SPECIAL ECONOMIC ZONES

Ajit pal Ajit raj meena

Prologue

Special Zones
Not a new concept in India. The concept of having free trade zones, export oriented zones and SEZs dates back to 1960.

Economic Policy of 1960 marked the development of EPZs

Export Promotion Zones (EPZs)

Industrial zones set up to attract foreign investors, in which imported materials undergo some degree of processing before being re-exported First EPZ in India : Kandla in 1965 SEEPZ Mumbai in 1974 developed specifically for processing electronics goods By 1986, gems and jewellery complex was added.

Export Promotion Zones (EPZs)

By 1994, there were 8 EPZs in India. But they proved to be a failure. Need of better export performance and infrastructure building.

What are SEZs ?

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.

The SEZ Concept

Introduced by China

The most successful SEZ in China, Shenzhen, has developed from a small village into a city with a population over 10 million within 25 years.
Following the Chinese examples, SEZs have been established in several countries, including India, According to World Bank estimates, as of 2007 there are more than 3,000 projects taking place in SEZs in 120 countries worldwide.

Whats special about SEZs

Special tax incentives Greater independence on international trade activities. Economic characteristics are represented as "Four principles: Construction primarily relies on attracting and utilizing foreign capital Primary economic forms are nation-foreign joint ventures and partnerships as well as wholly foreign-owned enterprises Products are primarily export-oriented Economic activities are primarily driven by market

Indias SEZ Policy

Special Economic Zone (SEZ) is a specifically delineated duty free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs.

- Ministry of Commerce and Industry

SEZs approved in India

As of 2007, more than 500 SEZs have been proposed.

So far 234 have been formally approved by the government.

At present there are thirteen functional Special Economic Zones. Eight of these SEZs were originally EPZs.

SEZs approved in India

List of operational SEZs :

Santa Cruz (Maharashtra) Cochin (Kerala)

Kandla (Gujarat)
Surat (Gujarat) Chennai (Tamil Nadu) Visakhapatnam (Andhra Pradesh) Falta (West Bengal) Noida (Uttar Pradesh)
Greenfield

Converted

Objectives of the SEZ policy

Attracting FDI
Increasing exports Accelerating nations economic growth

Indias tryst with SEZs

Distinguishing features of Indias SEZ policy:

Public-Private partnership Leading role of State Governments Single window system under existing rules and regulations

Indias tryst with SEZs

Terms & conditions for setting up of SEZ:

Only approved units permitted to be located in it

Abidance of local laws, rules, regulations or bye-laws Security arrangements to fulfill all the requirements of the laws Minimum area of 1000 hectares and at least 50 % of the area earmarked for processing zone.

Indias tryst with SEZs

Facilities & Incentives offered to SEZ Developers:

100% FDI allowed Income Tax benefit for any block of 10 years in 15 years Duty free import/domestic procurement of goods Developer permitted to transfer infrastructure facility Generation, transmission and distribution of power allowed Allocation of space on commercial basis. Authorized to provide and maintain basic services on commercial lines.

Indias tryst with SEZs

Obligations of the SEZ units:

Positive net foreign exchange earning.

Performance monitored by a Unit Approval Committee Statutory functions controlled by the Government Development Commissioner is the nodal officer for SEZs

India Poised for a quantum leap

Largest democracy & among the strongest emerging markets Liberalizing economy WTO member committed to provide opportunity to the global market

Large pool of educated manpower as well as labour at affordable cost

Indias export performance

2005-06

2004-05

2003-04

year

2002-03

Series1

2001-02

2000-01

1999-00
0 20 40 60 Exports (US$bn) 80 100 120

Source: Export Promotion Council, Ministry of Commerce & Industry, Government of India

Year 2000 vs. Year 2020

India Emerging As One Of The Top Global

Economies
US Japan Germany UK France Italy Canada China Brazil Mexico India Russia 0 5,000 10,000 15,000 20,000 25,000

GDP (US$bn)
Source: Projections made by Goldmansachs in Economic Paper no.99

India Poised for a quantum leap

Potential to attract US $ 100 billion over next five years Export Sectors to attract US$ 11 billion investments FDI increase will lead to increase in GDP by 2-3 %
source:FICCI

Indian SEZs Engines of growth

Benefits of local advantages within an international business environment

Liberalized SEZ Policy opens up exciting prospects for businesses.

