chapter - 2 a profile of special economic...
TRANSCRIPT
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CHAPTER - 2
A PROFILE OF SPECIAL ECONOMIC ZONES
2.1 Evolution of Special Economic Zones
2.2 History of Special Economic Zone
2.3 The objectives of SEZ
2.4 Advantages of SEZs in India
2.5 Disadvantages or Issues on SEZ in India
2.6 Summary
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CHAPTER - 2
A PROFILE OF SPECIAL ECONOMIC ZONES
2.1 Evolution of Special Economic Zones
To analyze the topic of special economic zone, one first needs to sort
out nomenclature of the concept. The concept of SEZ is described by different
countries of the world is no less than 19 different terms, such as Free Trade
Zone (FTZ), Industrial Zone (Singapore), Maquiladoras (Mexico), Export
Processing Zone (EPZ) and the common variants are FTZ, EPZ and SEZ.
They are undistinguished from one other in terms of meaning.
Thomas (1956) defines Free Trade Zones as: “An isolated, enclosed
and policed area, in or adjacent to a port of entry, without resident population,
furnished with necessary facilities for loading and unloading for supplying fuel
and ship’s stores for storing goods for reshipping them by land and water, an
area where goods may be landed, stored, mixed, blended, repacked,
manufactured and reshipped without payment of duties and without the
intervention of custom officials.”
This definition highlights their function as trading and reshipping ports.
Later the revolutionary decline in the transportation costs and emergence of
standards made it possible to move goods efficiently towards where
processing had comparative advantages. Thus the “free trade zones” evolved
in to export processing zones.
“Export Processing Zone” is one of the most common terms, Warr
(1988) 2defines it the following way, “Export Processing Zone (EPZs) are
economic enclave within which manufacturing for export occurs under virtual
free trade conditions.”
This is a generic definition that also fits most SEZs very well, naming
that there should be enclaves, manufacturing for exports and free trade
conditions.
World Bank3 (1992) describes export processing zones (EPZs) as
existing of free trade zone elements and industrial park element. This serves
as a fruitful division though there can be other elements as well; these are
always present and important.
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The researcher has chosen the special economic zones as the term
currently used in India.
Ge (1999)4 defines Special Economic Zones,” a special economic zone
may be characterized in general terms, as a geographic area within the
territory of a country where economic activities of certain kinds are promoted
by a set of policy instruments that are not generally applicable to the rest of
the countries.”
The above definitions are not concrete and there are many exceptions,
some EPZs may not be demarcated by physical barriers as in the case where
free trade applies throughout the country, as in the case of the city states of
Singapore and Hong Kong (Previously). Similarly China’s Special Economic
Zones are spread on such a large scale that they seem to evade the above
definition of EPZ.
2.2 History of Special Economic Zone
Free zones as a concept are at least as old as Western civilizations,
having existed in the Phoenician of Tyre, Roman Empire and at 300 BC in the
Greek Island of Delos which as a result became one of the wealthiest islands
in the world for nearby a country5. With operational success the role of the
FTZs expanded from trade to investment, technology, research and
development, service, training and free zones have become centre of
activities in the modern economy.
A more recent example incorporating the industrial park and thus much
more similar to the SEZ, is the full-fledged industrial estate, set up in
Manchester in 1896. The concept followed by developing and transitional
nations, starting with a Puerto Rican private venture in 1947. The first public
industrial estate was set up in Singapore in 1951. India, the Dominican
Republic and Taiwan all started building export processing zone in 1965.
Simultaneously Mexico started maquila programme where Maquiladoras
could be established with duty free imports for re-export. In the 70’s and in the
80’s SEZs flourished, in the Southeast Asia, Latin America and to some
extent in Africa and the Middle East and the rest of Asia6. The World Bank
(2008) estimates that today there are 3000 zones in 135 countries, accounting
for over 68 million direct jobs and over $500 billion of direct trade related
value added within zones.7
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2.3 The objectives of SEZ
United Nations Publication of 1985 listed the most common objectives
underlying the establishment of zones are as following:
• Generating foreign exchange earnings.
• Creating employment.
• Attracting foreign capital and advanced technology.
• Acquiring labour management skills.
• Creating linkages between EPZ industries and the domestic economy.
The government of India passed SEZ Act in 2005. The main objectives
of the SEZ Act, 20058 include.
• Promotion of investment from domestic and foreign sources.
• Development of infrastructure facilities.
• Creation of employment opportunities.
• Promotion of exports of goods and services.
In contract of the above stated general objectives and objectives of
SEZ, Act an attempt made to assess advantages and disadvantages of SEZs
in India.
The physical concept of SEZ, institutional framework and procedure to
set up SEZ are discussed in the flowchart given below:
Special Economic Zone – Physical Concept
Notified Area of SEZ Processing Area (50% min)
Entry / Exit Point (S)
Non-Processing Area
IFSC
FTWZ
The DC of the SEZ responsible for demarcating processing / nonprocessing areas Land / built-up space in the processing area to be leased: • To entrepreneurs holding valid letters of approval, with lease period co-terminus with LOA • For facilities for exclusive use of the Units such as canteens, public telephone booths, first aid centers, creches, etc. • To a person desiring to create infrastructure facilities for use by prospective Units
Developer may allot the land in the nonprocessing area for business and social purposes such as: • Educational institutions • Hospitals • Hotels • Recreation and entertainment facilities • Residential and business complexes
• DTA units not allowed to set up Facilities such as Free Trade & Warehousing Zones, International Financial Services Centrezmay be approved for establishment within the Processing Area
SEZ Institutional Framework - Overview
Special Economic Zone
BBooaarrdd ooff AApppprroovvaall �� AApppprroovviinngg pprrooppoossaallss ttoo sseett uupp SSEEZZss �� AApppprroovvaall ooff ""aauutthhoorriizzeedd"" ooppeerraattiioonnss iinn aann SSEEZZ �� FFDDII AApppprroovvaallss ttoo DDeevveellooppeerrss,, UUnniittss �� AApppprroovvaallss ffoorr iinnffrraassttrruuccttuurree pprroovviissiioonn ((tthhrroouugghh ccoo--ddeevveellooppeerrss,, eettcc..))
