Economics Affairs: Vol-54 No.3 & 4 (2009) Page No.

171 to 177

Special Economic Zones: An Overview

A. Abdul Raheem, C. Prabu and H. Yasmeen Sultana

ISS Lecturer and Research Supervisor, Department of Economics, The New College ,Chennai , Tamil Nadu 'Research Scholars, Dept. of Economic, The New College, Chennai Tamil Nadu

Abstract
A Special Economic Zone (SEZ) is a geographical region that has economic laws that are more liberal than a country's typical economic laws. The category 'SEZ' covers a broad range of more specific zone types, including Free Trade Zones (FTZ) Export Processing Zones (EPZ) Free Zones (FZ) Industrial Estates (IE), Free Ports, and other. Usually the goal of an SEZ is to increase foreign investment. Special economic zones (SEZs) as conceived by the government will be a powerful instrument to achieve rapid growth in manufacturing, employment and exports. Investments so for in SEZs, in India is around $700 million and within five years this is expected to grow to $306 billion. Over five lakh additional employment would be created with in SEZs and 15 lakh jobs out side, while the additional employment in the construction stage is expected to be 2.56 million man days. Therefore this paper examines an overviews of Special Economic Zones in India.

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Introduction
In the Globalisation process, the world is moving towards the concept ofa global village. India is no exception to the changes taking place the entire world over. In view of the Globalisation process which is taking place with an astonishing speed in the various parts of the world, the question of openness in trade and capital for economic development in the emerging economic development in the emerging economies has come into sharper forces. India has opted for a policy of import substitution or inward orientation approach to export promotion or outward orientation approach. This paradigm shift is an important change aspect. Thus, 'Trade or Perish' is the new mantra for policy makers. Special economic zones (SEZs) as conceived by the government will be a powerful instrument to achieve rapid growth in manufacturing, employment and exports. The government has provided a concrete shape to SEZs through the SEZsAct of2005, assuming SEZs, are crucial for generating employment, boosting manufacturing and allowing India to complete with countries such as China. There has been an unprecedented flood ofSEZs while the entire world has 400 SEZs and China only six and India has crossed 267 SEZs approval with in a year. Investments so for in SEZs, in India is around $700 million and within five years this is expected to grow to $306 billion. Over five lakh additional employment would be created with in SEZs and 15 lakh jobs out side, while the additional employment in the construction stage is expected to be 2.56millionman days. India was one ofthe first in Asia to recognize the effectiveness of the Export Procession Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965, with a view to overcome the shortcomings expressed on account of multiplicity of controls and clearances, absence of world-class infrastructure and an

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unstable fiscal regime and with a view to attract larger foreign investment in India the Special Economic Zone policy was announced in April 2000. The main difference between an SEZ and an EPZ is that the former is an integrated township with fully developed infrastructure where as an EPZ is just an industrial enclave. A Special Economic Zone (SEZ) is a geographical region that has economic laws that are more liberal than a country's typical economic laws. The category 'SEZ' covers a broad range of more specific zone types, including Free Trade Zones (FTZ) Export Processing Zones (EPZ) Free Zones (FZ) Industrial Estates (IE), Free Ports, and other. Usually the goal of an SEZ is to increase foreign investment. In order to provide a significant thrust to the policy, the government enacted the SEZ Act 2005. The Act became operative in February 2006 after the SEZ rules were framed and notified. One of the earliest and the most famous Special Economic Zones were founded by the government of the peoples Republic of China under Xiaping in the early 1980s. The most successful Special Economic zone in China, Shenzhen has developed from a small village into a city with a population of over 10 million within 20 years. Following the China experiment, Special Economic zones have been established in several countries including Brazil, India, Iran, Jordan, Kazakhistan, Pakistan, the Philippines, Poland, Russia and Ukrain. The Special Economic Zones in India closely follow the model of the Peoples Republic of Chine. 1.2 BENEFITS OF SEZs: SEZs is a novel attempt to overcome the infrastructural bottlenecks, procedural delays, bureaucratic hassles and barriers created by monetary, trade fiscal, taxation, tariff and labour policies. Since country-wide infrastructure is expensive and implementation of structural reform would required time, the establishment of SEZs in an important, strategic tool for speeding up the process of industrialization. The SEZs offer positive signals for domestic and foreign investors. These measures are likely to create a conductive business environment to attract local and foreign investment in a sizeable amount (See Table 1). Table 1: Export from the Functioning of SEZs during Last 3 Years Year 2003-04 2004-05 2005-06 2006-07 Value(Rs. in crores) 13,854 18,314 22,840 34,787 Growth Rate over Previous year 29% 32% 24.7% 52.3%

