SEZ. b. In the Philippines. 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. social. Lack of strict requirements concerning SEZ specialisation. corruption. these zones achieved almost 5. and other criteria. Improper planning of SEZ. and free trade zones). in China. Operation of SEZ can give positive results. organisation of proper management in these zones is quite complicated. Poor Selection of SEZ Location – Area with underdeveloped infrastructure. if it is properly planned. In this case.000 jobs). and 10 research and development zones were established. experts use economic. in China 5 combination zones. leading to unjustified expansion of privileges for practically all activities in the zone. Malaysia.In order to evaluate SEZ performance.7 times increase in employment (388. and privilege abuse for money laundering purposes 2. SEZ is not attractive for investors. this factor is very important for countries establishing SEZ for the first time and having no experience in their management. Fortune Institute of International Business Page 18 . 19 SEZ were introduced (including industrial. During 1994–1999. 3. however. large zones require enormous initial investment into developing their infrastructure. insufficient amounts of natural and labour resources. Improperly Determined Zone Size – For instance. export oriented. namely: a. tourist recreation. This is mainly caused by incoherent government policy. 14 open cities. International experience indicates that SEZ are not always effective.8 times increase in exports. Moreover. or insufficiently large market. These zones generate almost 40% of total exports and show an annual industrial production growth of 70%. For example. environmental.

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

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

122% of the total Argi land in India.5%) Total area for the proposed SEZ (FA + IP) = 1985 sq. 99689 Crore  Exports in 2009-2010 as on 30th June 2009 is Rs.76 Crore  Operational SEZs are 98 as on 30th June. notified SEZs :  Valid In-Principle Approvals (IP)  Total Area for Proposed SEZs : :  Total investment is Rs.53 crore as on 30th June 2009  Total Employment is 387439 persons as on 31st March 2009  Total Exports in 2008-2009 was Rs.Facts about Special Economic Zones in India  Number of Formal Approvals is 579  Number of notified SEZs is 327 (out of 579) + (7 Central Govt. Land Area  Notified SEZs : 39144 ha 73191 ha 125263 ha 1985 sq. km (54. km  Formal Approvals (FA) incl. 42501. 114640.066% of the total land area and not be more than 0. km 1620388 sq. SEZs)  Number of valid In-Principle Approvals is 147 Land Requirements Ground Realities: Total Land in India Total Agri Land in India : : 2973190 sq. km which would not be more than 0. 2009  2301 Units approved in SEZs as on 30th June 2009 Fortune Institute of International Business Page 21 . + 12 State/Pvt.

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. The SEZ Fortune Institute of International Business Page 22 . lengthy administrative procedures. Thus. Several other Export Processing Zones were set up at various parts of India in the subsequent years. 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. Further. the legal framework of Indian economy was not strong enough to prevent misuse of Indian markets by the foreign investors. This resulted in the formation of a much larger and more efficient form of their predecessors with world-class infrastructural facility. 2005'. the lack of investor friendly environment in India prevented growth of Indian industry. 2005 and SEZ Rules became effective on and from 10th February 2006. rigid labor laws and poor physical infrastructural facilities were the main cause of deterioration of Foreign Direct Investments (FDI) inflow in to India. the performance of these Export Processing Zones of India fell short of expectations. which was subsequently passed by Parliament in May 2005. A number of meetings were held across India for the formulation of . the Indian markets were not mature enough to facilitate easy entry of Foreign Institutional Investors (FIIs) in to the Indian economic system. The economic reforms incorporated during the 1990s did not produce the desired results. The SEZ policy of India was devised to act as a catalyst to promote the economic growth attained in the early 1990. The Indian manufacturing sector witnessed a sudden dip in the overall growth of the industry.History of SEZ in India The History of SEZs in India suggests that the seeds of the basic concept of Special Economic Zone (SEZ) were sown in the mid sixties. The 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. The History of SEZs in India suggests that red tape. 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. Furthermore. during the second-half of 1990s.'The Special Economic Zones Act. The SEZ Act. in spite of implementation of liberal economic policy by the central government.

