“PROSPECT OF SPECIAL ECONOMIC ZONE IN DEVELOPMENT OF INDIAN ECONOMY”

A PROJECT STUDY SUBMITTED IN PARTIAL FULFILLMENT FOR THE REQUIREMENT OF THE THREE YEAR POST GRADUATE DIPLOMA IN

MANAGEMENT (EVENING) 2007-2010

BY

KUMAR RANDHIR SINGH11/ 2007-10

UNDER THE GUIDANCE OF

(DR PANKAJ KUMAR)

LAL BAHADUR SHASTRI INSTITUTE OF MANAGEMENT, DELHI

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MARCH 2010LAL BAHADUR SHASTRI INSTITUTE OF MANAGEMENT, DELHI

Sector-3, R. K. Puram, Delhi

Dated 15.03.2010

CERTIFICATE

Certified that KUMAR RANDHIR SINGH has successfully completed Project Study entitled

“PROSPECT OF SPECIAL ECONOMIC ZONE IN DEVELOPMENT OF INDIAN

ECONOMY” under my guidance. It is his original work, and is fit for evaluation in partial

fulfillment for the requirement of the Three Year Post Graduate Diploma in Management

(Evening).

(Kumar Randhir Singh) (Dr. Pankaj Kumar)

Roll No. 11/2007 Project Guide

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ACKNOWLEDGMENTS

Success is not a destination, but a journey – i t is often said. I realized it even

better while doing the Management Research Project. When I completed this

journey, I may not have come this far without help, guidance and support of

certain people who acted as guides, friends and torch bearers all along the

way.

First of all, I would like to thank my family who has supported me in this long and strenuous

research process. They helped me in everything and without their help and co-operation; this

project would have not been possible.

I would also like to express my gratitude to my guide, Dr. Pankaj Kumar for his constant

and determined guidance throughout the research process. Dr. Pankaj Kumar, who

have inspired and guided me, for undertaking this project, his input to this study was

very useful right from commencement to finish. I would also like to express my

gratitude to Miss Ritka Makker, her support is also important in the completion of

this research.

Here are many more people whose contribution to this endeavor cannot be

overlooked. Their appreciation mixed with constructive advice not only made

my work interesting but also laid a strong foundation for my project. I express

my sincere thanks to all the people who, directly or indirectly, contributed in

time, energy and knowledge to this effort .

KUMAR RANDHIR SINGH

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ABSTRACT

This project paper is a research to study the Prospect of Special Economic Zones in Development of Indian Economy. This study is an endeavor to analyze the impact of Special Economic Zones in India on growth and development of its economy, creation of employment and other aspects. It also aims at examining the impact of Special Economic Zones (SEZs) on human development and poverty reduction in India. It identifies three channels through which SEZs address these issues: employment generation, skill formation (human capital development), and technology and knowledge upgradation.

The Project also analyzes the impact of SEZ in generating export and foreign currency. Considering the need to enhance foreign investment and promote exports from the country and realizing the need that a level playing field must be made available to the domestic enterprises and manufacturers to be competitive globally, more than 575 SEZs have been proposed. This has raised the concern of the World Bank, which questions the sustainability of such a large number of SEZs. This project studies the prospect of SEZ in development of Indian Economy.

The project also include a brief understanding of the SEZ formation, Business model and intricacies and oppositions and their reasons in Indian scenario.

The analysis reveals that ‘employment generation’ has been the most important channel through which SEZs lend themselves to human development concerns, in India. Employment generated by zones is remunerative. Wage rates are not lower than those prevailing outside the zones. Besides, working conditions, non monetary benefits (such as transport, health and food facilities), incentive packages and social security systems are better than those prevailing outside the zones, in particular, in the small/informal sector. The role of SEZs in human capital formation and technology upgradation is found to be rather limited. The study argues that the zones’ potential could not be exploited fully in India. This could primarily be attributed to the limited success of SEZs in attracting investment and promoting exports

However the creation of SEZs alone does not ensure the realization of their potential. The government will need to play a more proactive role for effective realization of the full range of benefits from SEZs so that its contribution in all round development of Indian economy along with human capital is not just myth.

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Executive Summary

A Special Economic Zone (SEZ) is a geographical region that has economic laws that are more liberal than a country's typical economic laws. Usually the goal is an increase in foreign investment.

Special Economic Zones (SEZs) were established in many countries as testing grounds for implementation of liberal market economy principles. SEZs are viewed as instruments enhancing the acceptability and credibility of transformation policies, attracting domestic and foreign investment and also for the opening up of the economy. SEZs in India seek to promote the value addition component in exports, generate employment as well as mobilise foreign exchange.

Globally, many countries initiated Free Trade Agreements (FTAs) which eventually led to a spurt in investments in infrastructure developments for Free Trade Zones (FTZs) and SEZs. A close examination of the evolution of SEZs in countries with similar economies as India eg; China, Iran, UAE and Jordan, will help us to understand their success stories and thereby implement those factors, in order to curb the SEZ bottlenecks faced by India today. The Shenzhen SEZ in China is a perfect example of a SEZ success story.

In India, the government has been proactive in the development of SEZs. They have formulated policies, reviewed them occasionally and also ensured that ample facilities are provided to the SEZ developers as well as the companies setting up units in SEZs. These favourable conditions resulted in the biggest ever corporate rush for the development of SEZs in India. Over 234 companies received formal approval, 162 companies received in-principle approval and 100 companies received notification to set up SEZs. The Indian government is expecting an investment to the tune of Rs.53,561 crore (USD 13274 million) and an additional job creation for 15,75,452 individuals in SEZs by December 2009.

Despite all the efforts, SEZ development has become the most controversial issue for India today. It is very important to understand all aspects of SEZs such as basic concepts, its various models and the life cycle of its business before initiating any policy or investments for these projects. Despite the fact that the existing SEZ Act and FDI Policies for SEZs are very lucrative; the rationale behind the rapid economic and industrial The diagram below is a snapshot of the different types of Sez’s :

(Picture 1.1)

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TABLE OF CONTENT

Certificate 2

Acknowledgement 3

Abstract 4

Executive Summary 5

CHAPTER 1: INTRODUCTION1.1 Introduction 8

1.2 Objectives 9

1.3 Scope & Use of study 10

1.4 Rationale of study 10

1.5 Methodology 11

1.5.1 Period of study

1.5.2 Data Period

1.5.3 Sample

1.5.4 Type of Data

1.5.5 Sources of Data

1.5.6 Method of Data Classification

1.5.7 Technique of Data Analysis

1.6 Chapterisation of Project 11

CHAPTER 2 : CONCEPT AND ITS FRAMEWORK2.1 Meaning of SEZ 12

2.2 Objectives of SEZ 13

2.3 Activities in SEZ 14

2.4 The History of SEZ in India 14

2.5 Evolution of SEZs in India 15

2.6 Important SEZ in India 16

2.7 Formation of SEZ 17

2.7.1 How to apply in Sezs & areas permits for Sezs

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2.7.2 Approval mechanism & administrative set up of sezs

2.7.3 Facilities & Incentives to Sezs

2.8 Current status of Sezs in India 22

2.8.1 SEZs in India – Sector & State wise Distribution

2.8.2 Status of SEZ approvals as on 10.02.2010 2.8.3 Status of Operational SEZ as on 13.12.2009 2.8.4 Export Oriented Units & Export Performance.

2.8.5 Why is the SEZ Policy being opposed?

2.9 SEZs plays developmental role in Indian Economy 31

2.10 Effects of Sezs on Different aspects Employment effects, Human capital formation &Technology upgrading effects 32

2.11 Export Performances from the functioning Sezs 34 to 36

2.12 Total investment in SEZs & status of employment in SEZs 37 to 40

2.13 Benefits derived from SEZs: Employment and FDI generation 42

2.14 SWOT analysis on SEZs in India 43

CHAPTER 3: CONCLUSIONS 47

3.1 Strategies for strengthening SEZs

CHAPTER 4: BIBLIOGRAPHY

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CHAPTER 1

INTRODUCTION

1.1 IntroductionIndia was one of the first in Asia to recognize the effectiveness of the Export Processing Zone

(EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965. With a

view to overcome the shortcomings experienced on account of the multiplicity of controls and

clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a

view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy

was announced in April 2000.

This policy intended to make SEZs an engine for economic growth supported by quality

infrastructure complemented by an attractive fiscal package, both at the Centre and the State

level, with the minimum possible regulations. SEZs in India functioned from 1.11.2000 to

09.02.2006 under the provisions of the Foreign Trade Policy and fiscal incentives were made

effective through the provisions of relevant statutes.

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, a comprehensive draft

SEZ Bill prepared after extensive discussions with the stakeholders. A number of meetings

were held in various parts of the country both by the Minister for Commerce and Industry as

well as senior officials for this purpose. The Special Economic Zones Act, 2005, was passed

by Parliament in May, 2005 which received Presidential assent on the 23rd of June, 2005. The

draft SEZ Rules were widely discussed and put on the website of the Department of

Commerce offering suggestions/comments. Around 800 suggestions were received on the

draft rules. After extensive consultations, the SEZ Act, 2005, supported by SEZ Rules, came

into effect on 10th February, 2006, providing for drastic simplification of procedures and for

single window clearance on matters relating to central as well as state governments. The main

objectives of the SEZ Act are:

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(a) generation of additional economic activity

(b) promotion of exports of goods and services;

(c) promotion of investment from domestic and foreign sources;

(d) creation of employment opportunities;

(e) development of infrastructure facilities;

It is expected that this will trigger a large flow of foreign and domestic investment in SEZs, in

infrastructure and productive capacity, leading to generation of additional economic activity

and creation of employment opportunities.

The SEZ Act 2005 envisages key role for the State Governments in Export Promotion and

creation of related infrastructure. A Single Window SEZ approval mechanism has been

provided through a 19 member inter-ministerial SEZ Board of Approval (BoA). The

applications duly recommended by the respective State Governments/UT Administration are

considered by this BoA periodically. All decisions of the Board of approvals are with

consensus.

The SEZ Rules provide for different minimum land requirement for different class of SEZs.

Every SEZ is divided into a processing area where alone the SEZ units would come up and the

non-processing area where the supporting infrastructure is to be created.

1.2 ObjectivesThe main objectives of the study are:

To find out the expected increase in export, employment and output through Special

Economic Zones policy implementation in India.

To analyse the relative performance of Special Economic Zones.

