Special economic zones in India

Why in new?

The government has amended the minimum land requirement from 500 to 50 hectares and categorization of special economic zones. The new rules will now enable co-existence of any SEZ from any sector with others. The steps may help unlock the potential of SEZs to attract investments and boost exports.

What is a special economic zone?

A Special Economic Zone (SEZ) is an area within a country where there are different trade and business laws from the remaining regions of the country. Basically, in an SEZ, the economic laws that would apply in that geography would be different and more relaxed and conducive to commerce when compared to the other areas of the country.

Countries create SEZs motivated by the need to attract foreign direct investment (FDI). A company located within an SEZ will get many benefits; it will be able to produce and trade goods at globally competitive prices. China successfully exploited the concept of SEZs. 

 Examples of SEZs Shenzhen in China, Incheon in Korea, East Coast Economic Region in Malaysia. Indian example Santa Cruz Maharashtra, Cochin Kerala, Kandla Gujrat.

What are aims to create SEZs?

1. Attract FDI as well as domestic investment
2. Increase export potential of both Goods and services
3. Generate large scale employment opportunities
4. Develop world class infrastructure to promote additional economic activity  

What are benefits provided in a SEZ?     

The incentives and facilities offered to the units in SEZs for attracting investments into the SEZs, including foreign investment include: -

• Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units
• 100% Income Tax exemption on export income for SEZ units for first 5 years,
• Supplies to SEZs are zero rated under IGST Act, 2017. 
• Other levies as imposed by the respective State Governments.  
• Single window clearance for Central and State level approvals.

What are reasons for sub optimal performance of SEZs?

1. Selection of site for SEZs based on real estate speculation that benefits local politicians rather than development potential. SEZs can succeed only if they are strategically located.
2. Local politicians also use site selection of SEZs to target specific ethnic and caste groups to create vote banks.
3. SEZs have failed to provide state-of-the-art technology and infrastructure facility, which reduces the cost of operations and act as an incentive for exports.
4. There has been a rush towards creating several small SEZs without looking at location and connectivity factors which has led to the underperformance of the zones.
5. IT sector shifted its location from domestic tariff areas to SEZs to benefit from tax concessions without generating additional economic activity or employment.
6. Lack of coordination between state and center bureaucracy in terms of various clearances.
7. Various SEZs incentives have been alleged to violate WTO rules, countervailing duties imposed by importing nation take benefits given by SEZs incentives rendering products less competitive.

How to revive SEZs in India?

1. The development of SEZs along economic corridors and smart cities would not only help the zones to access the logistics and social infrastructure, but would also enable them to have linkages with other industrial clusters. 
2. Larger SEZs could help the zones reap economies of scale.
3. Framework shift from export growth to broad-based Employment and Economic Growth (Employment and Economic Enclaves-3Es).
4. Formulation of separate rules and procedures for manufacturing and service SEZs.
5. Enhance competitiveness by enabling ecosystem development by funding high speed multi modal connectivity, business services and utility infrastructure. Critical to provide support to create high quality infrastructure either within or linked to the zones e.g. High-Speed Rail, Express roadways, Passenger/Cargo airports, shipping ports, warehouses etc.
6. Promote integrated industrial and urban development.
7. Enabling framework for Ease of Doing Business (EoDB) in 3Es in sync with State EoDB initiatives. One integrated online portal for new investments, operational requirements and exits related matters.
8. Infrastructure status to improve access to finance and enable long term borrowing.
9. Promote MSME participation in 3Es and enable manufacturing enabling service players to locate in 3E.
10. Dispute resolution through arbitration and commercial courts.