Special Economic Zones (SEZ) in India: Advantages & Disadvantages

The parliament had passed Special Economic Zone Amendment Bill, 2019. This Amendment allowed “trusts and any entity” to set up units in the SEZ. It aims to boost investment and generate employment in a wide range of economic activities, including in the infrastructure sector. This Bill opens up the possibility for all types of trusts to operate from the SEZs – public charitable trusts, private trusts run by big and small corporate houses, business trusts like the real estate investment trusts and infrastructure investment trusts and port trusts run by the government. The SEZs are of importance to the Indian economy as they are the catalyst for its growth. However, in India, its full potential is not being utilized like that of China. This new step may boost the SEZs’ potentials. However, necessary steps must be taken by the government to ensure that there is equal economic growth of the nation and not just in the SEZs.

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What is a Special Economic Zone?

  • Special Economic Zones (SEZ) is a geographical area within the boundary of a nation where the business and trade laws are different from the rest of the country and will be more liberal in nature.
  • Its main purpose is to increase the trade balance, employment, boost investments, create jobs and attract FDI.
  • The SEZs are set-up to encourage businesses to invest in the country by providing them with favourable economic policies like tax holidays.
  • The benefits the companies gain by being in an SEZ may include the low production costs and selling of goods and services at a cheaper rate.
  • This will give the companies an edge over their global competitors.
  • In India, the SEZs are well-defined, duty-free enclaves that can be considered as foreign territories for trade operations, duties and tariffs.
  • They can be established by any public or private companies, either be jointly or exclusively state-owned companies or even foreign companies anywhere within India.
  • The multi-product SEZ is required to have 1000 hectares while a single product SEZ requires little over 100 hectares.

How is it different from National Investment and Manufacturing Zone?

  • National Investment and Manufacturing Zones are one of the important instruments of National Manufacturing Policy, 2011.
  • It differs from SEZs in the following aspects:
  1. Purpose: SEZs are set-up to boost exports. There is no specification on the sectors involved. In India, the IT Sector thrived due to SEZs. NIMZs are exclusively meant for the manufacturers. It not only focuses on exports but also aims to enhance the domestic growth of the economy.
  2. Import duty: There is no 0% import duty provision for NIMZ. Whereas, the SEZs have 0% import duty provision.
  3. Land: For setting-up of NIMZ, at least 2500 hectares of land is required. Also, 30% of the land is reserved for manufacturing processes. There is no restriction of land for the SEZs.
  4. Government: For NIMZ, the land acquirement will be undertaken by the state government while the working capital for is infrastructure development will be provided for by the Centre. For SEZ, the land can be acquired by anyone – any private/public/joint sector or state government or its agencies and even foreign players can set up an SEZ.
  5. Labour: Labour interests are the priority of the NIMZ unlike that of SEZs. It does not allow sub-contracting labour force while the SEZ allows the same. The NIMZs have to provide job compensation through insurance or dedicated fund if there is a closure of the unit.

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How did the concept of SEZ come to be in India?

  • The idea of the basic concept of SEZ was sown in the mid-sixties.
  • The basic model of the present-day Indian SEZ was structured with the establishment of the first Export Processing Zone (EPZ) at Kandla in the year 1965.
  • Several other EPZs were established in various parts of India in the subsequent years.
  • However, the lack of good economic policies and inefficient management led to the failure of EPZs and their performance fell short of expectation.
  • The modern-day SEZ came to existence as the economic reforms of the 1990s did not yield the intended results.
  • The SEZ policy of India was devised to hasten the economic growth that was attained in the early 1990s.
  • The lack of an investment-friendly environment in the 1990s had prevented the growth of the Indian industries in spite of the implementation of the liberal economic policies.
  • This resulted in the formation of a much larger and more efficient form of their predecessors with a better policy framework and world-class infrastructural facilities.
  • The current Special Economic Zone Policies of India are complemented by the provisions of the Acts and Rules related to the same.
  • By 2005, all the EPZs were converted to SEZs.
  • Till 2006, India’s SEZs functions based on the provisions of the Foreign Trade Policy.
  • In May 2005, the SEZ Act, 2005 and SEZ Rules came to effect on and from 10th February 2006.
  • The SEZ Act, 2005 defines the key role of the State Governments in the export promotion and creation of infrastructural facilities.
  • The single window SEZ approval mechanism has been facilitated through a 19 member inter-ministerial SEZ Board of Approval or BOA.
  • The decision by BOA is binding and final.
  • As of March 2019, there are 232 SEZs in India.

What are the advantages of SEZs?

Brings in FDI:

As foreign investors are lured into the country through attractive facilities and policies, there will be an increase in Foreign Direct Investments.

Brings in new and advanced technologies:

The foreign companies that invest in India’s SEZs would bring with them new and emerging technologies to boost their profits. This, in turn, would help India to enhance its technological development.

Employment:

As there is an increase in the establishment of SEZs in India, there may be a boost in the employment opportunities within the nation and may, as a result, improve the standard of living of the locals. The majority of Indians are employed under the agriculture sector. The SEZs may divert them towards the manufacturing and industrial sector

Faster economic growth:

SEZs can be an asset to the Indian economy as they bring in many advantages such as inflow of FDI, transfer of technologies from abroad, boost in the service and industrial sector, infrastructural growth, etc. This, as a result, may hasten the economic growth of the nation.

Export Growth:

The products manufactured within the SEZ can be of export standard. Also, the facilities are provided within the SEZs to boost the exports of the economy. Thus, through exports, a nation can gain foreign exchange reserves and can help deal with the balance of payment crisis.