The intricacies of setting up of Special Economic Zones by a firm, business module

and Financing.

Foreign Exchange generation by Special Economic Zones and FDI in Special

Economic Zones.

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1.3 Scope and Use of study

A Special Economic Zone (SEZ) is a geographical region that has economic laws that are

more liberal than a country's typical economic laws. Usually the goal is to increase

employment, export and output to generate foreign exchange. One of the earliest and the most

famous Special Economic Zones were founded by the government of the People's Republic of

China under Deng Xiaoping 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 over 10

million within 20 years. Following the Chinese examples, Special Economic Zones have been

established in several countries, including India, Iran, Jordan, Poland, Kazakhstan, the

Philippines, Russia, and Ukraine. In the United States, SEZ are referred to as "Urban

Enterprise Zones".

The Project analyzes the impact of SEZ in generating employment, export and foreign

currency. Considering the need to enhance foreign investment and promote exports from the

country and realizing the need that a level playing field must be made available to the

domestic enterprises and manufacturers to be competitive globally, more than 575 SEZs have

been proposed. This has raised the concern of the World Bank, which questions the

sustainability of such a large number of SEZs. This project will study the prospect of SEZ in

development of Indian Economy.

The project also includes a brief understanding of the SEZ formation, Business model and

intricacies and oppositions and their reasons in Indian scenario.

1.4 Rationale of studyOne of primary objective behind this study is to find out the impact of SEZ in India. It studies

the prospect of SEZ on GDP and relative changes on employment and generation of foreign

exchange and examines the merits and demerits of SEZ on different macroeconomics

parameters like, agriculture, domestic Industry and employment vis a vis farmers and export.

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1.5 Methodology

The information is most crucial, precious and vital in modern era. The person who can gather,

analyse and utilize it accurately and timely is a successful manager. In over to accomplish this

project successfully, task is taken up as follows:

1.5.1 Period of study

As SEZ policy is a new born baby in India, this study will take into account the post coming

of SEZ policy into existence. the SEZ Act, 2005, supported by SEZ Rules, came into effect on

10th February, The SEZ Act, 2005, supported by SEZ Rules, came into effect on 10th

February, 2006 so the period covered is from 2006 to end 2009.

1.5.2 Data Period: It covers a period of 4 years from 2005 to 2009.

1.5.3 Sample: The study comprises of all the SEZ functional in India till 2009 to examine

its impact on macroeconomic parameters of Indian economy.

1.5.4 Type of Data: The study is based on the secondary data, however as working for one

of the units in the Industry a vital insight into the development of SEZ that I gained has also

been included where ever deemed relevant.

1.5.5 Sources of Data: The necessary data have been collected and compiled from websites,

EBSCO database, journals, RBI annual reports & handbook on statistics, SIA news letter,

SEZ statistics, Ministry of Commerce and Industry, Annual Economic Surveys, magazines

and books.

1.5.6 Method of Data classification and analysis: The data has been classified year-wise,

SEZ-wise, region-wise and sector-wise.

1.5.7 Technique of Data analysis: As the history of SEZ is just 4 years old and only the

converted SEZs are functional, the data and its study with respect to GDP have been limited.

The statistical tools likes correlation and MS excel has been used to see the prospect of SEZ

on GDP growth of economy. Further, the percentage analysis has been used to see the trend

and measure of growth in SEZs from year to year.

1.6. Chapterisation Plan: The plan of study consists of Introduction, conceptual framework, literature review, data

structure and analysis and finally the findings and conclusion of the study.

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Meaning

Conceptually, Special Economic Zone (SEZ) is a geographical region that has economic laws different from a country’s generally applicable economic laws, with the underlying objective being an increase in economic growth and activity through increased foreign investment. SEZs have been established in several countries across the globe including the People’s Republic of China, India, Jordan, Poland, Kazakhstan, Philippines and Russia. According to World Bank estimates, as of 2007 there are more than 3,000 projects taking place in SEZs in 120 countries worldwide. Globally, establishment of SEZs have revolved around achieving the following basic objectives:

Economic growth and development – through exports and backward integration Foreign Investment Infrastructure development Employment generation Up-gradation of managerial and technical skills

Achievement of the above objectives through SEZs is typically facilitated through the following –

Income tax Holidays Hassle Free Environment Exemption from Indirect duties and taxes No currency restrictions Relaxed foreign investment norms Excellent infrastructure facilities

Special Economic Zone means a specified region in a state that has liberal economic laws in comparison to the state's typical economic laws. SEZs help in the economic and industrial growth of a country and this is the reason that the government of India is encouraging the setting up of more and more SEZs in the country

India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965. With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000.

Special Economic Zones (SEZs) Scheme in India was conceived by the Commerce and Industries Minister Murosoli Maran during a visit to Special Economic Zones in China in 1999. The scheme was announced at the time of annual review of EXIM Policy effective from1.4.2000. The basic idea is to establish the zones as areas where export production could takeplace free from all roles and regulations governing imports and exports and to give them operational flexibility. Special Economic Zone (SEZ) is a specifically delineated duty freeenclave, which shall be deemed to be a foreign territory for the purposes of trade operations and duties and tariffs.

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India is predicted to become one of the world’s leading economic powers. This poses new challenges for international firms and others willing to take advantage of India’s development. It also increases the need for proper knowledge about India’s corporate environment – its strengths, constraints and the implications for Sweden, Europe and the rest of the industrialized world.

India’s share of the world’s population is 17 percent, but it accounts for less than two percent of the global GDP and only one percent of world trade. It lags behind China and other emerging East Asian economies in key indicators such as per capita income, adult literacy rates, quality of infrastructure endowment and volume of foreign trade and investment. SEZs in India

However, it must be noted that India’s economy predominantly continues to concentrateon absorption of existing technology rather than development of new R&D or innovation at the global knowledge frontier. 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. There is considerable scope for more effective absorption of existing knowledge by expansion of foreign investments and trade, building effective capacity among Indian corporations, public education and research institutions coupled with various forms of collaboration between Indian and foreign partners.

The Indian economy is expected to grow at a rapid rate of 6–10 percent between 2007 and 2012 and beyond. By the year 2032, China will have the world’s largest economy, followed by the U.S. and India. In terms of purchasing power parity (PPP), even today India’s GDP is already the third largest in the world after the U.S. and China. While much of the country is likely to remain poor and industrially backward, other parts have the potential to grow as fast as China or other East Asian economies.

Objectives of SEZs

The objective behind an SEZ is to enhance foreign investment, increase exports, create jobs and

promote regional development. To put in the government’s own words, the main objectives of

the SEZs are:

(a) Generation of additional economic activity;

(b) Promotion of exports of goods and services;

(c) Promotion of investment from domestic and foreign sources;

(d) Creation of employment opportunities;

(e) Development of infrastructure facilities.

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Activities In SEZ

Manufacturing / Trading Service

Apparel, Garments & Leather IT enable services BiotechnologyAutomobile and Auto Components R & D ServicesEngineering - Light, Heavy & Application Health CarePharmaceuticals Financial ServicesFood Processing Knowledge (Education) ServicesTelecom Equipment Entertainment, Leisure & RecreationComputer Hardware & micro- electronics Sports & Related ActivitiesConsumer Electronics & Appliances Organized RetailGems, Jewellery & Diamonds Business Services (Convention / Exhibition)Wood, Rubber, Plastic & Warehousing & Trade Related ServicesLeather ProductsHandicrafts

The History of SEZs in India

The history of Sez In India suggests that the seeds of the basic concept of Special Economic Zone (SEZ) were sown in the mid sixties. Further, 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. Several other Export Processing Zones were set up at various parts of India in the subsequent years. 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. Thus, the performance of these Export Processing Zones of India fell short of expectations.

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. The SEZ policy of India was devised to act as a catalyst to promote the economic growth attained in the early 1990. The economic reforms incorporated during the 1990s did not produce the desired results. The Indian manufacturing sector witnessed a sudden dip in the overall growth of the industry, during the second-half of 1990s. The History of SEZs in India suggests that red tape, lengthy administrative procedures, rigid labor laws and poor physical infrastructural facilities were the main cause of deterioration of Foreign Direct Investments (FDI) inflow in to India. Further, the Indian markets were not mature enough to facilitate easy entry of Foreign Institutional Investors (FIIs) in to the Indian economic system. Furthermore, the legal framework of Indian economy was not strong enough to prevent misuse of Indian markets by the foreign investors. Thus, the lack of investor friendly environment in India prevented growth of Indian industry, in spite of implementation of liberal economic policy by the central government. This resulted in the formation of a much larger and more efficient form of their predecessors with world-class infrastructural facility.

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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. A number of meetings were held across India for the formulation of - 'The Special Economic Zones Act, 2005', which was subsequently passed by Parliament in May 2005. The SEZ Act, 2005 and SEZ Rules became effective on and from 10th February 2006. The SEZ Act 2005 defines the key role for the State Governments in Export Promotion and creation of infrastructural facilities. A Single Window SEZ approval mechanism has been facilitated through a 19 member inter-ministerial SEZ Board of Approval or BOA. And the decision of the SEZ Board of Approval is binding and final

EVOLUTION OF SEZs IN INDIA

In India, the first zone was set up in Kandla as early as 1965. It was followed by the Santacruz export processing zone which came into operation in 1973. The government set up five more zones during the late 1980s. These were at Noida (Uttar Pradesh), Falta (West Bengal) Cochin (Kerala), Chennai (Tamil Nadu) and Visakhapatnam (Andhra Pradesh). Surat EPZ became operational in 1998. The EXIM Policy, 2000 launched a new scheme of Special Economic Zones (SEZs). Under this scheme, EPZs at Kandla, Santa Cruz, Cochin and Surat were converted into SEZs. In 2003, other existing EPZs namely, Noida, Falta, Chennai, Vizagwere also converted into SEZs. In addition, approval has been given for the setting up of 26SEZs in various parts of the country. Apparently, India is now promoting the EPZ programmemuch more vigorously than in the initial phases of their evolution. Huge amounts of publicresources are being invested in the zones.

SEZs in India were announced by the government in March 2000. To provide a stable economic environment for the promotion of Export-import of goods in a quick, efficient andhassle-free manner, Government of India enacted the SEZ Act, which received the assent of the President of India on June 23, 2005. The SEZ Act and the SEZ Rules, 2006 (“SEZ Rules”) were notified on February 10, 2006. Since then 15 SEZs including 8 EPZs (Export Processing Zones) have been set up at Kandla, Surat, Mumbai, Kochi, Noida, Chennai (3 SEZs), Visakhapatnam, Indore, Jaipur and Jodhpur, Falta, Manikanchan, and Salt Lake.