A Single Window SEZ approval mechanism has been facilitated through a 19 member inter-ministerial SEZ Board of Approval or BOA. but when it comes to export manufacturing.400. there is great interest within India to promote the exportoriented manufacturing sector through Special Economic Zones or SEZs.. India is a rising power that no international company can afford to ignore. India’s middle class consists of 300 million people and its expansion will raise consumption and make economic growth faster and more sustainable. i. Hence. In 2005. the International Monetary Fund (IMF) reported India’s GDP to be US$3. India’s Economic Potential and SEZ With a population of 1.Act 2005 defines the key role for the State Governments in Export Promotion and creation of infrastructural facilities. Yet for all of India’s achievements. And the decision of the SEZ Board of Approval is binding and final.63 trillion in terms of purchasing power parity.e. India may have excelled in BPO. ranking fourth in the world. India has developed a world-class information technology and business process outsourcing (“BPO”) sector that exports its services globally. 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 . By some definitions. the country is still wrestling with high poverty and unemployment rates. As is well-known.  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. Objectives of SEZ  The primary objective of SEZ is to facilitate exports. India is the poorer cousin of China.1 billion and a GDP per capita of US$3.

Heavy investments are expected in sectors like IT. single window clearance for setting up of an SEZ. contract manufacturing for foreign principals with option to obtain sub-contracting permission at the initial approval stage. Pharma. private or joint sector.  State Governments have a lead role in the setting up of SEZ. in association with Private sector. Textiles.  A framework is being developed by creating special windows under existing rules and regulations of the Central Govt. for SEZ. and maintenance of the Special Economic Zones and for setting up and conducting business in SEZs. Petro-chemicals. This includes simplified compliance procedures and documentation with an emphasis on self certification.100. Investment of the order of Rs. Autocomponents. This is meant to offer equal opportunities to both Indian and international private developers. operation. Private sector is also invited to develop infrastructure facilities in the existing SEZs. no requirement for providing bank guarantees.. setting up a unit in SEZs and clearance on matters relating to Central as well as State Governments. The SEZ Rules provides the simplification of procedures for development. and State Govt. etc. Indian SEZ policy has following distinguishing features:  The zones are proposed to setup by private sector or by state Govt. 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). 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. exports and employment. Fortune Institute of International Business Page 24 . 000 crores over the next 3 years with an employment potential of over 5 lakh is expected from the new SEZs apart from indirect employment during the construction period of the SEZs. boosting economic growth. and ImportExport of all items through personal baggage. the Indian SEZ policy provides for development of these zones in the government. Bio-technology.

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

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.

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. 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 . 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. residential and business complexes. Facilities such as Free Trade & Warehousing Zones. recreation and entertainment facilities.e. multiproduct or product specific. 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. International Financial Services Centre may be approved for establishment within the Processing Area. Land / built-up space in the processing area to be leased:  To entrepreneurs holding valid letters of approval.

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

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

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

food court(s). fire and smoke detectors. 16. Roads with street lighting. coffee shops. Parking including multi-level car parking. restaurants. sewage treatment plants. Water treatment plant. Bus bay. Telecom and other communication facilities including Internet connectivity. including necessary substations of appropriate capacity. Security offices and police posts at entry. construction of multiplexes. Recreational facilities including clubhouse. 12. Drip or micro-irrigation systems. 9. Food services including cafeteria. 28. 26. exit and other points within and along the periphery of the site. medical centres. 15. 6. Clinic and medical centres. 5. Distribution network for electricity. Electricity generation. storm water drains and water channels of appropriate capacity. Sector Specific SEZs 1. 25. Office space. Fortune Institute of International Business Page 31 . gymnasium. sewage lines. 23. gas and petroleum natural gas. 3. 4. 24. Sewage and garbage disposal plant. 13. Landscaping and water bodies. 27. etc. Rain water harvesting plant. crèche. 10. pipelines and other infrastructure for effluent treatment. Fire protection system with sprinklers. canteens and catering facilities. etc. Effluent treatment plant. water supply lines. Swimming pool. Such other operation(s) specified above from 1 to 27 which the BoA may authorize from time to time. indoor and outdoor games. 14. Shopping arcade and/ or retail space. pipeline network. 11. pipelines and other necessary infrastructure for sewage and garbage disposal.21. 7. Employee welfare facilities like automated teller machines. Wi Fi and / or Wi Max Services. 8. signals and signage. 2. Playground. 22.