SSEEZZ AAuutthhoorriittyy �� MMoonniittoorriinngg ooff
iinnffrraassttrruuccttuurree sseerrvviiccee && eexxppoorrtt ppeerrffoorrmmaannccee
PPrrooppeerr OOffffiicceerr �� CCuussttoommss
aaddmmiinniissttrraattiioonn
CCoo--DDeevveellooppeerr �� PPrroovviiddeerr ooff
iinnffrraassttrruuccttuurree
DDeevveellooppeerr PPllaannnneedd ddeevveellooppmmeenntt ppllaann
�� PPrreeppaarree ddeevveellooppmmeenntt ppllaann �� DDeemmaarrccaattee aanndd ddeevveelloopp
ssiitteess �� AAllllooccaattee aanndd ttrraannssffeerr
pplloottss,, bbuuiillddiinnggss �� RReegguullaattee tthhee eerreeccttiioonn ooff
bbuuiillddiinnggss iinn aaccccoorrddaannccee wwiitthh tthhee ppllaann
�� DDeevveelloopp,, ooppeerraattee mmaaiinnttaaiinn iinnffrraa
�� DDeemmaarrccaattee ZZoonnee bboouunnddaarryy
TToowwnnsshhiipp AAuutthhoorriittyy �� MMaayy bbee
aappppooiinntteedd bbyy tthhee SSttaattee GGoovveerrnnmmeenntt,, wwiitthh ppoowweerrss aanndd ffuunnccttiioonnss aass mmaayy bbee pprreessccrriibbeedd
AApppprroovvaall CCoommmmiitttteeee �� AApppprroovvee iimmppoorrttss ooff
ggooooddss aanndd sseerrvviicceess iinnttoo tthhee SSEEZZ
�� AApppprroovvee pprrooppoossaallss ffoorr eessttaabblliisshhmmeenntt ooff SSEEZZ uunniittss
�� AAllllooww ffoorreeiiggnn ccoollllaabboorraattiioonnss // FFDDII pprrooppoossaall dduullyy cclleeaarreedd bbyy tthhee BBooaarrdd ooff AApppprroovvaall
�� MMoonniittoorr ccoommpplliiaannccee bbyy SSEEZZ DDeevveellooppeerr,,
DDeevveellooppmmeenntt CCoommmmiissssiioonneerr � Grant all local and state level clearances, etc.
delegated by the Central / State Government. � Monitor such approvals, licenses,
registrations, etc. � make town planning regulations
Application
SSttaattee GGoovvtt.. sshhaallll eennddeeaavvoorr tthhee ffoolllloowwiinngg pprriioorr ttoo rreeccoommmmeennddaattiioonn
�� EExxeemmppttiioonn ffrroomm eelleeccttrriicciittyy dduuttyy oorr ttaaxxeess �� AAllllooww ggeenneerraattiioonn,, ttrraannssmmiissssiioonn aanndd
ddiissttrriibbuuttiioonn ppff ppoowweerr wwiitthhiinn aa SSEEZZ �� eexxeemmppttiioonn ffrroomm SSttaattee aanndd llooccaall ttaaxxeess,,
lleevviieess aanndd dduuttiieess �� PPrroovviiddiinngg wwaatteerr,, eelleeccttrriicciittyy aanndd ssuucchh ootthheerr
sseerrvviicceess �� DDeelleeggaattiioonn ooff ppoowweerr ttoo tthhee DDeevveellooppmmeenntt
CCoommmmiissssiioonneerr iinncclluussiivvee ooff ppoowweerr wwiitthh rreessppeecctt ttoo wwoorrkkmmaann eemmppllooyyeedd bbyy tthhee ddeevveellooppeerr..
�� DDeeccllaarraattiioonn ooff tthhee SSEEZZ aass aa PPuubblliicc uuttiilliittyy sseerrvviiccee
�� PPrroovviiddiinngg ssiinnggllee ppooiinntt cclleeaarraannccee ssyysstteemm ttoo tthhee DDeevveellooppeerr aanndd UUnniitt uunnddeerr tthhee SSttaattee AAccttss aanndd RRuulleess..
SSttaattee GGoovvtt.. ttoo eennssuurree tthhaatt rreeqquuiirreemmeennttss uunnddeerr RRuullee 55 hhaavvee bbeeeenn ccoommppiilleedd wwiitthh aanndd ccooppiieess ooff rreelleevvaanntt nnoottiiffiiccaattiioonn iissssuueedd bbyy iitt aarree aattttaacchheedd
IIddeennttiiffyy tthhee AArreeaa aanndd mmaakkee aa PPrrooppoossaall ffoorr sseettttiinngg uupp aa SSppeecciiaall EEccoonnoommiicc ZZoonnee..
((FFoorrmm--AA))
PPrrooppoossaall ddiirreeccttllyy ttoo tthhee BBooAA rreeqquuiirreess pprriioorr rreeccoommmmeennddaattiioonn ooff tthhee SSttaattee GGoovvtt..