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Some of the important SEZ in India are as follows Karnataka Biotechnology and Information Technology Services - SEZ on

biotechnology sector in Bangalore's Electronics City, over an area of 43 acres

Shree Renuka Sugars Limited - SEZ on sugarcane processing complex covering 100

hectares, comprising a sugar plant, power station and distillery, at Burlatti in Belgaum

district

Ittina Properties Private Limited and three other - SEZs in IT sector, covering

electronics, hardware and software sectors in Bangalore, over an area of 15.732

hectares

Wipro Infotech - SEZ on IT / ITES at Electronics City, Sarajpur Bangalore

Hewlett Packard India Software Operation Pvt. Ltd. - SEZ on IT

Food processing and related SEZ services in Hassan, over an area of 157.91 hectares

SEZs on pharmaceuticals, biotechnology and chemical sectors in Hassan, covering of

281.21 hectares

SEEPZ - Andheri (East), Mumbai

Khopata - Multi-product, Mumbai

Navi Mumbai - Multi-product, Mumbai

Salt Lake Electronic City, West Bengal

Manikanchan - Jems and jewelery, West Bengal

Calcutta Leather Complex, West Bengal

Falta food processing unit, West Bengal

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Formation of SEZ

How to Apply in SeZs

Any individual, co-operative society, company or partnership firm can file an application for

setting up of Special Economic Zone. The application is to be made in Form-A to the

concerned State Government and the Board of Approval (BOA) in the Department of

Commerce, Government of India. However the application would be considered by the BOA

only when the State Government recommendation is received.

Once the BOA gives formal approval and the concerned Development Commissioner gives an

inspection report certifying the contiguity and vacancy of the area, the area is notified as SEZ

Area permits for different types of SEZs

(Table 1.1)Type

Area Area for Special States/ UTs

Multi-product 1000 hectares 200 hectares Multi-services 100 hectares 100 hectares IT 100 hectares 50 hectares

Gems and jewellery

10 hectares and minimum built-up area of 1 lakh square metres

10 hectares and minimum built-up area of 1 lakh square metres

Bio-tech and Non-conventional energy (including solar energy equipment/cell but excluding SEZs for non-conventional energy production and manufacturing )

10 hectares and minimum built-up area of 40,000 square metres .

10 hectares and minimum built-up area of 40,000 square metres

FTWZ*

40 hectares and minimum built-up area of 1 lakh square metres

40 hectares and minimum built-up area of 1 lakh square metres

Source: Department of Commerce, Government of India, (Briefs on Special Economic Zones in India).

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Notes: The special states/UTs are union territories including the erstwhile union territory of Goa and the special category states of Assam, Meghalaya, Nagaland, Arunachal Pradesh, Mizoram, Manipur, Tripura, Himachal Pradesh, Uttarakhand, Sikkim, and Jammu and Kashmir.* FTWZ refers to Free Trade Warehousing Zones

The number of Special Economic Zones in India has increased at a very fast pace over the last few years. In India, Special Economic Zones are being set up in many states of the country due to the efforts that are being undertaken by the Indian government.

Special Economic Zone means a specified area that has liberal economic laws in comparison with the state's economic laws. The government of India has encouraged the setting up of SEZs in the country for they help in the economic and industrial growth of a country. This is the reason that the Indian government has simplified the procedure for the setting up of SEZ unit in the country.

The Development Commissioner who looks after the proper functioning of the SEZ heads Special Economic Zones in India. The various incentives given to the Special Economic Zones in India are that the units within the SEZ are exempted from paying 100% income tax on the export income for a period of 5 years and after that they have an exemption of 50% income tax for a period of 5 years.In India SEZs are given various incentives such as foreign direct investments up to 100% are allowed and that the units can use the goods that are duty free in a period of 5 years. The companies are eager to set up their units in the Special Economic Zones in India for they get so many incentives and this helps in increasing their profit level. The Board of Approval has given approval to around 341 SEZs in India and the total land that will be acquired for setting up of the SEZs will be more than 44268 hectares. The SEZs in India that are being set up involve the manufacture of leather footwear, engineering, apparels & textiles etc.

What do SEZs Produce?

SEZs are the markers of government's strategy to create an "export-oriented" economy.Vast majorities of developing world have invested in servicing the needs of the European and the American consumers. Developing countries aim for export economies for garnering foreign exchange.

Special Economic Zones in India has flourished due to the efforts that have been taken by the government of India. And so in the future also the Indian government should make such policies with regard to SEZs that they increase in numbers for this will in turn bring growth and prosperity for the country.

Salient features of an SEZ

An SEZ is a geographically demarcated region that has economic laws that are moreliberal than the country’s typical economic laws and where all the units therein have specificprivileges. SEZs are specifically delineated duty-free enclaves and are deemed to be foreign

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territory for the purposes of trade operations, duties and tariffs. The principal goal is to increase foreign investment. Through the introduction of SEZs, India also wants to enhance its somewhat dismal infrastructural requirements, which, once they have been improved, will invite even more foreign direct investment.

As far as trade and commerce are concerned, SEZs are regarded as international territory. Local raw materials bought by producers within SEZs are regarded as exports whereas those goods that are produced in SEZs and sold in the DTA (Domestic Tariff Area) are regarded as imports.

The salient features/provisions of the SEZ Rules are given below:

Different minimum land requirement for different class of SEZs; Every SEZ is divided into a processing area where alone the SEZ units would come up

and the non-processing area where the supporting infrastructure is to be created; Simplified procedures for development, operation and maintenance of the Special

Economic Zones and for setting up units and conducting business in SEZs; Single window clearance for setting up of an SEZ; Single window clearance for setting up a unit in a Special Economic Zones; Single window clearance for matters relating to Central as well as State Governments; Simplified compliance procedures and documentation with an emphasis on self

certification.

Approval mechanism and Administrative set up of SEZs

Approval mechanism

The developer submits the proposal for establishment of SEZ to the concerned State Government. The State Government has to forward the proposal with its recommendation within 45 days from the date of receipt of such proposal to the Board of Approval. The applicant also has the option to submit the proposal directly to the Board of Approval.

The Board of Approval has been constituted by the Central Government in exercise of the powers conferred under the SEZ Act. All the decisions are taken in the Board of Approval by consensus. The Board of Approval has 19 Members. Its constitution is as follows:

(Table 2.1)1 Secretary, Department of Commerce Chairman2 Member, CBEC Member3 Member, IT, CBDT Member4 Joint Secretary (Banking Division), Department of Economic Affairs,

Ministry of FinanceMember

5 Joint Secretary (SEZ), Department of Commerce Member6 Joint Secretary, DIPP Member7 Joint Secretary, Ministry of Science and Technology Member8 Joint Secretary, Ministry of Small Scale Industries and Agro and Rural Member

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Industries9 Joint Secretary, Ministry of Home Affairs Member

10 Joint Secretary, Ministry of Defence Member11 Joint Secretary, Ministry of Environment and Forests Member12 Joint Secretary, Ministry of Law and Justice Member13 Joint Secretary, Ministry of Overseas Indian Affairs Member14 Joint Secretary, Ministry of Urban Development Member15 A nominee of the State Government concerned Member16 Director General of Foreign Trade or his nominee Member17 Development Commissioner concerned Member18 A professor in the Indian Institute of Management or the Indian

Institute of Foreign TradeMember

19 Director or Deputy Sectary, Ministry of Commerce and Industry, Department of Commerce

Member Secretary

Administrative set upThe functioning of the SEZs is governed by a three tier administrative set up. The Board of Approval is the apex body and is headed by the Secretary, Department of Commerce. The Approval Committee at the Zone level deals with approval of units in the SEZs and other related issues. Each Zone is headed by a Development Commissioner, who is ex-officio chairperson of the Approval Committee.

Once an SEZ has been approved by the Board of Approval and Central Government has notified the area of the SEZ, units are allowed to be set up in the SEZ. All the proposals for setting up of units in the SEZ are approved at the Zone level by the Approval Committee consisting of Development Commissioner, Customs Authorities and representatives of State Government. All post approval clearances including grant of importer-exporter code number, change in the name of the company or implementing agency, broad banding diversification, etc. are given at the Zone level by the Development Commissioner. The performance of the SEZ units are periodically monitored by the Approval Committee and units are liable for penal action under the provision of Foreign Trade (Development and Regulation) Act, in case of violation of the conditions of the approval.

Facilities and Incentives

Incentives and facilities offered to the SEZs

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 under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years.

Exemption from minimum alternate tax under section 115JB of the Income Tax Act.

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External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restriction through recognized banking channels.

Exemption from Central Sales Tax.

Exemption from Service Tax.

Single window clearance for Central and State level approvals.

Exemption from State sales tax and other levies as extended by the respective State Governments.

Exemption from Customs/Excise duties for development of SEZs for authorized operations approved by the Board of Approval.

Income Tax exemption on export income for a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act.

Exemption from Minimum Alternate Tax under Section 115 JB of the Income Tax Act.

Exemption from Dividend Distribution Tax under Section 115 O of the Income Tax Act.

Exemption from Central Sales Tax (CST) and Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).

The major incentives and facilities available to SEZ developers include:-

Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA.

Income Tax exemption on income derived from the business of development of the SEZ in a block of 10 years in 15 years under Section 80-IAB of the Income Tax Act.

Exemption from minimum alternate tax under Section 115 JB of the Income Tax Act.

Exemption from dividend distribution tax under Section 115O of the Income Tax Act.

Exemption from Central Sales Tax (CST).

Exemption from Service Tax (Section 7, 26 and Second Schedule of the SEZ Act).

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Current Status of SEZ in India

In India, a policy was introduced on April 1, 2000 for setting up of Special Economic Zones with a view to provide an internationally competitive and hassle- free environment for exports. The policy provides for setting up of SEZ’s in the public, private, joint sector or by State Governments. It was also envisaged that some of the existing Export Processing Zones would be converted into Special Economic Zones. Accordingly, the Government had converted the following seven EPZs into SEZs.