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Note: Project exports from all SEZs for 2007-08 is Rs. 67088 crores

Source: www.sezindia.nic.in
The SEZs are expected to give a big push to exports, employment and investment. Investment of the order of Rs. 1,00,000 crores including FDI of US $ 5-6 billion is expected by the end of December 2007. More than 5,00,000 direct jobs are expected to be created by December 2007. The benefits delivered from the multiplier effect of the investment and additional economic activity in the SEZs and the employment generated thus will far outweigh the tax exemption and the losses on account of land acquisition. 1.3 CHALLENGES AND ISSUES The special economic zone Act 2005 basically violates the right to life and livelihood of the people who are

forcibly displaced for the implementation of the project. It raises the issue of land based livelihood of the farmers, environmental concerns labour exploitation. On land grabbing the principle of Eminent domain which is the basis of Land Acquisition act of 1894 is being misused and even given priority over the principles in the 73rd and 74th amendments of the Constitution that gave primacy to Gramasabhas as autonomous decision making entities. Talks should be held with people's groups communities and Panchayat representatives to seek their opinion on strengthening local economics. The status of deemed foreign territory being granted to the SEZs, will further undermine the sovereignty of the local governance system, what is really challenging the governance system is the concentration of power in the hands of commissioner at the state level and in the Board of approval at the centre. The empowered groups of ministers on SEZs and Board of approvals is severely criticized for this by civil society groups and sought repeal of the act and cancellation of the approved and notified SEZs, and return of the land. Ironically the SEZs are being granted approvals with no single mention of studies being carried out on social environmental impact and damage. It has been repeatedly high lighted that very legislative frame work of SEZs is problematic, making it a draconian act, that promotes large scale privatization and monopoly of resources in the hands of a few private developers at huge costs to the exchequer as well as economy and environment. (The Board of approval under the commerce ministry has already granted formal approval for 237 projects of which 63 have been notified while hundreds are still awaiting for approval) India is already going through a crisis in terms of water scarcity as well as loss of forests and bio-diversity. In the current frame work of economic development, the costs of loss of forests and other common lands, large scale exploitation of water resources, coastal land and environmental pollution are not being computed. These observations have been endorsed by eminent farmers, individuals, dalits, adivasis, fisher workers and women's rights groups non-government organizations researchers and intellectuals. The SEZs projects promoted by the government in the name of creating jobs in reality depriving the people of existing means of livelihood. The SEZs and town ships strike at the root of constitutional guarantee of social and economic equality by creating isolated islands of comforts for the rich and powerful. This is a new form of colonization (the sorry state of people uprooted by the grand projects of the past such as sea-bird at Karwar of Karnataka were the proof of the failure of rehabilitation packages). How can one set of people be rendered landless to provide more lands to rich with bonus of tax holidays and free resources? The concession given to SEZs far out weighed the claims of investment and employment generation. The RBI statistics shows that 1,75,000 crore rupees concession were given to SEZs in India as against an investment of Rs. 1,00,000 crore. The Industries coming up in SEZs were technology intensive and did not create jobs to justify concessions. 1.4 SEZs PROSPECTS The SEZs offer the only way forward in bridging the gap between India and South Asia (including China) in terms of Manufacturing and employment. Indian economic growth so far fuelled by service and domestic demand. However manufacturing had been hampered by the burden of embedded taxation lack of infrastructure and enormous procedural issues all of which added to costs and thus rendered industries uncompetitive to that extent that the concept of SEZs was intended to address these issues and bangon it was most relevant. The focus of SEZs should be on manufacturing. Incentives for developers and industrial units were necessary

