Special Economic Zones in India: Objectives, Objections and Scenario

by DK Sinha
Special Economic Zones (SEZs) are specially earmarked geographical zones,
which can be developed by a private sector or public sector developer or in a
public private partnership (PPP) model.
In these zones, units function under rules and regulations different from those
under which other units in the country operate. The units in the SEZs have to be
net foreign-exchange earners but they are not subjected to pre-determined
value addition or asked to fulfill minimum export performance requirements.
Approved industrial units, banks, insurance, etc., can be located here.
SEZs in India are modified versions of the earlier export processing zones. The
policy to set up SEZs, first introduced in April 2000, got a legal validity with the
SEZ Act passed in 2005. The Act came into force on February 9, 2006.
A state can have more than one SEZ with freedom to the manufacturing unit to
establish in any SEZ in any state. State governments will have to attract industry
by framing bold policies and providing world-class external infrastructure to the
zone.
The SEZ Act includes India specific rules which provide for drastic
simplification of procedures and single window clearance on matters relating to
Central and state governments along with income-tax exemptions for 15 years.
They also provide for setting up multi-product and product-specific zones while
also making provisions for services sector SEZs.
It was clarified that there would be no relaxation of labour laws in these zones
though some states had sought relaxation of these provisions. Other laws of the
land would also prevail, but for the purposes of customs duty levies, the zones
would be treated as foreign territory.
Objectives of SEZs:
In an era of intense competition for markets and investment, SEZs attract
export-oriented foreign direct investment and develop industrial skills and
resources to successfully compete in the international economy.
They can promote foreign trade.
They can create employment.
They can develop relatively less developed areas, and thus reduce disparities in
socio-economic development, besides accelerating industrialisation and
urbanisation.
Why Opt for SEZs:

The SEZs provide facilities to help support production units which can match the
international level in quality. The SEZ exports can reach a staggering high,
boosting a countrys exports tremendously. They promote economic activity
through backward and forward linkages with domestic economies and aid in
development of technological and learning spillovers. They are one way of
ensuring infrastructure and other facilities come up across the countrya
difficult thing to ensure otherwise.
The world-class infrastructure set up will cut down the cost of conducting
business and render the industry competitive globally. The infrastructure will
include electricity availability at competitive rates, capital availability at
internationally benchmarked rates, good transport links to check shipment
delays and flexible labour laws.
The SEZs are duty-free enclaves and deemed foreign territories where trade
operations, duties and tariffs are concerned. The exemptions given to SEZs
mean that infrastructure facilities are available at lower cost. SEZs are also seen
as good attractions of FDI.
Objections to SEZs:
In spite of the advantages of SEZs, objections have been raised against the
utility of SEZs. Economists argue that they attract investment by extending
lopsided incentives rather than creating competitive conditions. The SEZs cannot
operate to a countrys advantage without certain necessary conditions. Proper
location, incentives, policies, linkage between them and the domestic sector and
sufficient trained human capital are all necessary to prop up the SEZs.
There should also be the back-up of accurate identification of markets, multimarket strategy and other factors. It is also feared that as the policy inside the
SEZs is quite attractive, investors may relocate their operations here to benefit
from the facilities.
So the incentives to firms may put a fiscal burden on the taxpayer. The costs of
maintaining zone privilegesdirect and indirectwould lead to pockets of
prosperity and the economy as a whole in the true sense would not benefit.
Special tariff zones that are being created go against canons of public finance
that advocate uniformity. There is also the question whether the selectivity
inherent in the SEZ policy might slow down action on the more difficult work of
improving infrastructure for the whole country. Critics also fear that SEZs would
come up in those states with a strong tradition of manufacturing and exports:
this would only aggravate regional, disparities.
The National Association of Software and Service Companies (NASSCOM) has
said that the SEZ scheme favours big companies and not small ones.
Apprehensions have been expressed on misuse of the scheme and relocation of
existing industries into SEZs. However, experience has shown that these