The performance of the seven converted SEZs is given below:

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SEZs in India - Sector wise Distribution

The above sector wise distribution of SEZ’s clearly shows that majority of the formal approvals granted have been in IT/ITES sector which comprises nearly 62% of the total formal approvals granted till date. This can be as a result of India’s growing prowess in the IT/ITES Sector and availability of trained manpower which is resulting in outsourcing of such activities to India. Another possible reason could be the small size of such SEZs as compared to sector specific/multi-product SEZs which results in speedier land acquisition/aggregation for SEZ Development. The high number of formal approvals of IT/ITES Sector has also resulted in a high share of such SEZs in the notified SEZ category (67%). Other prominent sectors include; Biotech, Textiles, Pharma, Engineering etc in addition to 21 formally approved multi-product SEZs. In terms of in-principle approvals, large multi-product SEZ’s have a share of more than 50% followed by textile/ biotech sectors. The SEZ BoA is not granting any in-principle approval to proposals for IT/ITES Sector.

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SEZs in India - State wise Distribution

State wise distribution of formally approved SEZs clearly shows the pro-activeness of the Southern states in attracting investors and mobilizing investments in terms of granting State Government recommendation. Although western states are not far-behind there is still some catching up to do. The northern and eastern states are lagging way behind in terms of providing the right environment for the investors to get their proposals formally approved and notified. This is substantiated by the fact that in case of in-principle approvals the northern states have a share of almost 40%.

On the basis of the above, the northern and eastern states need to take pro-active steps in order to encourage investors to consider their states for investment.

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Measures which could be taken are:

Enactment of State SEZ Act/Policy in line with Central SEZ Act providing benefits to investors

Single window facility Proper screening procedure for granting State Government recommendation to SEZ

proposals Proper grievance addressal mechanism for investors

Status of SEZ approvals as on 10.02.2010

(Table 2.2)Number of Formal approvals 575Number of notified SEZs (As on 10th February, 2010)

348 (out of 575) + (7 Central Govt. + 12 State/ Pvt. SEZs)

Number of valid In-Principle Approvals 151

Land for SEZsNotified SEZs

Formally Approved (FA) incl. notified SEAs

Valid In-Principles approvals (IP)

Total area for proposed SEZs (FA+IP)

41,765 Ha

73,661 1,26,963 Ha

2,00,624 Ha

Total area for the notified SEAs would not be more than 0.014% of the total land area of India.

Land is a state subject. Land for SEZs is procured as per the policy and procedures of the respective State Govts.

The above status approvals as on 15.03.2010 clearly shows that total number of formal approvals Sezs are 575.It also mentions the land for Sezs as per the policy and procedures of the respective state governments Total land area in Ha. For notified Sezs is 41,765, formally approved is 73,661, area for proposed Sezs is 2,00,624 in Ha.

Status of Operational SEZ as on 13.12.2009

(Table 2.3)OPERATIONAL SEZs (As On 31st

December, 2009105

Units approved in SEZs(As On 31st December, 2009

Centeral Government SEZs

State/Pvt. SEZs set up before 2006

SEZs Notified under the Act

Total

1,243 945 573 2,761

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EPZ and SEZ differences

Conceptually, EPZs and SEZs are different – the former is an industrial estate whilst thelatter is an industrial township. Despite criticisms that India’s attempt to convert its Export Processing Zones (EPZs) into SEZs is an insurmountable task, India has gone full steam ahead. The SEZ and EOU/EPZ schemes have a common philosophy and common objectives. Therefore, by and large the procedures are the same. The one critical difference is that whereas the EOUs are ‘stand alone’ units the units in the SEZ/EPZ are in a well defined enclave.However, a perusal of the supporting customs and central excise duty exemption notifications and procedures reveals a confusing scenario. This is since there are an unduly large number of notifications (over 50) and circulars and instructions (over 300) in existence. It can well be contemplated that both the tax administrators and the units themselves would have a lot of doubts in view of the sheer volume of relevant material. It is also quite possible that cases of misuse of the scheme, which are on the rise in recent years, are on account of the absence of codification of the law and procedures in respect of the said schemes

Comparison of Special Economic Zones with Export Processing Zones

No minimum export performance (EP) or Net Foreign Exchange earnings as percentage of exports (NFEP), as for EOU/EPZ units.

Performance of SEZ units monitored by a committee headed by Development Commissioner and consisting of Customs.

Duty to be recovered in case of failure to achieve positive NFEP under the Customs Act in proportion to shortfall, unlike in EOU/EPZ.

No fixed ceiling on DTA sales by SEZ units. For EPZ, only 50 per cent of exports.

Exemption from customs/excise duty for import/domestic procurement of goods for setting up units. This facility is not available to EPZ units.

Duty- free material to be utilised over five years, unlike in EOU/EPZ where it is one year.

Sub-contracting facility available to SEZ jewellery units; not available to EPZ units.

All imports on self-certification, unlike in EOU/EPZ where attestation of Development Commissioner is required for import of capital goods.

No routine examination by Customs of export and import cargo in SEZ.

100 per cent FDI investment through automatic route available to manufacturing SEZ units. In EOU/EPZ, FIPB approval is required.

Retention of 100 per cent of export earning in EFFC account. For EOU/EPZ units it is 70 per cent.

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Exports proceeds to be realised and repatriated within 12 months for SEZ units, while for EPZ units it is 6 months.

Simplified procedur es for operations like record keeping, inter-unit transfer, subcontracting, and disposal of obsolete material and waste and scrap.

Export Oriented Units

The Export Oriented Units (EOUs) Scheme is complementary to the SEZ scheme which was introduced in early 1981. It adopts the same production regime but offers a wide option in locations with reference to factors like source of raw materials, ports of export, hinterland facilities, availability of technological skills, existence of an industrial base and the need for a larger area of land for the project. 2037 units were in operation under the EOU scheme as on 31st March, 2006.

Export Performance in export oriented units

The Export Oriented Units (EOUs) scheme, introduced in early 1981, is complementary to the SEZ scheme. It adopts the same production regime but offers a wide option in locations with reference to factors like source of raw materials, ports of export, hinterland facilities, availability of technological skills, existence of an industrial base and the need for a larger area of land for the project. As on 31st December 2006, 2168 units are in operation under the EOU scheme.

PROBLEMS OF SEZs

While the SEZs are intended to stimulate production for export and to facilitate foreign direct investment (FDI) and transfer of technology, the volume focusses more on employment generation, economic growth, and regional development. While the flow of FDI into India has shown a significant increase since 2003-04, it is still less than what flows into China and that sector-wise, manufacturing industries and services have been major beneficiaries of the FDI. Referring to the problems the SEZs have run into in respect of land acquisition and rehabilitation of the displaced persons, he says the government, while taking decisions on the SEZs, should “incorporate concerns expressed by political and social scientists.”

Why is the SEZ Policy being opposed?

When the SEZ Act was passed in 2005, it generated a euphoric response from the privatesector. The general feeling was that the government had finally given the space and incentive for private industry in upcoming sectors like IT-ITES, BT, real estate, and pharmaceuticals to boom. The last eight months have seen an unprecedented rise in SEZ fever with state governments undertaking widespread acquisition and leasing out/selling land for SEZ development; the central government’s blitzkrieg approval for over 250 SEZ projects and private entrepreneurs seizing this opportunity. All of these have raised concerns in the eyes of those who do not see SEZs benefiting them but rather increasing hardships for economic livelihood and sustenance. And these concerns are not unfounded. Some of the prime concerns

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being raised by farmers groups, fisher folk communities, marginalized communities and other movements on the government’s SEZ policy are:

1. Large scale and unjustified acquisition of land

2. Inadequate resettlement and rehabilitation policies and plans

3. Inadequate employment opportunities for local people through SEZs leading to

loss of livelihood

4. Increasing burden on natural resources and the environment and alienation of

local communities from these resources

5. SEZs contributing to real estate boom and creating real estate zones

6. Potential revenue loss from heavy subsidizing in SEZs

7. Concerns over the process of approving and implementing SEZs – where is local

government consultation and sanction?

8. No wider public consultation

9. Threat to water security

10. Bypassing local governments and ignoring local communities

11. Increases regional disparities

SIZING UP THE SEZ POTENTIAL According to resarch with the development of special economic zones (SEZ) have been a mixed bag, of successes and failures. There are more than 3,000 SEZs in 116 countries, not all have succeeded in their desired objective of steering export-led growth. Chinese SEZs have, however, presented a remarkable success story, generating around $12 billion of exports in 2004.Inspired with China’s success, India enacted its own SEZ Act 2005, ‘to build excellent infrastructure in designated enclaves and provide incentives to lure investors in export-oriented industries.’ In a country where inadequate infrastructure is the biggest development bottleneck, such a policy is expected to fast track the development of world-class industrial infrastructure. Thanks to the policy, 362 SEZs have been formally approved and 176 projects have received in-principle.

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Key concerns The ride to SEZs has not been smooth in India. There have also been failures and Nandigram (WB) is a dark reminder. Reliance’s SEZ in Jhajjar (Haryana) is also facing strong opposition from locals. One major difference in the Indian and Chinese SEZ policy is the role of private sector. In China, SEZ are purely public sector projects. In India, SEZs could be public, private, or public-private partnerships. Conceptually, it is a novel idea to channel private sector investment into policies which lead to economic development. Then why the opposition?

Why the opposition The dissents against SEZs, as it appears, is not due to policy but implementation. Of the total 362 approved SEZs, 225 are for IT/ITeS, which in India has grown 2.4 times since 2004 and export constitutes around 80 per of its revenue. Why offer incentives to a sector that is already export, oriented and is poised to grow on its own strengths? Besides, employment generation potential of services sector is limited. An SEZs is supposed to provide economies of scale through agglomeration economies. Internationally, SEZs vary from 2 to 800 sq km. In China, Hainan SEZ is 34,000 sq km (entire province is an SEZ). SEZ policy in India provides for a minimum size of 10 sq km and maximum of 50 sq km. However, only 4 percent of the approved SEZs are more than 10 sq km and only 13 per cent are above 2 sq km. Next, 171 SEZs are near large cities and 138 are in Ahmedabad, Mangalore, Chennai, Delhi, Gurgaon, Hyderabad, Kolkata, Mumbai, and Pune. Such a strategy stretches the infrastructure in these cities. SEZ-led job creation would cause further migration and put pressure on the overstressed land markets. SEZs here cannot absorb surplus agriculture labour, due to the mammoth costs households face in migrating to large cities. Rising land prices in large cities make it attractive for developers to propose SEZs here, as these allow an easy route to acquiring land for commercial uses. Another criticism of the policy is that it leads to loss of agriculture land. This perception seems to be overstated as the Board of Approval and state governments agree that mainly barren (if necessary, single-crop) land should be acquired. The main opposition against such large projects, as in Nandigram and Jhajjar, is the fear of land acquisition without adequate compensation and that the land so acquired would be misused for real estate development. Under the SEZ regulation, up to 65 per cent of and SEZ can be used for housing or commercial development. This raises the danger of SEZs becoming real estate projects.