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initial distortions. Since with zero distortions there will be no mobility. The gap in the fiscal incentives applicable to manufacturing inside and out side SEZs should not be more than reasonable. The vision of the programme of SEZs, was the creation of 500 industrial townships and large zones with adequate infrastructures. The risk of abuse of incentives for the banks and state governments should exercise vigilance over individual zones to see whether they are representing a land grab game or infrastructural game. It is for the states to decided where to locate zones which ideally should not be too close to urban centers and at the same time not in the deep agricultural regions. Lands should be acquired at close to market rates and also land owners be given a share of 15% in the post facto appreciation of land values in the future promise of development augments land value and when development does happen the value exalted further The setting up of SEZs should not be done in an ad-hoc manner but should be based on solid scientific facts, this calls for mapping of the areas through remote sensing. Farmers with little land holdings are struggling on their own with out any advice. However there has arisen a need for diversification employment both on farm and nonfarm sectors and this called for judicious utilization of available land. The mapping would help in finding true biological potential of particular area and based on that the development process should be taken up.
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Special economic zones (SEZs) should be set up on barren lands. There is a sizeable barren land in the country that could be chosen for development of SEZs. Selecting locations for SEZs would not affect productive agricultural land of farmer's lively hood. A survey of farmers opinion about farming on such barren land show that many farmers did not want to continue with farming on their land. This indicates that farmers would shift to non-agricultural sectors that would have to be encouraged and encouraging industrialization and service sector must aim at accommodating farmers for employment in these sectors through proper education and training. The unemployed youth farmers would get on jobs skills development, training through industries associations by paying stipend for trainees with varying durations depending up on the nature of sector. Considering the need to enhance foreign investment and promote exports from the country and realizing the need that level playing field must be made available to the domestic enterprises and manufactures to be competitive globally, the Govt. of India in April 2000 announced the introduction of SEZs policy in the country. As per the policy, SEZs are deemed to be foreign territory for the purposes of trade operations, duties and tariffs. The SEZs in India closely follow the PRC model. Units may be set up in SEZ, for manufacture of goods and rendering of services. All the import / export operations of the SEZ units will be on self-certification basis. The units in the zone have to be a net foreign exchange earner but they shall not be subjected to any pre-determined value addition or minimum export performance requirements. Sales in the Domestic Tariff Area by SEZ in the Domestic Tariff Area by SEZ units shall be subject to payment of full customs duty and import policy in force. Further offshore banking units may be set up in SEZs. With a view to augmenting infrastructure facilities for export production, it has been decided to permit the setting up of SEZs in the public, private, joint sector or by the State Governments. The minimum size of the SEZ shall not be less than 1000 hectares. The SEZ Act was officially passed in 2005 but operationalised in February 2006 i.e., it came into force with effect from 20th February 2006. On the same day the Ministry of Commerce and Industry notified the SEZ Rule 2006. The SEZ Policy of 2000 was the work of Murasoli Maran, the then Commerce minister who, inspired by Guangdong SEZs made the concept a central part of the 2000 EXIM Policy. The SEZ Act of 2005 was the result of various efforts at honing the concept to suit local needs. Till May 9, 2007 the Board of Approval (BOA) for SEZs has formally cleared 212 proposals have

been given to 152 (The Economic Times dt. 9-5-2007). All these SEZs are in various parts of the country (spread over 17 states and 2 Union Territories) in the private / joint sectors or by the State Govt. 1.5 INDIAN SEZs SPECIAL FEATURES AND CONCESSIONS An SEZ is a specific zone in India deemed to be a foreign territory for the purpose of the trade operations and duties / tariff. The key objective of the SEZ scheme is to attract investments into India by providing fiscal incentives to units located in an SEZ. Accordingly the following concessions and incentives are made available to them: (i) (ii) (iii) (iv)
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A designated duty free enclave and to be treated as foreign territory for trade operations and duties and tariffs. No license required for import. Exemption from customs duty on import of capital goods, raw materials, consumables, spares, etc. Exemption from central excise duty on procurement of capital goods, raw materials, consumable spares, etc. from the domestic market. Reimbursement of central sales tax paid on domestic purchases. 100% of Income Tax exemption for a block of five years, 50% of tax exemption for 2 years and up to 50% of the profits ploughed back for next 3 years under sec 10-A of Income Tax Act.