4. Security offices and police posts at entry. Fire protection system with sprinklers. medical centres and building hospitals. sewage lines. Landscaping and water bodies. 21. exit and other points within and along the periphery of the site. canteens and catering facilities. gymnasium. 13. including necessary substations of appropriate capacity. indoor and outdoor games. Swimming pool. Clinic. pipelines and other necessary infrastructure for sewage and garbage disposal. fire and smoke detectors. Roads with street lighting. Distribution network for electricity. 25. Effluent treatment plant. Office space. pipelines and other infrastructure for effluent treatment. Telecom and other communication facilities including Internet connectivity. storm water drains and water channels of appropriate capacity. etc. 5. Fortune Institute of International Business Page 32 . School and / or technical institution and / or educational institution. signals and signage. 12. Rain water harvesting plant. gas and petroleum natural gas. Bus bay. Playground. 3. 8. food court(s).17. 6. water supply lines. Wi Fi and / or Wi Max Services. Electricity generation. restaurants. Access control and monitoring system. 27. 9. Parking including multi-level car parking. 22. 23. Drip or micro-irrigation systems. Such other operation(s) specified above from 1 to 27 which the BoA may authorize from time to time. Recreational facilities including clubhouse. Food services including cafeteria. Rail head 26. 20. Water treatment plant. 14. 19. 24. sewage treatment plants. 10. pipeline network. 7. 2. coffee shops. 11. Multi – Product SEZs 1. Sewage and garbage disposal plant. 18.

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

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

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. Chapter I Chapter II Chapter III Chapter IV Chapter V Chapter VI Chapter VII Chapter VIII Schedule I Schedule II Schedule III Preliminary Establishment of Economic Zone Constitution of Board of Approval Development Commissioner Single Window Clearance Special Fiscal Provisions for Special Economic Zones Special Economic Zone Authority Miscellaneous Enactments (See Section 7 and 54) Modifications to Income Tax Act.000 crore over the next three years with an employment potential of over 500. 2006. the SEZ Act was enacted. apart from indirect employment during construction period of the SEZs. a comprehensive Special Economic Zones Act 2005 was passed by Parliament in May 2005. Fortune Institute of International Business Page 35 . to give a long term and stable policy framework with minimal regulation.Special Economic Zones Act 2005 The policy relating to SEZs was earlier contained in Foreign Trade Policy. Investment of the order of Rs 100. However. Co-developers and approval for units to be located in the notified area.000 was also expected from the new SEZs. In 2005. Appointment of the Developer. The SEZ Act 2005 is mainly divided into 7 different chapters and 3 schedules. The SEZ Act 2005 and the rules of the SEZ Act came into force from February 10.

Salient Features of SEZ Act The SEZ Rules provide for: • Single window clearance for setting up of an SEZ. At the zone level. proposals of the state governments and private developers are to be screened and approved by the board. securities transaction tax. * * Offshore Banking Unit & International Financial Services Centre. While the central government may suo motu set up a zone. • Simplified compliance procedures and documentation with an emphasis on self certification. • Single Window clearance on matters relating to Central as well as State Governments.* Exemptions. Setting up of offshore banking units / International Financial Services Centre in SEZs. 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. sales tax and income tax. 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. drawbacks and concessions including exemptions from customs duty (on goods brought into or exported from the SEZ). Earlier. service tax. • Single window clearance for setting up a unit in a Special Economic Zone. This system did not give confidence to investors to commit substantial funds for development of infrastructure and for setting up units. It is to be constituted by the central government. out zone supplier and residents. 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. The responsibility for promoting and ensuring orderly development of SEZs is assigned to the board of approval. approval committees are constituted to approve/reject/modify proposals for setting up SEZ units. Fortune Institute of International Business Page 36 . Another major feature of the Act is that it claims to provide expeditious and single window clearance mechanisms. Notified Offences & Civil Suits. excise. occupant enterprise.

Fiscal Benefits Chapter 6 of the SEZ Act of 2005 deals with the special fiscal provisions for SEZs. Fortune Institute of International Business Page 37 .In addition. Entire profits from developing SEZs are eligible for tax concession. the Development Commissioner (DC) and his/her office is responsible for exercising administrative control over a zone. 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. 2. Finally.  Exemption from payment of service tax on taxable services provided to a developer. On the basis of this chapter. Affected parties may appeal to high courts against the orders of the designated courts.  Developers are exempted from paying taxes on dividend declared out of the current income. The setting up of a “SEZ authority” in each central government SEZ for developing new infrastructure and strengthening the existing one. The developers have to choose their block period of 10 years. 4.  Exemption from payment of Minimum Alternate Tax (MAT).  Sales taxes are not charged on sale or purchase of goods (other than newspapers) by developers. 3. the available benefits are as follows:The benefits available to the Developers are: Income tax exemption for ten years (in a block of 15 years) from the date of commencement of operations. The public private participation in infrastructure development. 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 setting up of offshore banking units and units in an international financial service centre in SEZs. The labour commissioner’s powers are also delegated to the DC. Infrastructure Provisions have been made for:1.