SSttaattee GGoovvtt.. ttoo ffoorrwwaarrdd tthhee pprrooppoossaall ttoo tthhee BBooAA,, wwiitthh rreeccoommmmeennddaattiioonnss,, wwiitthhiinn 4455 ddaayyss ((RRuullee 44))
CCoonnttiinnuueedd oonn NNeexxtt
SSttaattee GGoovvttss.. rreeqquuiirreedd ttoo iinnddiiccaattee wwhheetthheerr pprrooppoosseedd aarreeaa ffaallllss uunnddeerr rreesseerrvveedd oorr eeccoollooggiiccaallllyy ffrraaggiillee aarreeaa aass ssppeecciiffiieedd bbyy ccoonncceerrnneedd aauutthhoorriittyy
Formal Approval
Application In-Principle Approval
Notification
SEZ Approval
BBooAA ddeecciiddeess oonn tthhee PPrrooppoossaall ssuubbjjeecctt ttoo tthhee rreeqquuiirreemmeennttss pprreessccrriibbeedd bbyy tthhee CCeennttrraall GGoovvtt..
PPrrooppoosseedd AApppprroovveedd
PPrrooppoossaall AApppprroovveedd wwiitthh MMooddiiffiiccaattiioonnss
PPrrooppoossaall RReejjeecctteedd
CCoonnttiinnuueedd ffrroomm PPrreevviioouuss PPaaggee
MMooddiiffiiccaattiioonnss aacccceeppttaabbllee ttoo DDeevveellooppeerr
MMooddiiffiiccaattiioonnss nnoott aacccceeppttaabbllee ttoo ddeevveellooppeerr
PPRROOPPOOSSAALL AAPPPPRROOVVEEDD
PPRROOPPOOSSAALL RREEJJEECCTTEEDD
Central Govt. grants Letter of Approval
Rule 5 (2) - Requirements foe minimum (contiguous) Area and other terms and conditions for an SEZ
� Multi product - 1000 hectares or more (<5000 HA) & minimum 50% for processing area.
� Multi Product Exclusive Services - 100 hectares or more
� Specific sector or in a port or airport - 100 hectares or more and minimum 50 % for processing area.
� Electronics and hardware and software including ITES and non-conventional energy - 10 hectares or more
� free Trade and Warehousing - 40 hectares or more & a built area of not less than one lakh sq. mtrs.
The BoA shall record reasons for the rejection and intimate the Central Govt. , who informs the concerned person.
The Central Govt. shall grant the LoA within thirty days of receipt of communication to the concerned person or the concerned State Govt. LoA valid for ONE years but can be extended for a further period of two years in Form - B The Developer shall obtain approval from Concerned Departments of the Central and State Govts. or Government Agencies, as may be required.
Authorized Operations
Formal Approval
Application In-Principle Approval
Notification
Notification
LLeetttteerr ooff AApppprroovvaall rreecceeiivveedd bbyy DDeevveellooppeerr iinn FFoorrmm -- BB
Continued form Previous Page
AApppplliiccaattiioonn ttoo tthhee CCeennttrraall GGoovvtt.. ffoorr DDeeccllaarraattiioonn ooff iiddeennttiiffiieedd aarreeaa aass SSEEZZ
Continued on Next Page
The Developer is required to furnish following details:
� Proof of legal possession and irrevocable right with regard to the identified area.
� Developer to submit Certificate from the State Govt.
or its authorized agency stating that --Developer has legal possession & irrevocable rights to develop said SEZ -- The said area is free from all encumbrances � In case the identified area is a leasehold property, the
lease shall be for period not less than twenty years. � Identified area shall be contiguous and vacant and it
should have no public thoroughfare. ** BOA can relax the condition of contiguity on case to case basis, on merits, for reasons to be recorded in writing.
Authorized Operations
Formal Approval
Application In-Principle Approval
Notification
Notification
Continued from Previous Page
NNoottiiffiiccaattiioonn ffoorr DDeeccllaarraattiioonn ooff aann aarreeaa aass SSEEZZ
Continued on next page
The Central Govt. shall notify the identified area as a SEZ subject to the following
� Submission of details mentioned above and other details, if any. � Acceptance of conditions specified in the Letter of Approval
The Central Govt. shall be guided by the following as per sec. 5: � Generation of additional economic activity � Promotion of exports of goods and services � Promotion of investment from domestic and foreign sources � Creation of employment opportunities � Development of infrastructure facilities � Maintenance of sovereignty and integrity of India; the security of the
State and friendly relations with foreign States.
Exemptions, drawbacks and concessions shall be available for the authorized operations after the SEZ has been notified by the Central Govt.
The Central Govt. if it considers appropriate, notify subsequently any additional area to be included as a part of the existing SEZ. No minimum area requirement for additional area notification
Authorized Operations
Formal Approval
Application In-Principle Approval
Notification
Operations
Continued from previous page
GGrraanntt ooff AApppprroovvaall ffoorr AAuutthhoorriizzeedd ooppeerraattiioonnss
PPrroocceessssiinngg aanndd NNoonn--pprroocceessssiinngg aarreeaa SSeecc.. 66
The Developer shall submit to the BoA the details of operations proposed to be undertaken at the SEZ.