Factors for success

Based on experience and economics, there are at least three critical factors that need attention while implementing SEZ policy.

Size and location: The upper ceiling of 50 sq km needs to be critically assessed, as it is could be insufficient for the development of manufacturing clusters. If large size SEZs prove prohibitive for a single private developer, there is a strong case for public-private partnership. If mainly barren land is acquired and compensation package is well designed, acquisition of large land would not pose constraint.

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Acquisition of land:This produces substantial redistribution effects between farmers whose land has been compulsorily acquired and those who still possess their lands. Presumption here is that the farmers can sell their land when urbanisation reaches their land if their land is not compulsorily acquired. Such an indirect income redistribution effect causes tension between governments and farmers. There are some broad lessons to be learnt from Chinese experience. Wherever plans in China required land development, municipal governments increased the land supply through land acquisition, a conversion of land ownership from rural communes to the state. Farmers were compensated for their land with a package that included: job offers in enterprises established on the acquired land, housing compensation, compensation for the loss of crops, and urban residency.In China rural residents can’t migrate to urban cities without a permit from government: without permits the migrants can’t access public services like education, medical, pension, and subsidised goods. Compensation in terms of non-farm job (responsibility of the government agency acquiring land) and city residency are very lucrative and for the farmers these intangibles far exceed the direct compensation package. To reduce resistance to SEZs, a well-designed package is required that combines monetary (equivalent to the market value of land) and non-monetary (jobs and social benefits) compensations. There is provision for compensation by SEZ developers, but a clear government policy is needed. MIDC, in Maharashtra, has an R & R package which includes non-monetary compensation in terms of assured employment for displaced families and land at concessional rates in the developed area. These individual efforts need to be complemented by a national policy on R & R, with scope for adjustment at local level.

InfrastructureSEZs near large cities find justification in the lack of infrastructure (road, rail, power) at the other locations. Development of transportation infrastructure throughout the country is important to stimulate dispersed development of SEZs.To conclude, I would however like to stress that for the sustained growth of economy it is necessary to improve the overall investment climate, which would require the development of infrastructure nationwide. In the long run, SEZs cannot be insulated from institutional and economic environment of the country and the short-term competitiveness created on the basis of incentives cannot be sustained over long periods.

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SEZs plays developmental role in Indian Economy

Special Economic Zones carry multiple benefits of creating jobs, augmenting exports, building infrastructure of international standards and bringing in foreign investment. Kamal Nath, Union Minister of Commerce stressed on the advantages SEZs have at the awards ceremony of the Export Promotion Council for Export Oriented Units (EOUs) on 19th January, 2007 The SEZs will witness rapid growth in labor-intensive manufacturing and services. The minister estimated investment from SEZ developers to touch $60 billion (almost 300,000 crore) by 2012 if all SEZ approved projects are implemented. By the end of the year the minister expects a domestic investment of Rs.75, 000 crore, and an FDI of Rs. 25, 000 in SEZs alone.

The employment figures would proportionately zoom to 500,000 people by the end of 2007. SEZs make local recruitments, and provide training for their operations. The gem and jewellery SEZ in Hyderabad, the textile SEZ of the Mahindras in Chennai, Nokia SEZ in Sriperambedur, Flextronics in Chennai, Apache SEZ in Nellore, Brandix Apparel SEZ in Vishakapatnam, Divi Laboroatories in Andhra Pradesh and the Rajiv Gandhi Technology Park in Chandigarh have created employment in their respective zones. The sensitive issue of land acquisition and rehabilitation was also brought up during the address, and the Minister urged State governments to partner the SEZ scheme in this regard

The SEZ Scheme has generated tremendous response amongst the investors, both in India and abroad. This is evident from the fact that several prominent private sector developers have come forward for establishing SEZs. Some such prominent SEZs which have recently come up are:

Nokia SEZ in Tamil Nadu

Quark City SEZ in Chandigarh

Flextronics SEZ in Tamil Nadu

Mahindra World City SEZ, Tamil Nadu

Motorola, DELL and FoxConn

Apache SEZ (Adidas Group) in Andhra Pradesh

Divvy's Laboratories, Andhra Pradesh

Rajiv Gandhi Technology Park, Chandigarh

ETL Infrastructure IT SEZ, Chennai

Hyderabad Gems Limited, Hyderabad

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Effects of Sezs on Different aspects

Following the existing SEZ literature, we identify three channels through which SEZsmay affect human capabilities

• Employment effects• Human capital formation effects• Technology upgrading effects

Employment Effects

The employment effect of SEZs operates through three channels : one, SEZs generatedirect employment for skilled and unskilled labour ; two, they also generate indirectemployment; and three, they generate employment for women workers. It is believedthat employment creation generates incomes, creates non pecuniary benefits,improves the quality of life of labour and enhances their productivity. These, in turn,have poverty reduction effect.

Direct employment generation

In so far as SEZs comprise labour-intensive activities, enterprises in SEZs constitute,a priori, a significant source of new employment. Due to the availability of labour atlow wages, developing countries generally attract investment into simple processinglabour intensive industries. This increases the demand for unskilled labour within thezone. Shift towards higher value added activities as SEZs grow, might increasedemand for skilled labour also. SEZs also generate employment for unskilled labourby creating demand for physical infrastructure within the zone. This stimulates thelocal construction industry giving employment to unskilled labour. Sivalingam (1994)Demand for utilities such as water, electricity, communication, and administration also rises. Finally, there has been increasing demand for various support services such as, hotels and restaurants, and transport, which is expected to have a substantial impact on employment generation.

Focus on Export Promotion

SEZs represent the latest, and best, thinking so far on India’s export policy. Since the 60s, India has seen the emergence of several initiatives to boost exports, some good, some bad, some indifferent. Notable amongst these are:

a) Export Processing Zone (EPZ) Schemeb) Export Oriented Units (EOU) Schemec) Software Technology Park (STP) Schemed) Electronic Hardware Technology Park (EHTP) Schemee) Export Promotion Capital Goods (EPCG) Schemef) Advance Licensing and Deemed Exports Schemeg) Free Trade Zone(FTZ) Scheme

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Past schemes of promoting exports have hardly paid off. All India has to show after a decade and a half of export processing zones, export-oriented units and other measures outlined above is a measly share of less than 1% of world exports. This, as is widely accepted within the Government, is quite insignificant for a country of our size and capabilities. It was early 2000 when the then Union Commerce and Industry Minister, the late Murasoli Maran, undertook a trip to China to get first-hand experience of how China had come to become the darling of foreign investors. Included in his itinerary was a visit to SEZs, which led the announcement of SEZs in India through the annual Export-Import

(EXIM) Policy of March 2000. It is now almost eight years since the concept has been part of India’s economic policy. The country not only has greenfield SEZs, but also has the erstwhile export processing zones / Free trade Zones converted into SEZs. The SEZ policy not only represents the most ambitious of export boosting efforts, but it goes much further, in that it seeks to radically change the environment for exports and FDI, by offering a trouble-free business-friendly environment and world class infrastructure.

It allows the Government to experiment with radical economic reform on a localized basis, introducing reforms that are difficult to implement at the national level, given the country’s large size and social disparities.

India’s SEZ policy can be looked at as the logical outcome of developments in India’s export-import policy in recent years. Trade policy reforms over the last decade have moved towards providing

an export-friendly environment simplified procedures better input availability quality / technology up gradation Improved competitiveness.

Underlining this, recent modifications in the EXIM policy (over the last 4-5 years) have focused on four major areas:

In the first place, efforts have been made towards removing restrictive export import

regulations. An important first step in this regard was the proposal to set up SEZs.

Secondly, conscious steps have been initiated to ensure that the process of trade

liberalization in India remains aligned to the norms of multilateral trading agreements.

Thus, the incentive structure for exporters has been recast to make it consistent with

India’s commitments to WTO. Tariff changes and Quantitative Restriction (QR)

reforms in accordance with WTO commitments have been made.

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Thirdly, measures have been initiated to simplify and decentralize the procedures

associated with the administration of foreign trade. The current SEZ framework brings

this factor to the fore.

Lastly, policy announcements have been made to provide special incentives to certain

categories of Indian exports.

Export Performances from the functioning Sezs

Exports from Special Economic Zones have been showing a steady increase. Compared to

exports of Rs. 34,615 crore made by SEZs in 2006-07, exports to the tune of Rs. 66,638 crore

have been effected in the year 2007-08, registering a growth of 92 per cent and thereafter it has

increased in 2008-09 to Rs. 99689 crore an increase of 50% over the previous year and that was

despite the recession world over. Moreover, the growth rate of exports from SEZs has been

continuously increasing during the past six years (Refer the table below).

The SEEPZ EPZ in Mumbai, Noida SEZ and Surat SEZ account for about 21, 32 and 23 per

cent, respectively, of exports originating from all the eight EPZs, followed by the

Visakhapatnam, Kandla and Madras SEZs, which are far behind and accounted for about 2-4

per cent of total SEZ exports in 2007-08. Although the share of the Cochin SEZ in the eight

major SEZ’s exports is low, the growth of the exports of this SEZ over a period of time is

significantly high (457 per cent in 2007-08 over the year 2006-07); this is in contrast to other

SEZs which reported tremendous declines in their exports in 2007-08.

The growth rate of exports from SEZs touched 67 per cent compared with an average of 15

per cent during 2002-03. Exports from the Cochin, Noida and Surat SEZs have performed quite

well during the years 2006-07 and 2007-08. Exports from all SEZs except SEEPZ and

Visakhapatnam performed well during 2007-08 (Refer the table below).