Business Infrastructure combined with social facilities Development, Administration and Operation to be undertaken by private sector to enable a hassle free operating environment

Lopsided Development Story

Highly disproportionate development Domination by certain sectors, primarily IT Adequate importance not accorded to the manufacturing industry. Possibility of employment generation stifled. Lead to regional disparity & spur social conflicts Exploitation of the loopholes in the SEZ policy by developers.

Lopsided Development Story

Sector-wise Distribution

Source: www.sezindia.nic

Export Performance of SEZs

Source: Export Promotion Council, Ministry of Commerce & Industry, Government of India

Contribution of SEZs

Source: Council of Institutional Investors report, 2005

Share of FDI in Total Investment

45 40 35

Percentage of FDI

30 25

30.7

Series2

20
15 12.7 10 5 0 4.9 1.3 Kandla 9.2

38.8 28.4 13.7

Series1

12.3
8.4

9.6

4.0 3.1 Falta 0 Vizag

Santacruz

Noida

Source: Ministry of Commerce & Industry. Government of India

Chennai

Cochin

Money Matters

Unprecedented tax holidays & sops which represent tremendous revenue loss of Rs.1,70,000 crores by 2010 for the state exchequer. Loss of foreign exchange due to increased imports. RBI says, these may be justified only if the SEZ units ensure forward and backward linkages with the domestic economy. Government maintains that increased exports together with tax revenue in the later future will more than compensate the short term losses.

Political Impact

The Left front has alleged that SEZs are pro-development at the expense of being anti-farmers. The government has put a freeze on all new SEZs as recommended by the EGoM (Empowered Group of Ministers)

Political Impact

The dominant opinion within the government still holds that the policy is essentially sound and that popular concerns can be addressed by suitably tweaking it. Recent disturbances in Nandigram and Singur are indicators that those who do not stand to immediately benefit from SEZs could well see the projects as inimical to their interests.

The Ground Realities

Land: Sole source of livelihood to farmers

No Just Compensation
No proper rehabilitation programs Corrupt practices by state government and enterprises

Nandigram Massacre

JV by state government and Indonesian based Salem Group

10,000 acres Chemical and Pharmaceutical Hub

Political and social unrest led to public protests that rocked the whole nation 15 people were killed in police firings.

SEZ : Sovereign States

Virtual Townships : Size of a mega enterprise with population in millions

Structure : SEZ Development Authority (SDA) headed by Development commissioner (DC) acting as a super bureaucrat vested with enormous powers.
By section 49 of SEZ Act of 2005, they are exempted from any central act or other regulations Negation of 74th & 75th amendments in constitution

SEZ : Sovereign States

No Environmental Impact Assessment (EIA) for industries in SEZ Several provisions of the Industrial Disputes Act, Contract Labour Act amended by the some states have put labour on notice. SEZs will have their security system and state police can intervene only in certain cases. No mechanism for denotifying unsuccessful SEZs.

Corrective Measures

Rationalization of the tax sops. More transparency on the business plans of various SEZs, so that their projected benefits are in the public domain. Large, successful SEZs will shape into Indias new cities, hence a new & comprehensive policy for the management & administration of SEZs New land acquisition & rehabilitation policies. Incorporation of mandatory employment provision clauses in the SEZ act.

Conclusion

India today stands at a rostrum where it is poised for a quantum leap to become a powerful economic engine from being a lethargic economy in the 1990s The growth propelled by services sector can not be sustained for long if it is not buttressed by commensurate growth in the manufacturing sector. SEZs can serve as the best centers of promoting and fostering growth in the manufacturing sector.

Conclusion

SEZs are like double-edged swords which if used properly, can serve as the cutting edge of Indias economic growth.

By December 2007, it is expected that investment of Rs. 100,000 crore, including Rs. 25,000 crore FDI will take place in the country. This growth is achievable only if a robust SEZ policy is in place as soon as possible.
With the suggested measures in place, there is no reason why India cannot replicate the success of the Chinese model & make its SEZs Engines of growth in every sense of the word.

THANK YOU

Queries

?????