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

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

Therefore the communities such as those of the fisher folks.The Key Issues 1. Creating Real Estate Zones The SEZs are but creation of –‘Real Estate Zones’ to compliment the rich and elite in country. 25 August 2006). SEZs will not create employment for local population but will lead to distress migration of locals since the jobs created will need education and skill levels unreachable for most of the people.000 Crore due to tax sops offered to SEZs. 00. As per the SEZ Act. There are no provisions for monitoring of the cumulative environmental impacts of all the units coming under one SEZ. Loss of Livelihoods – Inadequate Employment Opportunities There has been no Cost-Benefit analysis conducted for SEZ projects or assessment of economic losses as a result of diversion of agricultural land to non-agricultural purposes and resultant impacts on local livelihoods. th Under the SEZ Act (Section 26 to 30) and SEZ rules. This would increase the Fortune Institute of International Business Page 40 . 3. Rest of the land could be left to develop recreation centers and housing etc. excessive Tax and Tariff concessions are being given to companies for a consecutive period of 15 years. Dalits and other marginalized will remain untouched by all new employment opportunities arising out of the SEZs. only 35% land would be for industrial set up while the remaining would be for other non-industrial purposes. 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. farmers. 4. landless labourers. (TOI. women. 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). 2.

This is against the Indian Constitution and nationhood. Liberalizing of labour laws under SEZ Act (Section Sec. Once given the status of SEZs private industries will simply reap the benefits of all leverages provided by the government.2% of total work force still comes under the unorganized sector. 6. the most critical being land acquisition in the name of ‘public purpose’. Adverse Impact on Labour Conditions In India 93.49) would adversely impact the social security and livelihoods of this large labour force. 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.burden of taxation on the common people. the most powerful in SEZs). This would only worsen the condition of labour in our country further. security arrangements. manufacturers and entrepreneurs in the long run. The fact that the SEZs would have their own regulations. which actually means that they would be ‘self contained privatized autonomous entities’. 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’. small scale industries. the rights for environmental and labour related clearances. Fortune Institute of International Business Page 41 . the accountability of whose is not certain. 5. The disproportionate growth as a result of SEZs will adversely hit the farming sector.

As Indian SEZ policy has been introduced in 2001. In the same period the total exports in India grew by 12. Interestingly. it grew at 92% from the previous year.4% from 2001-2004. it grew at 39%.1%. 13854 Crore and in the 2004-2005. Trend in Export Performance of SEZs The export from SEZs in the year 2003-2004 was Rs. it went up to Rs. 34615 in 2006-2007 i. 66638 crore from Rs. in the year 2007-2008.e. The exports from SEZ grew by 16.e. the potential of SEZs in India is still to be discovered.Performance Analysis The performance of SEZs is improving a lot as from the past. The most important fact to notice is that the export from SEZs grew by 381% from 2003-2004 to 2007-2008. the export went to Rs. 18314 crore i. Fortune Institute of International Business Page 42 .

it just increased to 4. Crore) 13854 18314 22840 34615 66638 Growth Rate(Over Previous Year) 39% 32% 24.88%. which shows that the contributions of SEZs are increasing.Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 Export (Rs. the contribution of SEZs in country’s total export was 4.72% and in the next year. Year Export from Total Export Contribution of Page 43 Fortune Institute of International Business . In that year the contributions of SEZs were around 10.16%.7% 52% 92% Contribution of SEZs in Country’s Total Export In the year 2003 – 2004. The biggest increment was seen in the 2007 – 2008.