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Exports from the functioning SEZs during the last three years are as under:

(Table 3.1)Year Value (Rs. Crore) Growth Rate ( over previous year )

2003-2004 13854 0.392004-2005 18314 0.322005-2006 22 840 0.252006-20007 34615 0.522007-2008 66638 0.932008-2009 99689 0.5

Export performances from Sezs

0%

20%

40%

60%

80%

100%

2003-2004

2004-2005

2005-2006

2006-20007

2007-2008

2008-2009

Years

Gro

wth

rate

Growth Value

This above chart shows Export performances from SEZs. It clearly shows the positive growth trend performance from 2003 to 2009. We can see that from the year 2005 till 2008 export performances had shown a remarkable growth rate ranging 20% to 93% and further in 2008-09 it falls to 50% due to the global crisis.

Export Performance of the 8 functional SEZs (Rs. Crore)

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(Table 3.2) Zone 2000-01 2002-03 2004-05 2006-07 2007-08 Kandla SEZ 527.9 729.3 710.8 1482.7 1882.0 SEEPZ SEZ 5193.7 6083.2 6589.8 12047.7 11264.7 Cochin SEZ 304.3 270.4 290.0 802.7 4471.0 Noida SEZ 1043.2 1001.2 2479.0 6893.0 16843.4 Madras SEZ 690.8 822.4 979.2 2383.9 3046.5 Visakhapatnam SEZ 219.1 357.3 288.0 749.7 741.3 Surat SEZ NA NA 1539.7 5197.4 12294.0 Falta SEZ 520.0 520.5 573.7 998.7 1026.3 Total for SEZs 8499.0 9784.1 13450.2 30555.7 51569.2

The above table shows that exports from SEZs have been increasingly consistently in the years from 2001 to 2008 with the SEEPZ, Surat and Noida SEZs clocking the highest exports.

Status of Export from SEZ as on 10.03.2010

(Table 4.1)Export in 2008-09 Rs. 99,689 Crore (Growth of 50% over 2007-08)

Overall growth of export of 620% in five years (2004-2009)

Export in 2009-10(As On 31st December, 2009

Rs. 1,52,092.685 Crore

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Investment in SEZs

Exports and employment in SEZs largely depend on investment. Promotion of investments from domestic as well as foreign sources is one of the main objectives of the SEZ scheme. In 2008-09, foreign investment, including NRI investment in the setting up of units in SEZs, was Rs. 1,28,390 crore. FDI up to 100 per cent for setting up SEZs is permissible with the clearance of the Board of Approval. See Table below for details of investment in SEZs.

Status of Investment in SEZ as on 31.03.2009

(Table 4.2)INVESTMENT TOTAL INVESTMENT

(In Rs. Crores)SEZs Notified under the Act 1,15,603.78State/Pvt. SEZs set up before 2006 6,799.70Central Government SEZs 5,986.96Total 1,28,390.44

The above table shows investment made in central and private/state government SEZs and it can be seen that investment in notified SEZs is much higher than in both the private/state government SEZs and central government SEZs. Table describes the investment made by central government and private/state government SEZs for the year 2008-09; it shows that investments by private/state government SEZ (Rs. 6,799.7 crore) is greater than the investment made in central government SEZs (Rs. 5,986.9 crore).

Exports and employment in SEZs largely depend on investment. Promotion of investments from domestic as well as foreign sources is one of the main objectives of the SEZ scheme. In2007-08, foreign investment, including NRI investment in the setting up of units in SEZs, was Rs. 3899 crore. FDI up to 100 per cent for setting up SEZs is permissible with the clearance of the Board of Approval. See Table 4.3 below for details of investment in SEZs.

Total Investment in SEZs as on June 30, 2008

(Table 4.3)

Investment in notified SEZs (as of June 30, 2008)

Rs. 73,348 crore (all incremental investment generated after February 2006)

Investment in Private/State Govt. SEZs which came into force prior to SEZ Act, 2005 (as of June 30, 2008)

Rs. 3702 crore (incremental investment generated since Feb. 2006 is Rs. 1,946 crore)

Investment in 7 SEZs established by the Central Government (as of June 30, 2008)

Rs. 4043 crore (incremental investment generated since Feb. 2006 is Rs. 1,764 crore)

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Table 4.3 shows investment made in central and private/state government SEZs and it can be seen that investment in notified SEZs is much higher than in both the private/state government SEZs and central government SEZs. Table 4.4 describes the investment made by central government and private/state government SEZs for the year 2007-08; it shows that investments by private/state government SEZ (Rs. 3,960 crore) is greater than the investment made in central government SEZs (Rs. 3,899.5 crore). Further, Table 4.5 shows the distribution of total investment made in different central government SEZs. In total, investment in central government SEZs stood at Rs. 3,900 crore in 2007-08 and all the central government SEZs get almost equal investment, except for SEEPZ SEZ. Given that SEZs were set up with the objective of attracting FDI into the country, in 2007-08 the seven central government SEZs have attracted FDI to the tune of Rs. 865.8 crore. The MEPZ SEZ has attracted the maximum FDI to the tune of Rs. 237 crore, followed by the SEEPZ SEZ, Mumbai of Rs. 154.3 crore. The total FDI received by SEZs in 2007-08 comprises about 8 per cent of the total FDI inflows into the country. This shows that there is tremendous scope to increase FDI in SEZs across the country. In contrast, the private/state governments SEZs do not get an equal distribution of investment. Nokia SEZ has got the most investment (about 50 per cent of the total investment in state government/private SEZs), followed by Indore and Mahindra City SEZ (IT), but the Manikanchan, Jodhpur, Wipro, Mahindra City (Textile) and Surat Apparel Park SEZs get a comparatively low investment.

Summary of Investment in SEZ Set up Prior to SEZ Act, 2005 (Rs. crore)

(Table 4.4)Central Government SEZs 3899.5 State Govt/Pvt. SEZ established prior to SEZ Act, 2005 3960.4 Total 7859.9

Government SEZs (EPZs Converted to SEZs) (Rs. crore)

(Table 4.5)

Zone GovernmentInvestment

PrivateInvestment by

Units(Excl. FDI)

FDIProposed

FDIMade

TotalPrivate

Investment made

Kandla SEZ 93.6 238.1 0.0 137.4 375.5 SEEPZ SEZ 57.3 635.1 461.9 154.3 789.4 Noida SEZ 117.7 540.0 0.0 135.0 675.0 MEPZ SEZ 87.5 434.3 252.5 237.4 671.7 Cochin SEZ 104.3 429.0 0.0 76.8 505.8 Falta SEZ 101.1 385.4 8.4 393.8 Visakhapatnam SEZ 67.9 371.5 200.0 116.5 488.0 Total 629.7 3033.7 914.4 865.8 3899.5

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Foreign Direct Investment in SEZs

Some of the policy measures taken to attract foreign direct investment (FDI) in Special Economic Zones (SEZs) include:

i. FDI up to 100 per cent under the automatic route for all manufacturing activities, except arms and ammunition, explosives and allied items of defence equipment, defence aircraft and warships, atomic substances, narcotics, psychotropic substances and hazardous chemicals, distillation and brewing of alcoholic drinks, and cigarettes / cigars and manufactured tobacco substitutes.

ii. 100 per cent FDI allowed for development of townships including housing, commercial and recreational facilities on a case-by-case basis.

iii. Facility to foreign companies to set up manufacturing units in SEZs as branch operations on a standalone basis without approval from the RBI.

Further, in the Special Economic Zones notified under the SEZ Act, 2005 and the modifiedSEZ Act, 2006, a substantial amount of FDI has already been made. Some SEZs with a majorFDI component of investment are:

Apache Sez Development India Private Ltd., Andhra Pradesh

Brandix India Apparel City Private Ltd., Andhra Pradesh

Emaar Hills Township Private Ltd., Andhra Pradesh

Zydus Infrastructure Private Ltd., Gujarat

Esar Hazira SEZ Limited, Gujarat

DLF Limited, Haryana

Tanglin Development Limited, Karnataka

M/s Information Technology Park Limited, Karnataka

Quarkcity India Pvt. Ltd., Punjab

Flextronics Technologies (India) Private Limited, Tamil Nadu

SIPCOT SEZ, Tamil Nadu (Foxconn & Motorola as co-developer) – Dell (unit)

Special Economic Zones (SEZs) are set to see major investments after the straightening out of certain regulatory tangles. According to India's Commerce Secretary, Mr. G. K. Pillai, India has approved 513 SEZs till August 2008, of which 250 have been notified. Investments are expected to cross US$45.73 billion by December 2009, providing incremental employment to 800,000 people. In December 2008, the government cleared 22 proposals for setting up SEZs. The proposals included a major foreign direct investment (FDI) project by a Dubai-based developer.

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STATUS OF EMPLOYMENT IN SEZS AS ON 31.12.2009

EMPLOYMENT INCREMENTAL EMPLOYMENT

TOTAL EMPLOYMENT

SEZs Notified under the Act

2,27,669 persons 2,27,669 persons

State/Pvt. SEZs set up before 2006

48,787 persons 61,255 persons

Central Government SEZs 78,671 persons 2,00,907 personsTotal 3,55,127 persons 4,89,831 persons

This table supra shows the status of employment from SEZs. It clearly shows that notified SEZs are employing 2,27,669 persons, State/Pvt. SEZs are employing total 61,255 persons and central government SEZs are employing 2,00,907 persons.

Total Employment in SEZ as on June 30, 2008

The number of jobs created often determines the success of SEZs. In a labour-surplus developing economy such as India, employment is among the top priorit ies. The number of people employed in SEZs in India from February 2006 to July 2008 is shown below in Table 4.6.

(Table 4.6)Direct employment created in notified SEZs (as of June 30, 2008)

100,885 people (all incremental employment generated after February 2006)

Direct employment in private/state govt. SEZs which came into force prior to SEZ Act, 2005 (as of June 30, 2008)

48,988 persons (incremental employment generated since Feb. 2006: 36,250 people)

Direct employment in 7 SEZs established by the Central Government (as of June 30, 2008)

1,99,330 persons (incremental employment generated since Feb. 2006: 77,094 people )

Table 4.6 shows that the total employment provided by Central Government SEZs (199,330 people) is higher than that by private/state government SEZs and notified SEZs (149,873 persons).

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Employment in SEZs Set Up Prior to SEZ Act, 2005

(Table 4.7)Employment (Persons) No. of Units

Central Government SEZs 193,474 1,122 State Govt/Pvt. SEZ 44,768 403 Total 238,242 1,525

Table 4.7 indicates that employment provided by central government SEZs is four times higher than that by the state government/private SEZs for the year 2007-08. Also the number of employed persons per unit is 172 and 111 for central and state government SEZs, respectively. This implies that central government SEZs creates more opportunities for employment than the other SEZs. Among the central government SEZs, the highest employment providers are the SEEPZ, Noida and MEPZ SEZs with 43, 17 and 15 per cent shares in total employment, respectively. Also, the employment opportunities for men and women are equally distributed except in the Noida SEZ (Table 4.8).

