Special Economic Zones

Evolution: From EPZs to SEZs

• Special Economic Zones (SEZs) are geographical regions that have

economic laws different from a country's typical economic laws. The
goal is usually an increase in foreign direct investment (FDI) in the
country.
• Traditionally SEZs are created as open markets within an economy
that is dominated by distortionary trade, macro and exchange
regulation and other regulatory governmental controls.
• SEZs are believed to create a conducive environment to promote
investment and exports. And hence, many developing countries are
developing the SEZs with the expectation that they will provide the
engines of growth for their economies to achieve industrialisation.
• To achieve its three-fold objectives of attracting FDI, increasing
exports and accelerating the country's economic growth, the
Government of India announced the introduction of SEZs in its
Export-Import Policy of March 2000.
 Evolution: From EPZs to SEZs
• The first EPZ in India was set up in Kandla, Gujarat in 1965. The
Santacruz EPZ in Mumbai came into operation in 1973. However,
the EPZ policy was deficient by several factors like:
• limited power of zonal authorities,
• absence of single window facility within the zone,
• rigid custom procedures for bonding and bank guarantees,
• restrictive FDI policy, procedural constraints and severe
infrastructural deficiencies.

• During 1991-2000, wide-ranging measures were initiated by the GoI

for revamping and restructuring EPZs. This phase was thus marked
by progressive liberalisation of policy provisions and relaxation in
the severity of controls and simplification of procedures.
• Focus had been on delegating powers to zone authorities, providing
additional fiscal incentives, simplifying policy provisions and
providing greater facilities.
 The EXIM Policy (1997-2002)
• Under this a new scheme was introduced from April 1, 2000 for establishment
of the Special Economic Zones (SEZs) in different parts of the country. As per
the policy-
1. SEZs are permitted to be set up in the public, private, joint sector or by the
State Governments with a minimum size of 1000 hectares.
2. The number of incentives both fiscal and non fiscal has also been extended
to the units operating in SEZs.
3. Several measures have been adopted to improve the quality of governance
of the zones. These include relaxation in the conditions for approval process
and simplifying custom rules.
4. Development Commissioners have been given the labour commissioner's
powers. SEZ policy is thus the most significant thrust towards ensuring the
success of export processing zones.
5. From November 1, 2000 the Export Processing Zones at Kandla, Santa Cruz
(Mumbai), Cochin and Surat have been converted into SEZs.
6. In 2003, other existing EPZs namely, Noida, Falta, Chennai, Vizag were also
converted into SEZs.
• As on June 2005, 53 SEZs have been approved by the Government of India
out of which 11 SEZs are functional and the rest 42 SEZs are under
establishment.
 SEZ Act 2005
• According to the SEZ Act 2005, the GoI has proposed that multi-
product SEZs must have an area of at least1,000 hectares, while
sector-specific zones including ports and airports, must have a
minimum area of 100 hectares.
• However, the area norms for multi-product SEZs in the northeastern
states like Assam, Meghalaya, Nagaland and the states of Jammu
and Kashmir, Himachal Pradesh and Uttaranchal have been limited
to 200 hectares and 50 hectares in the case of sector-specific SEZs.
• Exports from SEZs grew by 16.4% from 2000-01 to 2004-05. In the
same period, total exports in India grew by 12.1%. This clearly
signifies the importance of SEZs in India. As is evident from Diagram
1, exports from SEZs have a steady increasing trend over the
period. The export figure from SEZs has actually doubled over the
period. However, the share of exports from SEZs in the total exports
of the country has only increased from 4.2% in 2000-01 to 5.1% in
2004-05.
 Export Performance of SEZs
• Exports from SEZs grew by 16.4% from 2000-01
to 2004-05. In the same period, total exports in
India grew by 12.1%.
• This clearly signifies the importance of SEZs in
India. As is evident from Diagram 1, exports from
SEZs have a steady increasing trend over the
period. The export figure from SEZs has actually
doubled over the period.
• However, the share of exports from SEZs in the
total exports of the country has only increased
from 4.2% in 2000-01 to 5.1% in 2004-05.
 Sector-wise Performance in SEZs

• In the 1990s, the engineering sector accounted for the largest share
of exports followed by drugs, electronics and gems & jewellery.
• In 2002, the share of engineering goods came down to 5% of total
SEZ exports. The share of drugs and pharmaceutical sector also fell
from 26% in 1990 to around 6% by 2002.
• The textile sector has shown a marginal decline of 2% in its share
over the period. In contrast, exports of gems and jewellery which
had only a share of 11% in 1990 rose rapidly and accounted for 42%
of the total SEZ exports in India in 2002.
• The share of electronics exports also grew from 25% in 1990 to 34%
in 2002 faster than the overall zone exports. It is to be noted that
50% of the electronics sector is software.
• Thus in 2002, the electronics and gems & jewellery sectors
accounted for more than 75% of the total exports from SEZs in India
and thus can be named as the key performing sectors in Indian
SEZs.
• Diagram 4 shows the sector specific
composition of the 53 SEZs approved by
GoI till June 2005. As is evident, five of the
SEZs are in the Electronics and IT sector
in which India has a comparative
advantage.
 Key Focus Area for SEZs
development
Location
1. Region Specific: Locating SEZs near or in industrial/urban areas is likely to
be a factor critical to their success. This satisfies the labour needs of the
zone units , ensures more accessible and uninterrupted utilities, better
services and allows for more spillover effects.
2. Strategic: SEZs located near ports or airports or having proximity to a bigger
city have been more attractive than other industrial sites and are likely to
show better export performance.
Quality of Infrastructure
Availability of good quality infrastructure improves the business climate by
reducing the cost of operations and boosting operating profitability. The term
'infrastructure' includes physical infrastructure within the zone as well as
external and also social infrastructure within the zone. Physical
infrastructure within the zone includes water, electricity, warehousing,
transport, telecommunication, police station, fire station and banks while
physical infrastructure external to the zone includes transport facilities for
the zones, roads leading to the zones and port facilities. Social
infrastructure within the zone comprises of residential complexes, schools,
hospitals and recreation facilities.
 Key Focus Area for SEZs
development
Quality of Governance
An efficient governance in all stages of the creation and
running of an SEZ is crucial to its performance. It greatly
influences the attractiveness of a zone to foreign
investors and its eventual performance. The provision of
efficient bureaucratic and economic services, a clear and
transparent legal and regulatory structure and an
unfettered and stable policy framework ensure the
success of the zones.
 Key Focus Area for SEZs
development
Incentive package
• A preferential treatment is given to SEZ units by granting them government
policy concessions. Governments offer a multitude of fiscal and non fiscal
concessions.
• Fiscal concessions include duty free imports of raw and intermediate inputs
and capital goods and income tax exemptions.
• Non fiscal incentives vary widely across countries. These include relaxation
from industrial laws including labour laws in many countries.
• The theory behind these incentives is that liberalising the rules and tax
commitments lowers direct and indirect costs. Fiscal incentives have direct
bearing on the cost. These incentives may help in directly reducing the
costs of producing and exporting. Non fiscal incentives affect costs
indirectly. These concessions expedite decision making and streamline day
to day operations. Investor friendly custom regime, for instance, implies that
the entrepreneurs are free from routine inspections of import- export cargo.
Relaxations in labour market help in reducing labour market rigidities and
may improve labour productivity.