Special Economic Zone:An Analysis

Submitted by:

Anshika Srivastava

Chetna Yadav

Rohit Menon

Introduction

Geographical region that has economic and other laws that are more free-market-oriented than a country's typical or national laws.

established to accelerate foreign investment and endorse exports from India.

created by the Government and run by Government-Private or solely Private ownership.

As per law, SEZ units are deemed to be outside the customs territory of India

HISTORY

first Export Processing Zone (EPZ) at Kandla in the year 1965.

The Special Economic Zones (SEZs) Policy was announced in April 2000.

Five year later, SEZ Act (2005) was also introduced and in 2006 SEZ Rules were formulated until when it was guided by Free trade ploicy.

All export processing zones (EPZs), which were later converted in to SEZs in 2006

(1965)

(2000)

(2005)

(2006)

ObjectivesGeneration of

Additional Economic Activity

Promotion of export goods and

services

Promotion of investment from

domestic and foreign

sources

Creation of Employment Opportunities

Development of Infrastructure

Facilities

INCENTIVES

Duty free import/domestic procurement of goods for development ,maintenance and operation of SEZ units

100% income tax exemption for first 5 years50% income tax exemption for next 5 yearsIncome tax exemption for next 5 years to the extent of profits  reinvested (Maximum 50%)

Exemption from MAT ,central sales tax ,service tax

ECB by SEZ units upto US $ 500 million in a year

Single window clearance for central and state level approvals.

Other features:

100 percent FDI is permitted for all investments in SEZs

SEZs are required to be net foreign exchange earners.

Goods flowing from SEZ to DTA are considered exports while goods coming from DTA to SEZ are treated as imports

No import license required

Setting up of Off shore banking units(OBU) allowed in SEZs

Allowed to carry forward losses

Life Cycle Of SEZ

Launching Phase

Ram UP

Phase

Payback Phase

Annuity Phase

Life Cycle:

RISK

RETURN

• High Risk, Low return• Low Risk,

Low return

• High Risk, High return

• Low Risk, High return

Phase III

Phase II

Phase I

Phase IV

Risk V/s Return for SEZ

STRENGTHS WEAKNESS

•Familiarity with Western concepts of business practices

• An established legal redress system

• Relatively low labour costs

• India’s large English speaking workforce

• A large and growing domestic market.

•No advantages on labour flexibility or addressing labour indiscipline

•Can sell in DTA only on payment of full duties.

• Poor infrastructure

• High cost of capital

SWOT

OPPORTUNITIES THREATS

•To use SEZs to catalyse infrastructure development

• Realistically establish competitive advantages in SEZs

• A large NRI base

• To increase India’s small share of world trade

• To increase investments in core strength areas like IT and softwareproducts and services.

•Increasing rejection rate for proposals to establish SEZs.

•Sops provided to the units in the SEZ’s could be disputed in the WTO

•Prospect of even more restrictive labour laws being introduced

•Committee to monitor SEZ

•Critics claim that it could lead to regional imbalances and widening of gap between Developed and impoverished areas

•Can result in grave impact on ecosystem •Farmers being emotional about the land

SWOT (contd)

SEZ in CHINA and INDIA

Comparison

Issue China India

Size Very big. Typically in hundreds of hectares. Even 10 hectares will do.

Location Well thought out and located only on coasts. To facilitate exports and imports easily.

Anywhere. No restriction.

Labour laws Relaxed in the SEZs. Flexibility is totally absent.

Policy regime Experimentation of liberal policies in the specified areas while insulating them from the rest of the country.

Based on fiscal sops.

Investors Basically foreigners who are wooed with sops and promise of stability in policy.

Basically locals. Not foreign investor driven; which should have been the case.

Commencement In 1979 In 1969 with the export processing zone concept. But failed to muster courage in giving these regions foreign territory status till the year 2000 when Murasoli Maran announced the SEZ policy.

Number Only six: Shenzhen, Zhuhai, Shantou, Xiamen, Hainan and Pudong

Any where and any number. So far 115 operational. About 577 received approvals.

Tax holidays Present. Longer and steeper than in China.

SEZ 2005-2010

The story so far..

FACT FILE

No. of formal SEZ approved 577

Number of notified SEZs(As on 27th August, 2010

363(out of 577) + (7 Central Govt. + 12 State/Pvt. SEZs)

No. of valid In-PrincipleApprovals

155

Operational SEZs(As on 30th June, 2010)

114 (Out of this 14 are multi product SEZs, remaining areIT/ITES, Engineering, electronic hardware, textiles,Biotechnology, Gem& Jewellery SEZs and other sector specific

Units approved in SEZs(As on 30th June, 2010)

3,048

INVESTMENT(As on 30th June, 2010)

Rs.1,66,526.43 cr

Total Employment 5,50,323 persons

Exports in 2010-11(As on 30th June, 2010)

Rs. 58,685.46 crore (Growth of 68% over thecorresponding period of 2009-10)

SEZ locations In INDIA

The bitter part of the story..

• The Ministry of Finance estimated a revenue loss of Rs 175,487 crore from tax holidays

• The Companies are achieving the prescribed ‘positive’ NFE mainly though domestic sales to DTA

• SEZ developers using the power to develop real estate

• Farmer protests due to Improper compensation and destruction of agricultural land.

• No special increase in FDI

What went Wrong??

Lack of proper rules

Lack of Infrastructure

Locational disadvantage

Threat to water and food security

Fertile land destruction

Corrupt credentials of the developers

Suggestions for improvement

Strong fiscal disincentive/penalties for SEZs to sell in domestic market

Proper location and size for every SEZ

Proper checking of developers credential and a constant check on their activities.

Proper rules to compensate farmers

Disincentive for SEZ in and around metro cities

Proper co-ordination between various ministries.

Conclusion…• SEZ can provide tremendous opportunities for

growth.• But the current policy and its implementation has

lots of flaws.• Once these flaws have been addressed SEZs can

really change the face of the country

“One Shenzhen can bring India FDI in excess of $20 billion with per

capita income touching $5,000. This means India can become debt-free, with surpluses on its

balance of payments.”

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