74 375339.72 4.05 10.71 1651.78 573.17 16068..4 1854.52 SEZs (%) 4.97 1316. Crore) 293366.86 571779.88 5.87 3.02 24 645. The total incremental employment generated in SEZs since Feb.0 6.46 3846.065 1423.68 23006.327 518.45 Export in 200708 (In Rs. Crore) 33. 2006 is 214499 Fortune Institute of International Business Page 44 .17 4701.22 168.26 11121.682 Employment Generation The total direct employment in Special Economic Zones as of 30th June 2008 is 349203 lakh persons.66 237.342 0.47 22.49 393.89 25358.45 3985.16 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. Crore) 13854 18314 22840 34615 66638 (In Rs.SEZs 2003 – 2004 2004 – 2005 2005 – 2006 2006 – 2007 2007 – 2008 (In Rs.58 126.08 ----------------133.48 849.84 1106.48 66637.53 456417. Crore) 159.13 1389.33 657.01 20866.05 30. Footwear and Sports Good Ceramics Food and Agro Industry Non-Conventional Energy Trading and Service Textile and Garments Tobacco related Products Misc TOTAL (In Rs.26 655863.61 18.29 6.

persons. 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. 2006.. Private Investment in Special Economic Zones The total private investment in Special Economic Zones as of 30th June 2008 is Rs. The investment in notified SEZs is Rs. 199330 persons is the direct employment in 7 SEZs established by the Central Government.91 crore whereas Rs. 77058 crore is the incremental investment since Feb. 81093 crore out of which Rs.28 crore is the investment in 7 SEZs established by the Central Government. 2005 is Rs. 73348 crore and the investment in private/ state government SEZs which came into force prior to SEZ Act. Comparative study – India and China SEZs in China Fortune Institute of International Business Page 45 . 3701. 4043.

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

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

Given the institutional structure. while providing considerable economic incentives and leeway for local authorities to press ahead with experimentation in local reform and development. Second. During 1981 and 1982. the Chinese did a good job of sustaining national institutional linkages with SEZs. local officials invested their energy in attracting foreign and domestic investment in order to generate economic and fiscal growth. As a result. In November both cities were made municipalities under the direct jurisdiction of the province (MDJP). Hence Shenzhen. This centralized and efficient Fortune Institute of International Business Page 48 . oversized bureaucracy was trimmed. three new offices responsible for economic policies in the SEZ were placed under the jurisdiction of the Mayor’s Office: the General Office of the city government. In June 1982. and development. By early 1982 the number of party and governmental officials in the zones was cut by 65 percent and the number of vice-mayors dropped from seven to three.The Chinese Communist Party also used its power of appointing officials as a lever to push forth reforms. Third. The office was led by Premier Zhao and Vice Premier Gu Mu. National administrative and economic arrangements helped lay an institutional foundation for the operation and development of SEZs. the SEZ Development Company. These changes installed the predominant control of the mayor (who was also the party secretary) over the course of the city’s development. Deng favoured those who had a good record of stimulating reform and generating economic development. The party’s nomenclature was turned into a powerful growth machine. the government of Shenzhen was downsized and its structure and organization streamlined. First. In promoting young leaders. the SEZ and non-SEZ portion of Shenzhen were clearly distinguished. opening. could communicate directly with the office while also earning the support of leaders of their home province. 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. and the SEZ Construction Company. the State Council under Zhao’s leadership created a Special Economic Zones Affairs Office (SEZAO). Institutional Arrangements and Local Initiatives in SEZs Only proper arrangements could motivate local efforts to promote reform. along with other SEZs.

Economic Arrangements SEZs enjoyed a number of special policies until April 1984. First. and easy urban residency to attract talent. Third. Shenzhen did not have to remit revenue to the national and provincial governments until 1989. Liang promised spacious apartments. but needed special approval outside them. even lower than the 18. In Shenzhen.economic decision process in the hand of local leaders paved the way for rapid formation and operation of the SEZ. He sent head hunters around the nation to recruit qualified professionals and workers. and the share of college-educated cadres rose from 8 percent to 21 percent. the number of engineers grew from two to 732. SEZs were granted preferential fiscal arrangements. as well as a freer play of markets in SEZs. Liang confronted a severe shortage in qualified talent and office floor space. From 1979 to 1983. but by central plans outside the zones. Fiscal autonomy generated tremendous fiscal incentives and exerted heavy pressure for Shenzhen to reform and develops. These privileges enabled investors to enjoy the lowest corporate income tax rates and tariffs on imports and exports. Fourth. the corporate income tax at the SEZs was set at a preferential rate of 15 percent. Local Initiatives in Shenzhen SEZ SEZs also undertook initiatives to prepare the zones for operation and for investors. To overcome the problem. Meanwhile. joint ventures and foreignowned enterprises were allowed in the SEZs.5 percent in Hong Kong. Fortune Institute of International Business Page 49 . SEZs become the premier place in China for attracting FDI. Finally. according to national and provincial provisions. SEZs had jurisdiction in approving much larger investment projects than non-zone localities. generous wages. This was not surprising as the city was largely rural when an area inside the city was designated as the first SEZ in China. the average age of cadres declined from 43 to 37. Second. For example. For example. which was much needed for the newly established zone in its very early years. SEZs enjoyed preferential treatment in tax and tariff reductions and exemptions. prices and distribution of goods were regulated by the market within the SEZs. nor would the province and Beijing provide subsidies.