apprehensions are ill-founded and fresh investments and employments have

been flowing into the SEZs.
The benefits derived from multiplier effect of the investments and additional
economic activity in the SEZs along with the employment generated is
estimated to far outweigh the revenue losses on account of tax exemptions
given to the SEZs. These SEZs are freshly developed industrial clusters and are
not relocated from elsewhere.
Concerns have also been expressed regarding acquisition of agricultural land for
setting up SEZs.
The SEZ Scenario in India:
The Union government notified SEZ rules in February 2006 operationalising the
Special Economic Zones Act, 2005.
Some eight working SEZs were there initially, all converted from what were
export processing zones. These SEZs are in Gujarat (Kandla and Surat), Kerala
(Kochi), Maharashtra (Santa Cruz, Mumbai), West Bengal (Falta), Tamil Nadu
(Chennai), Andhra Pradesh (Visakhapatnam) and Uttar Pradesh (Noida).
Some other SEZs that have come up in the; countries as of 2009-10
were as follows:
i. Nokia Special Economic Zone, Tamil Nadu (telecom equipments)
ii. Apache SEZ, Andhra Pradesh (footwear)
iii. Mahindra City SEZ, Tamil Nadu (apparel and fashion accessories, IT,
hardware-auto ancillary)
iv. Wipro Limited, Andhra Pradesh (IT)
v. ETL Infrastructure IT SEZ, Tamil Nadu (IT)
vi. Flextronics SEZ, Tamil Nadu (electronic hardware)
vii. Divvys Laboratories Ltd., Andhra Pradesh
viii. Wipro Limited, Karnataka2 SEZs in Sarjapur and Electronic City (IT)
ix. Biocon Limited, Karnataka (biotech)
x. Manyata Promoters Private Ltd., Karnataka (IT)
xi. Hyderabad Gems Ltd, Hyderabad (gems and jewellery)
xii. Serum Bio-Pharma Park, Maharashtra (pharma)

xiii. Mundra Port and Special Economic Zone Gujarat

xiv. Moser Baer SEZ, Noida, Uttar Pradesh (non- conventional energy)
xv. Chandigarh Administration, Chandigarh (IT)
xvi. Maharashtra
(multiproduct)

Airport

Development

Corporation

Ltd,

Maharashtra

The SEZ scheme got mired in controversy leading to a freeze on them for some
time.
On April 5, 2007, the government lifted the freeze on approving new SEZs but
changed several parameters to make the policy more acceptable. The
empowered Group of Ministers (eGoM) which gave the go-ahead heeded the
political concerns over crucial features of the policy.
The eGoM introduced a 5,000-hectare ceiling on the size of SEZs, tighter norms
for utilisation of land for core activities (raising the minimum share of the
processing area within them from 35 per cent to 50 per cent and reviewing list of
non- processing activities), and barring states from getting into land acquisition.
More importantly, the eGoM said that at least one member of each displaced
family be given a job in the SEZ.
However, no cap on the number of SEZs was fixed and the objections raised by
the finance ministry, particularly those related to loss of revenue because of tax
sops to developers, was turned down by the eGoM.
The eGoM also settled for a new comprehensive policy on land acquisition. To
ensure that existing projects do not get hit, the ministerial panel decided to fix
February 10, 2006 as the cut-off date.
The eGoMs new norms for the SEZs have provided a partial solution to this
controversy- marred concept. Firstly, the main objective of the policypromoting
the production of goods and services rather than real estate and commercial
developmentis sought to be strengthened by raising the processing area in an
SEZ uniformly to 50 per cent of its extent.
Secondly, a ceiling of 5,000 hectares is fixed on the size to keep the
administrative and social costs of dislocating people from farms and homes
manageable. Thirdly, the most significant change is the ban on the exercise of
the states power of eminent domain to compulsorily acquire land in the case of
pending applications for SEZs.
Compulsory acquisition has been the lightning rod for protests by farmers, social
activists and political parties and the change in policy should serve to defuse
much of the opposition to SEZs on the ground. The use of the Land Acquisition
Act of 1894 involves the obvious inequity in compulsorily acquiring land at low