Government SEZs (EPZs Converted to SEZs)

(Table 4.8)Direct Employment Zone

No. of Units Approved

Men

Women

Total

Kandla SEZ 167 9873 9129 19002 SEEPZ SEZ 333 58747 26356 85103 Noida SEZ 200 27080 5920 33000 MEPZ SEZ 106 12706 16489 29195 Cochin SEZ 120 6336 5038 11374 Falta SEZ 154 5612 5988 11600 Visakhapatnam SEZ 42 2342 1858 4200 Total 1122 122696 70778 193474

With respect to employment provided by state government/private SEZs, Surat and Nokia SEZs were the largest employment providers, while Jodhpur and Mahindra City (auto ancillary) SEZS were the lowest employment providers for the year 2007-08. Another noteworthy observation is that these SEZ’s also provide majority employment to women.

Benefits derived from SEZs: Employment and FDI generation

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Currently, 1277 units are functioning in SEZs that were set up prior to the enactment of the SEZ Act, 2005. These units provide direct employment to over 2 lakh people, of which 40 per cent are women. Private investment in these SEZs is over Rs. 7,104 crore.

In a span of a few years, there have been visible gains from SEZs by way of generating employment, creating world-class infrastructure within the zones, and attracting investment, including FDI. Sriperumbudur in Tamil Nadu is a leading global hardware hub with investments from companies like Nokia, Foxconn, Motorola, Ericsson, Samsung and Dell. Nokia SEZ already provides employment to 9,645 people, the majority of whom are women.Mahindra World City SEZ in Tamil Nadu is another SEZ cluster in which three SEZs for IT, auto and apparel have been set up in adjoining areas. Similarly, in Andhra Pradesh, in addition to a large of number of IT/ITES SEZs, several successful sector-specific SEZs for the manufacture of textiles, leather items and gem and jewellery are in full operation. Apache shoes in Nellore district employs about 4,500 workers, of which the majority are women from nearby villages, who receive training before being employed. Hyderabad Gems SEZ has employed over 2,000 people, with a projection of employing 30,000 people. These SEZs are new industrial clusters and are not relocated from elsewhere. (Excerpts from Ministry of Commerce, Government of India, Annual Report, 2007-08)

Issues related to SEZs

Apprehensions have been expressed about the misuse of the scheme and relocation of existing industries into SEZs. However, experience shows that these apprehensions are illfounded, and fresh investments and employment have been flowing into the Special Economic Zones. The benefits derived from the 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 new industrial clusters that have not been relocated from elsewhere.

Concerns have also been expressed regarding acquisition of agricultural land for setting up SEZs. The state governments have been advised by the Centre that in the case of land acquisition for Special Economic Zones, the first priority should be for acquisition of waste and barren land and, if necessary, single-crop agricultural land could be acquired for the SEZs. If a portion of double-cropped agricultural land has to be acquired to meet the minimum area requirements, especially for multi-product Special Economic Zones, it should not exceed 10 per cent of the total land required for the SEZ. Various issues related to setting up of SEZs in the country, including issues raised by various political parties, have been addressed by the Empowered Group of Ministries (EGOM). Pursuant to the decision taken by EGOM, all state governments have been informed that the Board of Approval will not approve any SEZs where the state governments have carried out or propose to carry out compulsory acquisition of land for such SEZs after April 5, 2007. (Excerpts from Government of India, Economic Survey, 2007-08)

SWOT analysis on SEZs in India

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Strengths

The legislative basis of the SEZs is sufficiently clear and the legislation is on a federal level, which protects the SEZ residents (companies registered within the SEZs) from sudden and unexpected legislative changes. As a sound legal foundation was missing in the earlier available free trade zones, only a few serious companies started their operations as STP or EPZ that too to avail the tax holidays, as they were afraid about the future policy of government in this regard.

The SEZs offer customs advantages, tax benefits and other privileges, which give SEZ residents some competitive advantage. Even if the benefits offered by the SEZs are concrete, the tax benefits alone do not make foreign firms want to invest in India, i.e. the SEZs lower the investment barrier for foreigners but the SEZ benefits alone are not sufficient to attract foreign firms to invest in India. This can easily be seen when one analyses the backgrounds of the SEZ residents. Leading foreign high-tech firms have not invested in the Indian SEZs, and it is anything but certain whether the entry boom of global high-tech companies into India will happen, unless the SEZ administration seriously starts to attract leading foreign high-tech companies into the zones (stronger marketing activities required). India's investment climate has improved but the FDI is not coming with very long term prospective. Majority of existing applicants and approved SEZ are all by Indian companies and MNC are still vying for setup as Units rather than establishing as an SEZ.

The SEZs act on the basis of the "one window" principle, which reduces the bureaucratic burden of investing firms. The SEZ administration can be extremely valuable for a investor, but on the other hand, the administrative special service may leave room for subjectivity in the bureaucracy, i.e. enhance corruption. So far, no corruption cases related to new SEZs have hit the headlines, except the massive application for SEZ and approvals there off which do not justify the hitherto requirements or demand of SEZ for India.

India offers an abundant educated workforce, which is cost-competitive compared to the other parts of world. Despite the higher wage levels in the West, their better functioning innovation environment has still supported the competitiveness of innovation work in the developed countries. In addition, some Asian tigers, such as China, are far ahead of India in producing qualified experts with lower salary requests. Furthermore, the brain drain from India to the West weakens the human resource base of India and the SEZs can hardly stem the intelligence outflow from India in either the short or medium term.

Weaknesses

The Indian SEZs remind one more of "plan factories" rather than real activity centres, i.e. unrealistic plans are a typical characteristic for the Indian SEZs. The macroeconomic results, such as additional GDP and employment generated, innovations and new patent-applications created, are non-existent. In fact, only a few SEZs have begun their operations and that too most of them are converted EPZs.

The R&D organizations together with the state agencies form a mammoth research network. The analysis of the Indian innovation system indicates that India does not lack innovation-related agencies, but it definitely lacks innovation-related activity. Currently, India's

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innovation sector reminds one more form of bureaucracy rather than a business-oriented innovation-promoting cradle.

The marketing activities of the SEZs are weak inside India, and non-existent outside the country. In fact, it is difficult to find any public information on these zones working, viability and suitability, even if one would be aware of their existence. The administration of the SEZs and the government agency coordinating their activities should take much more active role in promoting these zones both inside India and abroad so that not only SEZ are notified but they get the Units inside each SEZs so that the real objective is satisfied. With the last years recessions first denotification of 12 notified SEZs by the Approval Committee put a question mark on viability of hundreds of SEZs notified and other hundreds awaiting notification.

The SEZs do not provide foreign investors with any special advantages compared to the Indian firms operating inside the SEZ.

Original idea was to promote export, attract FDI by developing new township with world-class infrastructure. Thrust on manufacturing sector. Attractions for setting units by exemption, relaxation, concessions in taxation, labour laws, land acquisition for hassle free environment treatment and “foreign territory”. Dilution of commitment/compliance for exports, FDI and manufacturing segment. Developers become unit holders to abuse the benefits for DTA-Non Export business. Correction needed to enforce export and disincentive for DTA business.

Developer-cum-unit holder are to get undue 25% to 35% indirect tax benefits on erection, capital investment for DTA business capital goods, e.g. Power Project, Electronic Items (Customs Duty, CVD nil or negligible). Developer becoming unit holders to get undue tax benefits. Lesion should be learnt from abuse of Tax benefits of North East Cigarette-Tobacco Industries, Maritius Route & PN route. Direct/indirect taxes provisions should be corrected, loopholes to be plugged, tax benefit should be only for export activities and infrastructure development.

Almost all countries including China identified territory area, developed new township. Private entrepreneurs given land only for setting up Export Oriented Units (EOUs). In China no issue of abuse of tax provisions, land acquisition, “new Zamindars”, etc. prevails as Government itself is the owner. Commerce Ministry and Finance Ministry should separately study the concept, provisions, and benefits to private entrepreneurs of different countries.

Non-Processing Zones in the SEZs is an Indian phrase/concept. Illegal, non-scientific provisions of 75% non-processing zone. The calculation given/submitted by couple of private mega developers accepted by govt. this has inherent abuse of Government system to get maximum land in and around metro cities for real estate and other business.

The policy has negative impact on farmers due to manipulative acquisition/purchase of agricultural land for housing, hotels, medical education industries.

Policy provides for minimum 50 to 60% processing zone in Multi Sector SEZ. There should be Codification of activities in non-processing zone otherwise it will divert to personnel objectives of developers. There should be no tax benefit for non-export/ service sector business activities. There needs to be strict provisions to restrict/limit housing, hotels, malls, education – medical business and no tax benefits should be given for such activities.

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SEZs in and around metro cities are adding burdens on present infrastructure. Small units of IT/ITES, single sector SEZs not adding any infrastructure or social infrastructure.

So many Mega SEZs in Gurgaon, Haryana, Punjab where no port is available is quite surprising and it shows the demography and the locations natural advantages are not being considered and is not provided in the policy, SEZ are meant for export and port is an important part of cost of import that should have been considered in the account for notification, it seems the objective is to acquire large land banks in prominent areas of India where the value of land otherwise is bound to double and triple in next decades. All around the globe mega SEZ Developer usually prefers to go away from Metro City considering land cost but in India Mega SEZ coming in & around all Metro Cities. There should be provision of disincentive to SEZ in and around metro cities and abuse of Govt Acquisition provisions to get farmers land cheaply be avoided.

Land acquisition for SEZ started without policy, Maharashtra, Punjab and Haryana as well as Union Government are helping private developers to acquire, purchase land without evolving healthy rehabilitation package.

Undue benefits to SEZ developers-cum-unit holders for DTA business will affect the competitiveness in domestic industries. Tax/stamp duty/land price shall make the project cost 40 to 50% cheaper in SEZ which will have negative impact in domestic industries, employment etc.In future domestic industries will demand same relaxations/benefits. The whole country can become SEZ, i.e. Tax Heaven. Further there are long term implications on tax, revenue collection of State Central Governments. This result in disincentive and penalty for DTA business, level playing field for domestic industry is required.