In the first couple of years of the SEZ. and sewage in new districts. For this aim. A few years later. In 1983 the Shenzhen SEZ introduced social labour insurance for employees in labour contracts as well as a wage reform. Active recruitment allowed the number of construction workers to grow from several hundreds to 100. Shenzhen was short of funds necessary for building streets and urban infrastructure. water. Liang also tried to expand the level of technology and the scale of production of foreign enterprises. Within four years. It built two industrial districts as well as fifty-five streets of a total length of 100 kilometres. The city also arranged for 20. the governmental agency reduced taxes and land use fees. Shenzhen’s investment environment impressed Fortune Institute of International Business Page 50 . Liang also tried to help foreign firms in Shenzhen SEZ reap high profits.Building office space was another top priority for the city. mainly in processing. and charging rental on land use. In 1982. the wage reform also covered employees of governmental agencies and public institutions. and compensatory trade. the city had only been able to attract small and medium size foreign businesses. The city solved the problem by borrowing bank loans. It also reinvested earnings and loans in new urban developmental projects. lowered wage standards. power. assembly. Shenzhen became the experimental zone with the earliest and boldest economic reforms in the nation. the city started to attract technologyand knowledge-intensive foreign businesses. telephone. More importantly. the city accomplished urban development worth 100 million Yuan with only 18 million Yuan of loans.000 soldiers from the PLA Construction Corps to be demobilized and employed as construction workers in the city. investing in urban infrastructure such as roads. Some forty-five Nationally-known construction firms set up branches in the city. It implemented the first labour contract system among all enterprises and public and social institutions in 1982. thereby attracting more foreign enterprises to the SEZ. In addition. These measures helped satisfy the thirst for floor space in the city. The city carried out the nation’s first price reform in 1981. the first foreign bank in China was set up in Shenzhen.000. and streamlined administrative approval procedures for foreign enterprises. 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. In 1984. in 1985 China’s first foreign exchange redistribution centre opened there.

In the first five years. In its first four years and by 1982. In this period the SEZ increased its share in the city’s GVIAO from 29 percent to 83 percent. Shenzhen’s achievement in the early years stands up well against other export-processing zones (EPZs) in the region.271 was the highest in China. Fortune Institute of International Business Page 51 . which were regarded as among the most successful in the world. Meanwhile. The investment in infrastructure in the city grew from 50 million Yuan in 1979 to 2. Shenzhen attracted $234 million. This growth. the highest among the Chinese metropolises. and its GDP per capita of Y 59. rarely saw its foreign investment double on a yearto-year basis. Its exports amounted to $77. The rapid development of Shenzhen continued in the following decades.368 million Yuan. as retail sales grew by 30 percent a year. bold and sound local initiatives.4 billion. Taiwan’s zones. which grew 38 percent a year. with over 60 percent of the total from the SEZ. especially in Shenzhen. as fixed assets grew at 35 percent a year.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 city’s GDP reached Y342 billion. Each year between 1980 and 2004. investors from fifty countries and areas other than Hong Kong also arrived in Shenzhen. the Bataan DPZ in the Philippines attracted $128.862 million Yuan. the actual foreign investment in the city grew from $15 million to $180 million. 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. was driven by three engines— investment. and its actual FDI amounted to $2.8 million in foreign investment and the Masan EPZ in South Korea $88. In contrast. the highest among the nation’s cities. and that of the SEZ by forty-six fold from 50 million Yuan to 2.8 billion. As the favourable impression of the SEZ became known. the gross domestic product (GDP) of the city grew by 28 percent and per capita GDP by 14 percent. Success of Shenzhen and Other SEZs Favourable institutional setups. Driven by miraculously fast expansion of investment. the economy of Shenzhen grew rapidly. domestic consumption.760 million Yuan in 1985. Thus the SEZ had become the predominant growth engine of Shenzhen’s economy. actual foreign investment in Shenzhen grew by eleven fold in five years. By 2004. and steadfast support from local and national leaders thus helped contribute to a rapid improvement in the economic conditions of SEZs. among the top tiers in the Chinese cities.5 million. and exports.