The BoA may authorize the Developer to undertake in the SEZ, such operations which the Central Govt. may authorize
Development Commissioner (DC) of the SEZ shall be the authority for demarcating the areas falling under the SEZ as:
� Processing Area or � Exclusively area for trading or warehousing or � Area other than (a) & (b)
Issues pertaining to the processing area, FTWZ: � Separate entry & exit points and be fully secured by
taking such measures as approved by BoA � only authorized persons allowed to enter
Authorized Operations
Formal Approval
Application In-Principle Approval
Notification
Operations
Authorized Operation means operation which may be authorized by central government and such operations shall be mentioned in Letter of Approval. Sec 4 (2) And Sec 15 (9) Example : List of approved activities by BOA for certain SEZs 1. Land & Site Development 2. Utilities 3. Security Systems 4. Telecomm/Infocomm/Communication facilities 5. Facilities & Infrastructure 6. Waterside Infrastructure 7. Trading Hub 8. Common facilities & Services 9. Social Infrastructure
Authorized Operations
Formal Approval
Application In-Principle Approval
Notification
Procedure …1
AApppplliiccaattiioonn ttoo BBOOAA FFoorr AAuutthhoorriizzeedd AAccttiivviittyy
AApppprroovvaall ooff AAuutthhoorriizzeedd OOppeerraattiioonn bbyy BBOOAA
AApppprroovvaall ooff lliisstt ooff mmaatteerriiaall aanndd sseerrvviicceess ffoorr ccaarrrryyiinngg oouutt aauutthhoorriizzeedd ooppeerraattiioonnss bbyy
aapppprroovvaall ccoommmmiitttteeee ++
BBoonndd ccuumm LLeeggaall UUnnddeerrttaakkiinngg -- FFoorrmm DD
It is to be certified by Chartered Engineer
Duty saved for 3 months consumption
Procedure …2
AAppppllyy ttoo SSttaattee GGoovvtt.. && DDeevveellooppmmeenntt CCoommmmiissssiioonneerr ffoorr EElliiggiibbiilliittyy CCeerrttiiffiiccaattee
MMaaiinnttaaiinniinngg pprrooppeerr aa//cc ooff uuttiilliizzaattiioonn ooff dduuttyy ffrreeee iitteemmss
QQuuaarrtteerrllyy aanndd HHaallff yyeeaarrllyy ssuubbmmiissssiioonn ooff cceerrttiiffiiccaattee
ffoorr uuttiilliizzaattiioonn ooff dduuttyy ffrreeee iitteemmss iinn FFoorrmm -- EE
UUnnuuttiilliizzeedd dduuttyy ffrreeee iitteemm ccaann bbee ttrraannssffeerrrreedd ttoo DDTTAA oonn ppaayymmeenntt ooff dduuttyy aafftteerr aapppprroovvaall ffrroomm
SSppeecciiffiieedd ooffffiicceerr
IItt iiss ttoo bbee cceerrttiiffiieedd bbyy aannootthheerr
CChhaarrtteerreedd EEnnggiinneeeerr
DDuuttyy ffrreeee ggooooddss ttoo bbee kkeepptt iinn ssppeecciiffiieedd ppllaaccee iinnssiiddee oorr oouuttssiiddee tthhee pprroocceessssiinngg aarreeaa aafftteerr
ppeerrmmiissssiioonn ffrroomm ssppeecciiffiieedd ooffffiicceerr
CCoouulldd aallssoo bbee ttrraannssffeerrrreedd ttoo ootthheerr
ddeevveellooppeerr,, uunniitt oorr SSEEZZ aafftteerr aapppprroovvaall ffrroomm
SSppeecciiffiieedd ooffffiicceerr
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2.4 Advantages of SEZs in India
Worldwide SEZs have played a vital role in the promotion of exports,
employment generation as well as overall development of an economy. There
are costs too and in some countries it has been found that associated costs
are sometimes more than the benefits
2.4.1 Attracting Foreign Investment
Free trade and foreign direct investment have been powerful channels
for transmission of technology from the industrially developed advanced
countries to the developing nations. The process has benefited both: the
parent companies spread for economic advantage and the developing
countries gain advantage in the development ladder from resource-base, low-
tech production to high-tech value added products and services.
FDI inflows in India have been growing rapidly since 2004,
including a three-fold increase in the year 2007, because of SEZs with
excellent infrastructure and special operating law to attract foreign investment.
In 2007-08, India received FDI of US$ 24.57 billion as against US$ 15.7 billion
during 2006-07, a growth of 56 percent. The growth of foreign investment in
India is steadily increasing, but still far behind China. Cumulative FDI inflows
since August 1991 up to September 2006 were US$ 43.29 billion. During the
same period China was able to attract more than US$ 200billion.9 The
reasons for slow FDI inflows are multiplicity of Central and states laws
infrastructure bottleneck, lack of political will to implement the remaining, yet
much required, reforms such as capital account convertibility, labour laws etc.
2.4.2 Providing Employment Opportunities
One of the important objectives of SEZ is to reduce unemployment by
creating employment opportunities in developing countries. In order to
increase the job creation effect, SEZs are often establishment in areas where
a big number of workers are idle, often backward areas. Empirically it is also
found that activities taking place in SEZs are low-skilled often assembly work
and other basic manual work.
SEZs in India play an important role in providing employment
opportunities. SEZs in India provided direct employment to over 6.44 lac
persons as on 31/12/2010.10 Employment growth in EPZs / SEZs is shown in
the table given below.
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Table 2.1 Employment growth in EPZs / SEZs
Sr. No.
Year Total Employment
Average Zone Employment (No.)
Average Annual Employment
Growth rate (%) 1 1966 70 70 -- 2 1970 450 450 50.2 3 1975 1450 725 41.9 4 1980 6000 3000 34.2 5 1985 16200 4050 22.6 6 1990 35205 5868 16.9 7 1995 61432 10239 11.9 8 2002 81317 11624 6.2 9 2002 88177 12711 5.2 10 2006 178763 22600 77.8
Source: Department of Commerce, Govt. of India.