(v) (vi)

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(vii) 100% of Income Tax exemption for 3 years and 50% for 2 years under section 80 LA of the Income Tax Act for offshore banking units. (viii) Profits allowed to be repatriated freely without any dividend balancing requirement. (ix) (x) (xi) Exemption from industrial licensing requirement for items reserved for small scale industries (SSI) sector. No cap on foreign investment for SSI reserved items. Facility to retain 100% foreign exchange receipts in EEFC (Exchange Earners Foreign Currency) account.

(xii) No fixed wastage norms. (xiii) 100% Foreign Direct Investment in manufacturing sector allowed through automatic route barring a few sectors. (xiv) In house customs clearance. (xv) No routine examination by customs of export and import cargo.

(xvi) Supplies from Domestic Trade Areas (DTAs) to SEZ units to be treated as deemed exports. (xvii) SEZ units to be positive net foreign exchange earners within three years. However there is no minimum limit on the foreign exchange required to be earned by them. (xviii) Income Tax exemption to investor's in SEZs under section 10 (23 G) of Income Tax Act.

(xix) Investments made by individuals etc in SEZ developing companies eligible for exemption under the then section 88 of the Income Tax Act. 1.6 CONCLUSION Though theoretically, conceptually, economically, financially and operationally SEZs appear to be a blessing actually it is not so. Throughout the country the creation of SEZs has created a big fervor among politicians, economists, farming community, tax people and social workers. Specifically the states in which the SEZs have been approved are facing intense protests from the farming community, accusing the government of forcibly snatching fertile land from them at heavily discounted prices as against the prevailing prices in the commercial real estate industry. Dr. Abhirup Sarkar, Professor of Economics, Indian Statistical Institute, Kolkata rightly highlighted the problem: The problem is one of development versus displacement. For the development process to take off, land is needed. This means displacing people. So the success of a development strategy would depend on how the displaced people are rehabilated. The authorities before clearing any SEZ proposal should address the issue of rehabilitation of displaced people. Another issue to be given a serious concern in this regard is the huge loss of tax revenue to be suffered by the exchequer in view of the plethora of exemptions to be given to these SEZs. All these exemptions (tax cut, no duty, not income tax, etc), it is estimated, will mean a revenue loss of more than Rs. 1.75 lakh crores to the state exchequer after 5 years. This staggering amount is enough to feed the country's 320 million people who go to bed hungry stomach for a number of years or provide guaranteed employment to at least two members each of the rural families for the next 5 years. Whether the SEZs, already established and to be established would give more than this to the country and its stakeholders? No clear cut answer one could give for this though the commerce ministry is optimistic that these zones could make the exchequer richer by Rs. 45,000 crores annually. Facilities and opportunities created by developers of SEZs Usually any SEZ includes and provides the following facilities: Business Living Learning Safety and security Health care Recreation Utilities Logistics Industrial land on lease, ready built sheds, commercial offices and buildings Residential and social areas Schools, colleges, institutions and centers of excellence Adequate focus on security and disaster management systems Specialized and primary healthcare facilities Theme parks, restaurants, hotels and golf courses Efficient and reliable power, water, waste management and technology facilities A comprehensive logistics system encompassing road, rail, air and sea linkages.

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This is an era of opening up of economy worldwide. When the economy is opened up these sort of zones have to be allowed. But the opening up of economy should not open further and further the floodgates of the few abundantly affluent people only. It should give an economic opening to the major stakeholder of this country i.e. the poor and downtrodden,

most of whom belong to the farming community. That is the real opening up of the economy. REFERENCES 1. 2. 3. 4. 5. 6. 7.
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Aravanan, S., 2008. 'Special Economic Zones A Review', Indian Economic Panorama, 18(2), PP. 15-16. Economic Survey 2006-07, Government of India, New Delhi. Maria John Kennady, M., and Vennila, K. 2008 . 'Special Economic Zones: Problems and Prospects', Southern Economist, 47(2), PP. 43-44. Prabhudev, M.K., 2007 . 'Special Economic Zones: A Myth or Reality; Southern Economist, 46(2), PP. 3132. Puja Mehra, 2007. 'SEZ Controversy: Course Correction; India Today, PP. 64-65. Shankar Aiyar, 2006 . 'SEZ Good, Bad, Ugly' India Today, PP. 53-63. The Hindu Business Line dt. 18.12.2006

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