the Taiwan government restricts economic integration with the mainland. The reasons are as follows. 80 percent of the cumulative sum of foreign investment contracts went into manufacturing. Exports of Shenzhen grew from $500 million in 1985 to $26. Since 1992. and ownership of foreign investment in Shenzhen have also changed.4 billion in 1998.2 percent. investment into manufacturing soared. It is located close to Hong Kong and is connected to Hong Kong by rail. respectively. In 1985.5 times as large as the second-largest SEZ (Xiamen). with three of the four earliest SEZs. as described. Among the first four SEZs. Shenzhen has the largest area among the four SEZs—2. tourism (29. In 1981. By 2001. was a key base for China’s opening. Over the years. technical content.4 billion in 1998. In this period exports and foreign investment of the three SEZs in Guangdong grew by about 33 fold and 166 fold.6 percent. As late as Fortune Institute of International Business Page 52 .8 percent of the total). The technical content of exports in Shenzhen has also improved over the decades.4 percent went into the tertiary sector. increasing its share in the three SEZs from 51.2 percent whereas the latter increased to 30. In 1996. Shenzhen has been the most successful. In the 1980s manufactured exports of the city were mostly low-tech and labour intensive. the latter went up to 44 percent. and secondarily industry (16. First. Third. and only 12.2 percent).6 percent of the foreign investment contracts remained in the secondary sector. By the end of 1991. Shenzhen has become the city with the largest exports in China. and over 20 times as large as the smallest SEZ (Zhuhai). exports of its three SEZs totalled $970 million.9 percent). pledged foreign investment was predominantly in real estate (40. In the following years.Guangdong Province. an impressive record given the negligible amounts prior to the setup of the SEZs. Hong Kong government and business also support close economic linkage with Guangdong. the former SEZs and Foreign Investment in China 85 share declined to 69. The amount grew to $32. the sectoral composition.9 billion in 1998. leaders of Shenzhen made the best efforts to improve the investment environment and attract FDI. Second.4 percent in 1985 to 44 percent in 1997. Actual utilized foreign investment of the three SEZs totalled $170 million in 1983.5 percent to 80. Shenzhen’s location and external trading environment is the most advantageous. Even though Xiamen is the closest to Taiwan among all Chinese cities. 86. By 2004. Their share in Guangdong’s total exports increased from 19. It grew to $28.

Foreign ownership or joint equity.700 hectares) State Mostly coastal wasteland Very good (Shenzhen: Net exports 2006: $35 billion) Above 500 Mostly after 1991 India No discussion. Between 1991 and 2003. The change in the ownership of foreign investment is a natural outcome of foreign business. foreign investors usually seek to obtain a larger say in the operation and management of their ventures. secondarily joint management. and next wholly foreign-owned. becomes a more-preferred form of enterprise. a waiver of $1. foreign enterprises were primarily wholly foreign-owned and secondarily joint equity. and only a minority of them assumed the form of joint management.000 hectares) Private corporations Mostly fertile cultivated land Poor so far (In 1998.67 billion on customs duties was given to earn $1.2 percent of the manufactured exports.889 in 2004.6 billion and accounted for 51. In particular. 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. the share of electronics and information products in high-tech manufactured exports grew from 53 percent in 1997 to 98 percent in 2003. instead of joint management. high-tech manufactured exports grew by 34 percent a year.1991. By 2004. In 1983 foreign enterprises assumed the form of primarily joint equity. 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. As years pass.8 percent of the value of the city’s manufactured exports was high-tech. By 2004 they amounted to $30. the number of foreign enterprises by contract grew from 139 in 1983 to 16. Meanwhile. Parliament passed the law easily Small (3 – 14. only 2.04 billion in foreign exchange) Page 53 Fortune Institute of International Business .