prices from farmers, ostensibly for a public purpose, and handing it to industries
and real estate developers.
The change of use invariably saw land values increase several fold, the gains of
appreciation going to government agencies, industries, and real estate
developers rather than to the farmers. With SEZ developers now having to buy
land from willing sellers possibly at much higher prices, farmers will no longer be
uprooted against their will.
Still, two major policy areas remain unaddressed. Firstly, income tax concessions
and exemption from import duties, service tax, Central sales tax, and state taxes
are offered to SEZ developers and units. These results in a substantial loss of
revenue and the question arise if such tax incentives-led industrialisation is
sustainable.
Secondly, rapid growth and industrialisation have brought to the fore the issue of
conversion of farmland and wasteland to industrial, commercial, and residential
uses. The reform of land use planning laws and regulations to make them more
transparent and rule-based and the development of efficient land markets brook
no delay. An important component of the policy should be the rehabilitation of
farmers and farm labour, who will be unsettled from their traditional avocations.
In brief, what changed in 2007 are:
i. Area of an SEZ capped at 5,000 hectares; States can fix lower ceiling.
ii. State governments barred from acquiring land; developers will have to do it on
their own.
iii. At least one job per family of those displaced.
iv. Developers to devote at least 50 per cent area to core activities like
manufacturing.
v. List of non-processing activities may be reviewed.
vi. What has not changed are:
vii. No cap on number of SEZs.
viii. Tax exemptions.
SEZs vs New Towns:
SEZs and new integrated townships have become current buzzwords in urban
development. Integrated townships are seen as a planned way to provide worldclass residential environment capable of attracting foreign investment. SEZs are
conceived as privileged sites of production that enjoy tax holidays, exemption
from red-tapism and the many legal hurdles typically associated with
development in India. The government sees SEZs as instruments of boosting

exports, generating employment and attracting foreign direct investment.

However, the private sector, and not the government, drives both these types of
development in India today.
The important question that is being asked is whether SEZ or new township is
better suited as an urban development model. Experiences of other countries
show patterns of convergence where large SEZs do not remain sites of
production for long, but become self-sufficient urban developments.
On the other hand, the trend of mixed-use developments specifically under the
banner of new urbanism, and anti-sprawl smart growth, create opportunities
for work within housing. Both SEZs and new townships, for now, sell the vision of
economic prosperity and the good life according to western standards by
exploiting globalisation to overcome the constraints of local markets.
These developments transplant internationally standardised architecture on
Indian landscapes and provide good infrastructure. In actively imagining
globalisation through design and exclusionary planning, they stand apart from
the existing fabric of their surroundings, which are typically chaotic, grappling
with urban poverty and surviving on informal systems.
The experience of SEZs in China show while the enclaves themselves provide
ladders for upward mobility and better life, the development advantages they
enjoy are not shared with the surrounding region.
The question really is, whether there could be ways of planning other than
catering solely to economic interests. Whether there are ways in which SEZs or
townships could provide for social space, better integration with the
surroundings,
and
more
equitable
and
environmentally
sustainable
developments.
There are many sections who strongly oppose the idea of SEZs. The entire
opposition is premised on a preconceived notion that SEZs are an evil. But the
current realities seem to demand a new vision. It is rather high time to move
beyond this notion and figure out how agriculture and industry can coexist.
Facilitating such coexistence is achievable. All that is needed is to strike a clear
distinction while notifying land for such projects.
In the present scenario, it cannot be ruled out that agriculture is still the source
of sustenance for most Indian families. In what could be seen as a major
paradox, cultivable land in India has been shrinking every year. The onus to
ensure that fertile land is not notified for industrialisation should be on
respective state governments. They should also ensure that such projects are
limited to barren and wasteland.
What must be understood is that creation of new industrial townships, meant to
supplement the crumbling urban infrastructure of the country, can no longer be

postponed. That apart, SEZs are important also because they would aid the
much needed decentralisation of development and urban governance.