The table shows the growth of employment in EPZs / SEZs during the
entire period from 1966 till 2006. Total employment increased from a mere 70
workers in 1966 to around 89,000 workers in 2002.Employment per zone on
an average also increased from 70 to over 12,000. However, the average
annual growth rate in employment declined continuously.
It is worth noting that after SEZ Act came into operation in 2005 the
new generation SEZs provided more employment, which is reflected in the
figures, shown in the table above. The total employment almost doubled
between 2002 and 2006 registering an annual increase of about 20 percent.
The incremental employment generated by the SEZs in short span of time
since the SEZ Act came in to force in February 2006, is of order of 5.09 lac
persons.
Employment generating potential of SEZs, as reflected in the
employment elasticity of exports, is directly linked with their expansion. Since
the employment elasticity is large in the initial stages of SEZs, new SEZs are
likely to play a critical role in this country where over 50 percent of the
population is still directly / indirectly dependent on agricultural activities and
level of education attainment is low. The average employment elasticity in
Kandla during 1966-71 was estimated at 1.09; however, after economic
liberalization policy initiated and SEZ investment expanded during the period
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1991-2000, it was reported to be around 0.62. After the SEZ policy of 2000
came into effect, the employment elasticity at 0.295.11
4.3 Promoting Exports
Generally success of SEZ policy is judged by its ability to enhance
foreign investment and promote exports. As it is stated in the objectives that
promotion of export is an important criterion to measure success of SEZ
policy particular SEZ Act came into effect, SEZs in India showed tremendous
increase in exports. Export performance of EPZ / EPZ is discussed in the
table given below.
Table: 2.2
Export performance of EPZ / EPZ
(Rs. Million)
Phase Year Average Annual Total Export
1966-70 3.26
1971-75 17.36
1976-80 186.77
I
(1965-80)
Average 69.1
1981-95 2371.24
1986-90 5829.1
II
(1980-90)
Average 4073.17
1991-95 20848.74
1996-2000 59184.79
III
(1990-2000)
Average 40017
2001-03 93251.75
2003-04 138544
2004-05 183090
IV
(2000-2005)
Average 12277.85
2005-06 228395.3
2006-07 347874.71
V
(2005-07)
Average 288135.01
Source: Department of Commerce, Govt. of India.
The figures in the table show that there has been a meagre
growth in exports during the first phase (1965-1980) and it accelerated
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towards the end of the period when average annual exports raised to Rs. 187
million from just Rs. 17 million during the first half of 1970s. Although the
Phase-III (1999-2000) witnessed a big change in the government policies
towards explore due to economic liberalization the growth in exports remained
almost static during this period. The subsequent phases i.e., phase Iv and V
registered a quantum jump in average annual exports of Rs. 120277 million
and further to Rs. 288135 million from Rs. 40017 million during the phase
three (1999-2000). The overall growth rate of exports during the period 1966-
2002 is estimated at 42.4 percent. After the SEZ Act came into place in 2005,
there has been a tremendous growth in exports from these old EPZs
converted into SEZs and the new generation SEZs which came into effect
after the SEZ policy of 2000 and after the SEZ Act enacted in 2005. As it is
discussed in the Chapter-1 SEZs in India made a remarkable progress in
terms of export promotion during the period of 2005-06 to 2010-11. Especially
during the year 2001-10, exports by SEZs in India increased at 121% over
previous year. However, SEZs share in India’s total exports increased at
modest rate. For instance, in 2005-06 the total exports from SEZs stood at
Rs. 22,839 crore, which works out of around five percents of India’s total
exports for the year. In the year 2006-07 and 2007-08, the SEZ, share in
India’s total exports was around six percent and ten percent respectively.
Presently, the share of SEZ is about thirteen percent of total exports.12
2.4.4 Developing Infrastructural Facilities
As per the definition contained in the SEZ Rules, 2006,13 “infrastructure
means facilities needed for development, operation and maintenance of a
Special Economic Zone and includes industrial, business and social amenities
like of land, roads, buildings, sewerage and influent treatment facilities, solid
waste management facilities, park including jetties, single point moorings,
storage tanks and interconnecting pipelines for liquids and gases. Inland
Container Depot or Container Freight Station, warehouses, airports, railways,
transport system, generation and distribution of power, gas and other forms of
energy, telecommunication, data transmission network, information
technology network, hospitals, hotels, educational institutions, leisure,
recreational and entertainment facilities, residential and business complex,
water supply, desalination plant, sanitation facilities”.
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As it is stated in Chapter-1 the main difference between SEZ and EPZ
is that the former is just an industrial enclave but the later is an integrated
township with fully developed infrastructure. While applying the definition of
SEZ Rules, 2006 it is observed that the infrastructure within the SEZ is
generally superior to that available outside. However, no exclusive
arrangements have been made for power, water or telecommunications by
the zone authorities. Only Cochin and Madras SEZs have reported to have
effluent treatment plant and water purifier, captive power plant scheme is
applicable but not operational in any converted SEZs, except in India.
The new generation SEZs, however, have their own captive power
plants. The units in most of the SEZs have their own back up arrangements
for power supply. The old SEZs are not properly connected with good quality
roads different directions leading to the zone and there are no transport
facilities available within the zone. Poor streetlights and poor security system
create problems especially for the staff working during night shifts.