Growth of industrialisation:

In India, more than 60% of the population is working in the agricultural sector. Thus, there is increased competition for the limited employment opportunities within the sector. The establishment of SEZs may help deal with this problem by allowing the employment of these people in the industrial sector. Furthermore, it may also ensure the growth of the manufacturing industries within the country.

What are the disadvantages of SEZs?

Government:

  • Revenue loss:
  • The government typically gets huge tax (revenue) from the industries. However, as the government provides tax holidays under for the SEZs, it brings forth the revenue losses.
  • Thus, the government lays the burden on the common man to compensate for the revenue loss.
  • There is also the rise in the criticism of the government that it is favouring the rich at the cost of the poor.
  • According to the CAG, in 2016-17, the revenue loss for the government on the account of concessions to SEZs was Rs. 10,182 crore.
  • Authority:
  • The SEZs are exempted from the local laws and constraints.
  • Thus, they have hit the sovereignty of the local administrative bodies.
  • Humongous powers are given to the Developmental Commissioners for granting environmental clearance for SEZs so that they can even bypass the State Pollution Control Boards.

Social:

  • Land Seizing:
  • The lands are grabbed from the middle class and the poor on the pretext of economic development.
  • Generally, the land is the asset of the poor and the middle-class people.
  • They invest and work on it during their entire life.
  • However, the government can evacuate people from a particular region when the need arises.
  • Problems with compensations:
  • The government provides compensation in case the land is taken away from the private owners.
  • However, this compensation is not on par with the loss faced by the owners of the land.
  • Thus, people have to sacrifice their lands for the establishment of SEZs.
  • If the agricultural land is acquired for the SEZ, there are problems of land loss and livelihood loss for the farmers.
  • The compensation does not help him in the long-run.
  • No alternative employment opportunity for the rural poor:
  • People are displaced for the establishment of the SEZ.
  • In rural India, this is at high stake as there are no other employment opportunities available and they are forced to migrate in search of new jobs.
  • Landless labourers and non-farm workers:
  • These people do not receive any compensation from the government in case the land is seized.
  • Their livelihood is seriously disrupted due to the SEZs.
  • Discriminations:
  • The communities like the SCs and the STs are far more vulnerable in case the land is acquired for the SEZs.
  • Unequal Growth:
  • Many industries are lured in the SEZ due to attractive and favourable government policies.
  • This would lead to deindustrialisation and migration from areas other than SEZ, leading to the unequal development of the economy.

Environment:

  • Loss of cultivable land:
  • There are also instances of fertile land being used for the establishment of industries.
  • This, in turn, is jeopardising the livelihood of the farmers, growth of the agricultural sector and the nation’s food and nutrition security.
  • Regulations:
  • The SEZ Act, 2005 does not require the assessment of the environmental impacts caused by the SEZs.
  • This is because the SEZs are only permitted to contain “non-polluting” industries and infrastructures.
  • Cases of unfeasibility:
  • There are several cases wherein the SEZs are unsustainable in a long-run.
  • For example, the POSCO steel industry requires 286 million litres per day. In Tamil Nadu, people are suffering due to a severe water crisis. Establishing such industries in this region is impractical.
  • Pollution: There are cases of water pollution in the areas near SEZs due to the release of untreated water. This has caused deaths of livestock and has increased air pollution.

What is the Special Economic Zone (Amendment) Bill, 2019?

Special Economic Zones (Amendment) Bill, 2019 was passed in the parliament this year.

  • It allowed the trusts to establish units in the SEZs.
  • This Bill replaces SEZ (Amendment) Ordinance, 2019 that came into force in March 2019.
  • It amends the definition of “person” under Section 2(v) of the SEZ Act, 2005 to include trusts.
  • Furthermore, it adds that the Central Government may notify from time to time addition in the definition of “Person”.
  • As per Section 3(2) of the SEZ Act, 2005, the proposal for the establishment of SEZ can be made by any “person”.
  • Currently, under Section 2(v) of the SEZ Act, 2005, a “person” can be a resident of India or outside India, Hindu undivided family, cooperative society, companies (whether incorporated in India or outside India), propriety, firm, concern, or association of persons or body of individuals, whether incorporated or not, local authority and any agency, office or branch owned or controlled by such individuals.

What needs to be done?

  • The government should guarantee a sound compensation, resettlement and rehabilitation of the evacuated landowners for the equal growth and development of the nation.
  • Complementary infrastructures outside SEZs, like port connectivity, should be prioritized.
  • India is currently providing direct subsidies to the SEZs. This violates WTO rules. Instead, the government should provide indirect benefits to the investors.
  • The agricultural land should be used only as a last resort.
  • Fixed time frame needs to set to ensure faster notification by the BOA.
  • Also, there should be a speedy redressal of grievances by UAC/BOA and granting of NOC for the favourable investment environment.
  • The SEZs must become an investment and development catalyst rather than be used as enclaves to address the unemployment crisis of India.
  • The supplementary measures must be taken for the SEZs to be successful. This includes infrastructure development inside and outside SEZs and improving the skills and knowledge of the unskilled labour force through specialised training that is on par with the current demands.

Conclusion

SEZs are necessary tools to boost the economic growth of the nation. However, the SEZ policy requires a comprehensive overhaul for it to be successful. A patchwork repair does not help address the current problems faced by the SEZs. Rather, a non-partisan holistic approach is a must.

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