Opportunities

The image of the SEZs has improved among the Indian workforce, companies and particularly among the Indian decision-makers, i.e. the SEZs are no longer regarded as special zones created for money laundering and corruption. However, it will take plenty of time before the Indian SEZs become known among foreign business circles

The SEZs may become an additional tool in strengthening regional centres, but this would require that the development speed should be accelerated tremendously. At the moment, the SEZ suffer from a common virus in India, i.e. a good idea at the central level does not materialise in efficient implementation at the regional level. The SEZ administration, with a few exceptions, has seldom enough experience on assessing the development of global demand on high-tech goods, the competition involved, and make future visions needed for supporting innovation building. If the regional administration is not fully aware of the global demand and competition, it hardly can create the conditions needed for attracting globally–recognised innovators into India. Closer collaboration with the world’s leading high-tech countries and the global R&D corporations would benefit the SEZs. There would be more policy requirement to make the units opening inside the SEZs attractive otherwise there would more cases where developed SEZs would be idle without being occupied by the unit holders, manufacturers and that will impact the developers as well.

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Threats

The Indian SEZs should not neglect foreign investments for at least six reasons. First, foreign firms bring additional R&D capital into India. Second, foreign firms bring advanced technology and introduce best practices, which are even more important than the finance per se, since money can buy the technology but not its effective use. Third, without the participation of the leading foreign R&D companies, the Indian innovation network will focus on domestic needs instead of the global opportunities. Fourth, the foreign firms accelerate competition, i.e. they bring dynamism into India's stagnant innovation sector. Fifth, the leading foreign innovators have a better view of future innovation development than even best-informed bureaucrats. Sixth, foreign high-tech companies' investment in India is a more cost-efficient way to diversify India from a raw material producer towards a high-tech country than the acquisition of foreign high-tech companies and bringing their knowledge to India.

Indian SEZs should focus on inviting a couple of leading foreign innovators in the zones. Foreign innovation leaders would bring their own foreign clients into the zones, as internationalization often occurs via business networks (follow-your-client strategy). Since foreign innovation companies cannot act by themselves in India, the subcontracting agreements would be a natural way for Indian firms to join the global innovation networks without going abroad. Although the aforementioned recipe sounds easy, one should not assume that the SEZs alone would be a sufficient attraction to bring foreign innovators into India. Therefore, India should improve its investment climate and upgrade its innovation system to be able to succeed in a high-tech revolution.

The current financial crisis slows down the development of the SEZs, since the regions and the companies have to focus on securing their core operations instead of developing innovations, there has been many request for denotification of approved SEZ

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CONCLUSION

The benefits derived from multiplier effect of the investments, additional economic activity in the SEZs and the employment generated thereof are estimated to far outweigh the tax exemptions and the losses on account of land acquisition. Stability in fiscal concessions is absolutely essential to ensure credibility of the Government intentions. Benefits derived from the SEZs are evident from the investment, employment, exports and infrastructural developments additionally generated/expected to be generated. The benefits expected to be generated include:

At present, 1016 units are in operation in the SEZs, providing direct employment to over 1.79 lakh persons; about 40 per cent of whom are women. Private investment by entrepreneurs in the SEZs established prior to the SEZ Act is of the order of over Rs. 4400 crore. In the 63 notified SEZs which have come up after 10th February 2006, investment of Rs. 13,435 crore has already been made in less than one year. These SEZs have so far provided direct employment to 18,457 persons

This study has argued that the role the SEZs and more generally special zones play have varied widely depending upon the strategies of growth their hosting countries have followed and the special trade relationships they have with other countries. The roles have also varied over time depending upon the trade strategy and more generally the growth strategies pursued by the countries, especially when these are not already industrialised. It is useful to distinguish between laissez-faire, import-substitution and export led growth as distinct types of industrialisations to understand not only trade and investment and growth but also the roles and success of SEZs across a wide variety of countries and over time in the second half of the twentieth century.

Special economic zones following the enormous success of China have been widely imitated. But it is to be entirely anticipated that the results would vary greatly. Earlier avatars of SEZs in the form of Foreign Trade Zones (FTZs) and Export Promotion Zones (EPZs) were important in the export led growth of East Asia especially South Korea. But more than SEZs or EPZs per se it is the pursuit of “export led growth policies” which underlie the success of exporting and hence of SEZs. SEZz/EPZs can be seen as a (not necessary) microeconomic and spatial initiative in the pursuit of ELG under rather special circumstances by China, and South Korea and Taiwan to more limited extent in their early phases of transformation. In other countries not pursuing ELG success of SEZs/EPZs has been rather modest. The roles played by the SEZs/ EPZs etc whatever their original purpose were constrained and determined by the macroeconomic policies, trade policies, and regional alignments. There is little meaning in studying SEZs beyond their layout and design without reference to these broader trade and macroeconomic policies. Thus early pioneers line India could make little out of their EPZs since the policies severely biased against exports. We characterise export led growth (ELG) as the strategy that has allowed the late twentieth century industrialisations, which is far from both import substitution (as conventionally understood) and laissez faire, and to be the simultaneous pursuit of both IS and EP. With this framework we are able to understand the role and evolution of SEZs in a wide variety of countries. These help us to explain and anticipate that unless the policy turns sharply to favours exports (more correctly tradables over non tradables) the success of Indian SEZs would be modest and nowhere near that registered in China. Following from our characterisation of Import Substitution, Export Led Growth and Laissez Faire we also bring out the nature and performance of “special zones” when these are promoted under the very same regimes.

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The SEZ policy in India underwent gradual relaxation of procedural and operational rigidities. The changes effected in this policy since 1991 have been far reaching and significant. It is believed that the overall and EPZ investment climate has an overwhelming bearing on the SEZ performance. In India, however, a conducive policy framework has had only a limited impact on the zone performance. Though the gross exports, foreign exchange earning and employment increased phenomenally in absolute terms, their growth rates declined substantially. Growth in exports per unit of employment also slowed down indicating deterioration in the export performance. Net value addition performance compares favourably with other Asian countries but it has not been consistent and the trend growth rate in value addition had not been statistically different from zero. Furthermore, zones also failed to promote non-traditional exports. Traditional sectors namely electronics and gems and jewellery dominate the zones.

Growth in exports per unit of employment also slowed down indicating deterioration in theexport performance. Net value addition performance compares favourably with other Asiancountries but it has not been consistent and the trend growth rate in value addition had not been statistically different from zero. Furthermore, zones also failed to promote non-traditional exports. Traditional sectors namely electronics and gems and jewellery dominate the zones. This could be due to the piecemeal nature of the policy changes. Various committees were set up to examine the performance of the zones. These committees made far reaching recommendations regarding incentive package, development of infrastructure and improvement in governance. However, policy changes remained slow and extremely cautious.

Even the introduction of the SEZ policy did not impact on the SEZ performance. Their performance continued to slide SEZs are expected to induce dynamism in the export performance of a country by eliminating distortions resulting from tariffs and other trade barriers, the corporate tax system, excessive bureaucracy, and missing infrastructure. Fall in the protective walls and reforms in the tax system reduced the gap between EPZ and other units in the wider economy in respect of tax incentives. There should have been significant improvement in the quality of infrastructure and governance to compensate them for the lost benefits. But this did not happen. Dysfunctional policies, regulations, lack of single window clearance facilities, poor attitude of the officials, centralised governance, stringent labour laws and poor physical and financial infrastructure, all accounted for an undesirable investment climate. With so many complications involved, will this SEZ finally materialise at all? And finally for what? What kind of a development goal is one that will render around 50,000 farmers landless (per SEZ), destroy livelihood sources for a much larger number of people, pull all the stops against exploitation of labour and cause huge chunks of resources, private and otherwise, to

a) pass on into private handsTo find out the expected increase in export, employment and

output through Special Economic Zones policy implementation in India.

b) To analyse the relative performance of Special Economic Zones.

c) The intricacies of setting up of Special Economic Zones by a firm, business module

and Financing.

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STRATEGIES FOR STRENGTHENING SEZs

1. Capping months of debate on the pros and cons of developing SEZs, the commerce ministry has issued a caveat that prime agricultural land should not be used for business purposes India's commerce ministry has asked the chief ministers of all Indian states to ensure that prime agricultural land was not allotted to business houses for development as SEZ, and that in any event agricultural land must not exceed 10 percent of land allotted.

2. It said that SEZs should serve as a bridge between rural and urban economies. The concept of PURA (Provision of Urban Facilities in Rural Areas), which is how developed countries have holistically conceptualized their rural habitations, needs to be remembered at a time when India is entering an era of SEZs. The explosion in the economy envisaged through SEZs will have to be linked to integrated infrastructure in rural and urban areas. India should focus on comprehensive and integrated spatial planning within and beyond SEZs. This however is a dream come true here.

3. Encourage the development of several manufacturing clusters: Permitting greater flexibility in the use of contract labour, simplifying administrative procedures and extending SEZ-like benefits to existing clusters or implementing the concept of ‘virtual SEZs’ will help.

4. Implement and govern them effectively, streamline the processes of availing them, avoid delays and corruption in the system.

5. Creation of Zonal Administration like:

Zone management: It manages the general administration. Investor services: It co-ordinates with EPZ units and helps in processing import/export documents, custom clearance, helps in issuance of visas. Engineering services: It looks after infrastructure matters Security: It provides all security related matters Industrial relations: It looks after labour related problems. Finance: It receives payments towards, ground rent, water bills, import, export and other charges, taxes including stamp duty. Internal audit: The unit ensures monitoring of financial areas.

The SEZ policy in India underwent gradual relaxation of procedural and operational rigidities. The changes effected in this policy since 1991 have been far reaching and significant.It is believed that the overall and EPZ investment climate has an overwhelming bearing on the SEZ performance. In India, however, a conducive policy framework has had only a limited impact on the zone performance. Though the gross exports, foreign exchange earning and employment increased phenomenally in absolute terms, their growth rates declined substantially.

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Bibliography

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Raman, A. Thothathri and Parag Diwan (2002). Free Trade Zones to Special Economic Zones: The Great Indian Dream. New Delhi: Pentagon Press

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Aradhana Aggarwal; Working paper (194) on “Impact of SEZs on Employment, Poverty & Human Development”, May 2007; Indian Council for Research on International Economic Relations”, New Delhi.

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