Though the physical infrastructure is improving gradually since the SEZ
policy came into being in 2000, they are for from satisfactory, social utilities
are almost non-existent except canteen. Only in Kandla and Surat certain
area is earmarked for such facilities whereas in the rest of SEZs, it is almost
negligible, even basic facilities such as fire stations, guest house, hospitals
etc., are not available.14
However, new generation SEZs coming up mainly in the private sector
are developing world class infrastructure. Amongst the facilities provided to
the employers are a well-stocked library, a cafeteria, a double-storied
lunchroom which provides multi cushier food at a very subsidized rate, a well-
furnished gymnasium with state of the art equipment, a specious mediation
centre, a well functioning crèche and separate rooms for male and female
workers.
Power availability is rated as satisfactory in most of the zones except in
Noida where the units do not get regular supply of power for more than three
to four hours daily. Most of the respondents have expressed concern against
high electricity charges making cost of production relatively high. They also
rate other facilities such as warehousing, container handling, banking and port
as poor. Nearby half of the respondents said that these infrastructure facilities
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are improving since 2000 but the pace of such improvement is very slow.
Water supply in most of the zones is average but there is concern on high
water charges.15
2.4.5 Technology up gradations and technology trans fer
Most of economic and social progress of the past few centuries has
been due to technology. Most technological improvements in developing
countries to a large extent are dependent on the diffusion of technology from
advanced countries.
SEZs attract export oriented FDI and promote other forms of
collaboration between local firms and MNCs. For instance SEZs facilitate the
insertion of domestic SMEs (Small and Medium Enterprises) into global value
chains by offering them an enabling investment climate (Gerefit 2005) global
standard, low cost competition and advances in technology raise challenges
for the SEZ units comparing in global value chains. This simulates learning
and innovation which are crucial aspects of human development.
Learning and knowledge created in SEZs is eventually transmitted to
domestic firms supplying to the SEZ firms through backward linkages when
the companies within the SEZ buy inputs from the host country. Direct
transaction of technology and indirect spillovers though various channels such
as copying, reserve engineering and movement of workers and managers
between foreign and domestic companies also facilitate transmission of
knowledge to the rest of the economy. Further, trade bodies, manufactures’
associations and export marketing bodies which provides a useful platform to
interact and to faster closer rapport among members act as valuable forums
for information sharing and spillovers. Thus SEZs are not enclave / foreign
territories that are functioning in isolation.
Technology transfers take place in different ways, foreign direct
investment licensing (including technical consultancy) and acquisition of
capital goods.
SEZs in India have been dominated by domestic investment. The
share of FDI in total investment is increasing slowly. However, it still remains
around one fourth of total investment in the zone. Recent studies also
observed that MNEs are not carrying out R&D operations in India and extent
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of training provided to local employers is not significant. Contribution of MNC’s
in upgrading technological standards in developing countries is not significant.
SEZs contribution as an engine for promoting new knowledge,
technologies and innovations through technology transfer and technology
creation has been quite limited till new zones are dominated by medium tech
activities and most firms are involved in contract manufacturing, which leave
little scope for R&D activates. It is found that the technology related activities
of the SEZ units are not different from those of the export oriented domestic
units outside SEZs. Thus zones could not fulfil the role of promoting
innovation systems in the economy. This is despite the fact that knowledge
spill over potential of zones is rather high in the economy.
2.5 Disadvantages or Issues on SEZ in India
Following the SEZ ACT of 2005 and SEZ Rules of 2006, the Department
of Commerce has approved the setting up of a large number of SEZs in
different parts of the country. This has generated debates on a number of
issues and they can be broadly clubbed under five heads, which are as
follows:
2.5.1 Loss of Government Revenue
The SEZ Act, 2005 offers various fiscal and non-fiscal incentives and
facilities for attracting investment (including foreign direct investment) into the
SEZs. Incentives offered by SEZ Act are discussed in the questionnaire given
in appendix.
Madhumita Dutta16 observed that a closer task at the figures of one of
most so-called successful Nokia SEZ indicates that its investment is almost
entirely paid by public subsidy, much of the production is sold domestically,
employment generation is below projections, are workers are short-charged
(high turnover). This clearly reveals that there are fundamental flaws in the
SEZ policy and legislation.
Madhumita Dutta explains that SEZs are meant for export promotion,
but it is fairly surprising that the main incentive offered by the Tamil Nadu
Government to the Nokia SEZ was to reimburse Nokia for value added tax
(VAT).Vat is only the cost of company when it sells within India, since export
products are not going to attract this tax. This clearly indicates that, right from
the start, the company planned to sell a significant share of its phones in the
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Indian market. There are two cases to be considered for VAT/CST. The first
when Nokia sells mobile phones within Tamil Nadu. The Tamil Nadu
government, in this case, receive VAT money from the vendors of the phones
and reimburse it to Nokia. This results in a loss of income for the state. The
second case of reimbursement concerns sales by Nokia in a state other than
Tamil Nadu. Here the phones will attract central sales tax (CST) which will be
collected by the respective state government from the vendors, but it is the
Tamil Nadu government which reimburses Nokia for the payment of this tax.
This reimbursement becomes a cost for the government to be paid in
competition with other expenditure like education and health.
Nareshkumar17 highlighted that the prospects of revenue loss of SEZs
India are alarming. It is going to severely constrain the state government in
their expenditure, especially on public programmes and adversely affect the
poor in the light of Fiscal Responsibility and Budget Management (FRBM) Act.
The incentives given to SEZs could adversely impact the rest of the economy
and the net investment is likely to remain low. Low employment intensity in
the capital-intensive activities in SEZs implies an adverse impact on the
aggregate employment.