Employment Tax Revenue Collections Overall Economic Success Ease of Land Acquisition

Substantial number of low-paid jobs Only selective tax incentives provided Shenzhen very successful, but at least 2 SEZs have failed Land battles in some areas still

Very limited so far: 100,650 in all the SEZs till March 2005 Across-the-board tax holiday given to companies Somewhat Successful Bloody, bitter resistance

Comparison of SEZ policies of China and India
China India Very big. Typically in hundreds Even 10 hectares will do. of hectares. Location Well thought out and located only Anywhere. No restriction. on coasts. To facilitate exports and imports easily. Labour laws Relaxed in the SEZs. Flexibility is totally absent. Policy regime Experimentation of liberal Based on fiscal sops. policies in the specified areas while insulating them from the rest of the country. Investors Basically foreigners who are Basically locals. Not foreign wooed with sops and promise of investor driven; which should stability in policy. have been the case. Commencement In 1979 In 1969 with the export processing zone concept. But failed to muster courage in giving these regions foreign territory status till the year 2000 when Murasoli Maran announced the SEZ policy. Number Only six: Shenzhen, Zhuhai, Anywhere and any number. So far Shantou, Xiamen, Hainan and 94 operational. About 500 Pudong received approvals. Tax holidays Present. Longer and steeper than in China. Size Issue

On the basis of economic theory and history we can conclude that absorption of agricultural labour is necessary for sustained economic development of a developing country. “Special Economic Zones” constitute a medium for such sustenance. However, the SEZ policy in India Fortune Institute of International Business Page 54

has suffered from permission being granted for far too many sub-optimized SEZs. The present ceiling on SEZ size at 5000 hectares does not facilitate the full exploitation of economies of scale in service oriented SEZs and should be scrapped. There are other ways of minimizing peasant unrest during the process of land acquisition for SEZ development. Employment generation, both direct and indirect, has thus far been the most important channel, through which SEZs have impacted on human development and poverty reduction in India. India’s SEZs are not dominated by assembly type operations. ‘Value addition’ component and hence employment generation potential of zones is rather large. Much of this will be a net addition to employment as investment relocation/diversion in export oriented production is likely to be limited. Therefore,  There should be a vision in the design, establishment and operations of the SEZ.  It is necessary to develop zones as industrial clusters of specific products. The backward linkages would benefit the growth of accessories units as well.  The zones should specialise in terms of economic activities depending on the availability of human capital, resources and infrastructure in the region. They thus tend to transform into horizontally-integrated industrial clusters, which include industries that might share a common market for the end products, use a common technology or labor force skills, or require similar natural resources. It seems, therefore, that it would be desirable to develop zones as industrial clusters of specific products. This may encourage downstream industries also.  Zones in the long run need to give way to industrial clusters of horizontally and vertically integrated industries in general, high tech industries in particular. This would not only help to jump-start the manufacturing processes but would also improve export competitiveness with greater returns.  At present, there is no autonomous authority responsible for the development of zones and for providing single window clearances in India. The zone administration functions as a government department office.  Ideally, the SEZs should be managed by autonomous authorities, which should be constituted under specific Acts and should be assigned the responsibilities to promote the zones.

Fortune Institute of International Business

Page 55

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

org/ http://www.asp?id=1 _hubs http://www.htm http://sez.%202005.a spx Annexure SWOT Analysis of Indian SEZs Strengths Fortune Institute of International Business Page 57 .pdf http://www.ppt

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

maximising tariff revenue for customs authorities). This could be linked to the difficulty in reaching agreement between key ministries involved. how will these 'natural adversaries' help deliver this mandate? o Prospect of even more restrictive labour laws being introduced (eg. especially those involved in export promotion or fiscal policy. To increase investments in core strength areas like IT and software products and services. “reservations” for socially disadvantaged groups in private sector jobs). Threats o There are signs of an increasing rejection rate for proposals to establish SEZs. But with opposing interests (reducing tariffs to enhance trade for DGFT. Annexure – 2 Fortune Institute of International Business Page 59 . o Sops provided to the units in the SEZ’s could be disputed in the WTO – (eg. 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. This could lead to waning business confidence in SEZs.

Annexure – 3 Fortune Institute of International Business Page 60 .

Fortune Institute of International Business Page 61 .

Fortune Institute of International Business Page 62 .

Fortune Institute of International Business Page 63 .

Fortune Institute of International Business Page 64 .

Fortune Institute of International Business Page 65 .

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 .

Sign up to vote on this title
UsefulNot useful