Department of Revenue, Government of India18 is against providing
blanket tax sops to all SEZs and also all types of industrial and services units
operating in SEZs without some conditions. It has estimated that over a five
year period (2005-10) there will be revenue loss of Rs. 1, 75,847 crore due to
various tax incentives to SEZs.
It must be understood that this revenue loss is national as there would
be no revenue if these SEZs are not put in place. Further, since most of the
investment in these SEZs, will be private, it will not lead to extra burden on the
exchequer.
Department of Commerce, government of India while strongly
favouring tax exemptions / incentives for SEZs have critiqued the revenue
loss estimates of the Department of Revenue on the ground that these
estimates do not reveal the true picture of situation.
According to Department of Commerce, Government of India, 19 total
revenue losses due to SEZs would not be more than Rs. 33.065 crore. On the
other hand, it has estimated that due to additional economic activity GDP will
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increase by Rs. 8, 45,160.00 crore. This increase in additional economic
activity would generate additional revenue of Rs. 1, 48,352.00 crore during
the same period (i.e. 2005-10).
Table: 2.3
Revenue Loss on Account of Export Promotion Schemes
Scheme 2005-06 (Rs. in crore) 2006-07 (Rs. in
crore)
Advance License 13261 (35.27) 17610 (32.75)
EOU / EHTP / STP 10277 (27.34) 13651 (25.38)
EPCG 5332 (14.18) 8648 (16.08)
DEPB 5650 (15.03) 4873 (9.06)
SEZ 1070 (2.84) 2146 (3.99)
DFRC 815 (2.16) 824 (1.53)
DFIA --- 530 (0.98)
DFCEC 585 (1.55) 1266 (2.35)
Scheme 2005-06 (Rs. in crore) 2006-07 (Rs. in
crore)
Target Plus 500 (1.33) 3120 (5.80)
Vishesh Krishi and Gram
Udyog
60 (0.15) 800 (1.48)
Served Form India Scheme 40 (0.10) 300 (0.55)
Total 37590 53768
Source: Department of Revenue, Government of India. Figures in
brackets are percentage of total.
Above table shows that the revenue loss on account of SEZs is much
less than that due to other exports schemes. It is thus unclear why there is so
much debate on revenue loss on account of SEZs.
However, the Reserve Bank of India noted that the revenue loss can
be justified only if the SEZs ensure forward and backward linkages with the
domestic economy.
2.5.2 Degeneration of agriculture and associated li velihood issues
Currently, the most widely discussed issue is the land acquisition for
SEZs mostly from farmer. It has been argued that due to the implementation
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of the SEZ policy in different parts of the country, a large amount of
agricultural land will be put to use for industrial purpose and that will have
severe implications on the livelihood of farmers and food securities.
The setting up of SEZs has often been opposed by the farmers whose
land is being acquired and also by the local people.
It has claimed that the farmers are neither adequately compensated
nor properly rehabilitated. It was argued that the nature of the SEZ model of
industrialization destroys more jobs that it creates.
Asher20 examined the so-called successful Gujarat model of SEZ.
Problems related to land acquisition for SEZ are found to be not very different.
The image of “Peaceful” establishment of SEZ has been possible due to the
silence of the political class across the board including the opposition. Some
of the adversely affected communities are nomadic tribes without formal
ownership of land, though dependent on land resources for their livelihoods.
They are not aware of the uncertain future in store for them.
In India, there is over 130 million hectares of waste land. Thus the
issue of land acquisition for SEZs is a choice between using wasteland or
agricultural land.
This issue is also being looked at from the view of returns from
agriculture. In many parts of India, returns from agriculture are steadily falling.
In many cases, farmers are willing to sale their land for industrial purpose,
provided they received good compensation and other measures. In many
areas where SEZs are coming up land prices are increasing at a rapid rate.
Another issue in this regard is that acquisition of agricultural land will
damage India’s food security. This issue has economic as well as political
dimensions. Food security does not depend only on the availability of land
and production of food grains. Most, crucially it depends on a person’s access
and ability to buy food and that is related to purchasing power.
According to the Department of Commerce,21 total areas for the
proposed SEZ would not be more than 0.014% of the total land area and not
be more than 0.116% of total agriculture in India. It is true that cultivable land
is being increasingly used for industrial purpose (not just for SEZs) and
infrastructural development. Loss of agricultural land is a micro issue and
politically it is not prudent to set this aside by looking at it in a macro sense.
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The real issue is whether those who are losing their immediate livelihood
opportunities (on account of land acquisition, not only land owners but also
share croppers, tenant farmers, agricultural land) are expected to avoid
livelihood opportunities or not.
This is a complex issue and cannot be resolved in a short time, as
availing alternative livelihood opportunities would require acquiring different
types of skills etc. Multi pronged and cogent efforts on the part of state and
non-state actors are required in order to overcome this challenge over time.
2.5.3 Uneven Regional Development
One of the important objectives of planning of India is to secure a
balanced growth of the different regions of the country and thereby reduce
regional disparities in development. It is essential for the success of
democratic planning that the benefits of economic development should reach
all the regions of the country and no area or segment should feel neglected or
else people of such neglected areas would remain indifferent and apathetic to
the various development schemes of the government. This may ultimately
lead to serious discontent and even revolt. As such the planning strategy
should aim at a balance regional development.
The SEZ Act, 2005 was passed by parliament in May 2005. The Act
grants permission to set up of SEZ in any State / Union Territory. The fact that
the approved SEZs are spread over 20 states and 3 union territories indicates
that these are not concentrated in any particular region. But, state-wise
distribution of SEZ as on 31/12/2010 in the table given below supports the
criticism that SEZ will aggravate regional disparities.
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Table: 2.4
Sate-wise Distribution of Approved SEZ as on 31/12/ 2010)
State Formal
Approvals
In Principle
Approval
Notified
SEZ
Operational
SEZ
Andhra
Pradesh
109 5 74 32
Haryana 45 17 34 00
Gujarat 46 13 29 03
Karnataka 56 10 36 20
Maharashtra 105 38 63 16
Tamil Nadu 70 19 57 22
Other states 149 53 81 37
Total 580 155 374 130
Source: www.sezindia.nic.in
It has been observed from the above table in terms of SEZ approvals
six states such as Andhra Pradesh, Haryana, Gujarat, Karnataka, and
Maharashtra, Tamil Nadu accounted for almost 71 percent of formal approval,
75 percent of notified SEZ and 71 percent of operation SEZ. It is interesting to
note that except Andhra Pradesh all these states have witnessed significant
industrial development.
In recent years a number of policy measures have been initiated for the
development of backward regions of the country and to attract private
investment in these areas. In spite of these measures, facts of SEZs reflected
that a significant proportion of investment has been made in developed states
of the nation.
2.5.4 Misuse of land for real estate:
It has been argued by many critics that in India on the name of
industrialization and economic department the Land Acquisition Act is now
being used to take away lands from poor farmers to give these to mega rich
private companies for their real estate business. It is being argued that the
promoter of SEZs will get land cheaply and will make a fortune out of real
estate development and indiscriminate speculation. The required minimum
processing area is 35 percent. The rest will be for residential, recreation
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facilities, which will be used by these developers for real estate / commercial
purposes.
The provisions of the SEZ Act clearly mentions that land utilization
would be strictly according to the UDPFI (Urban Development Plan
Formulation and Implementation) guidelines issued by the Ministry of Urban
Development Government of India.
To regulate usage of SEZ area by the developers, the SEZ Board of
Approvals will assess the size requirement of infrastructural facilities like
housing, commercial spaces, recreational amenities etc. based on
employment generation potential of as SEZ. In the first Phase it is proposed to
allow on to a maximum of 25 percent of the approved housing while the other
approved infrastructure will be allowed to be created as per developer’s plan
and as approved in the Master Plan. The balance housing shall be allowed to
be established by the Approved Committee in three phases depending upon
the progress in allotment / occupancy of units in the processing area.
2.5.5 Discrimination against existing industries
There is a criticism that due to fiscal incentives enjoyed by units in as
SEZ, they will be relatively outside SEZs and as a result of this there may be
a tendency to establish industrial units only in SEZs, which can aggravate
uneven economic development of the country. However, it is also true that
many EPZ-related incentives are equally applicable and units in an SEZ are
required to undertake many obligations too. Many critics have argued for
providing special incentives for similar units located outside as SEZ.
There is a complex issue and one cannot reach to any conclusion
without a comprehensive study of the performance of similar units in SEZ and
non SEZ areas.
2.6 Summary
The chapter deals with the evolution and history of the concept the
SEZ. The chapter presents the physical concept, institutional framework and
procedure for approval of SEZs in India with the help of flowchart. The chapter
also discusses objectives of the SEZ ACT, 2005, advantages and
disadvantages of SEZs in India. The chapter-3 reviews the main literature of
the study.
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References
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Maritime Press, Cambridge, England.
2. Warr, P.G. (1988), ‘Export Processing Zones- The Economic of Enclave
Manufacturing’, Working Papers in Trade and Development, 8815, The
Australian National University Research School of Pacific Studies.
3. World Bank (1992), ‘Export Processing Zones, Policy and Research
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Development and Trade Policy Division, Country Economics Department,
The World Bank, Washington DC.
4. Ge, W. (1991), ‘Special Economic Zones and Opening of the Chinese
Economy: Some Lessons for Economic Liberalization’, World
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5. Heywood, Robert (2000), ‘Free Zones in the Modern World’ WEPZA.
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Implications for India’, NHH, Bergen.
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China’, New Century Publications, New Delhi, India.
10. Department of Commerce, Government of India, 2010.
11. Aggarwal Aradhna (2007), ‘Impact of Special Economic Zones on
Employment, Poverty and Human Development‘, ICRIER, Working Paper No.
194, pp-19.
12. ‘An Assessment of Potential Costs and Benefits of SEZ, in India- A study
for the Department of Commerce, Government of India,’ CUTS International,
Jaipur, India 2009
13. Department of Commerce, Government of India.
14. & 15. ‘An Assessment of Potential Costs and Benefits of SEZ in India - A
study for the Department of Commerce, Government of India,’ CUTS
International, Jaipur, India. 2009
16. Dutta Madhumita, ‘Nokia SEZ, Public Price of Success,’ Economic and
Political Weekly, October 3, 2009, Vol.44 No. 40, pp 23 to 25.
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17. Sharma Nareshkumar, ‘Special Economic Zones: Socio-economic
Implications,’ Economics & Political Weekly, May 16, 2009, Vol. 44 No. 20,
pp 18 to 21.
18 &19 ‘An Assessment of Potential Costs and Benefits of SEZ, in India- A
study for the Department of Commerce, Government of India’, CUTS
International, Jaipur, India.2009.
20 Mansi Asher, ‘A Citizen Report card on Special Economic Zone’, SEZ
News, Vol-2, Issue 1, July 2009, pp 3 to 10.