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  • 1. Project Report ON “Capableness of SEZs on Promoting Export from India ”Project submitted in partial fulfillment of degree of Bachelor of BusinessAdministration.Under the guidance of Submitted ByDr Roopali Sharma UJJWAL(Head of Department, Management) 8BBA/4003/09 Department Of Management BIRLA INSTITUTE OF TECHNOLOGY Mesra, Ranchi Ext Centre Jaipur 2011,2012
  • 2. AcknowledgementIt gives me immense pleasure to express my deepest gratitude towards Dr. Roopali Sharma forproviding me with the opportunity to undertake this project, which helped me to learn so muchabout the real world situations happening in different economies related to the economic zones.I would also like to express our sincere thanks to all other faculty members as well as the staff atlibrary and computer lab who has helped me on the project work with the necessary inputs. Theirconstant support has been the key to our achievements on the projects.I would also like to thanks my parents, fellow colleagues and friends for helping out in timelycompletion of the project report and for providing for their moral support, suggestions andencouragement.However, i accept the sole responsibility for any possible error of omission and would beextremely grateful to the readers of this project report if they bring such mistakes to our notice. UJJWAL 8BBA/4003/09
  • 3. PREFACEBBA is a stepping stone to the management carrier and to develop good manager skills,it is necessary that the theoretical must be supplemented with exposure to revealenvironment. Theoretical knowledge just provides base and it’s not sufficient to produce agood manager, that is why practical knowledge is needed. The main objective of projectreport is familiarization with the necessary theoretical input and to gain sufficientpractical exposure to establish a distance linkage between the concept . This project notonly helps the students to utilize his or her skills properly and learn field realities butalso provides a chance to the organization to find out talent among the buddy managersin the very beginning. UJJWAL (8BBA/4003/09)
  • 4. CERTIFICATE OF APPROVALThe project titled “Capableness of SEZs on Promoting Export from India” is herblyapproved as a credible study of financial specialization carried out by UJJWAL(8BBA/4003/09) student of BBA VI semester is in satisfactory manner to warrant itsacceptance as a prerequisite to the dedgree of BBA for which it has been submitted.(Internal Examiner) (External Examiner)
  • 5. BONAFIDE CERTIFICATEThis is to certify that the project report “Capableness of SEZs on Promoting Export fromIndia” is the bonafide work of UJJWAL (8BBA/4003/09) who carried out the projectunder my supervision.Head of the Department Supervisor
  • 6. TABLE OF CONTENTSl NO TOPICS PAGE NO 1. Objective Of The Study 1 2. Executive Summary 2 3. Introduction 3 4. Research Methodology 5 5. Limitations Of The Study 6 6. Economic Zones 7 • Types of Economic Zones 7 • Regional Distribution of Zones 10 7. Special Economic Zones 11 • History & Evolution of SEZ 14 • International Experiences 15 8. SEZ in India 19 9. Facts about SEZ in India 20
  • 7. TABLE OF CONTENT10. Objectives of SEZ 2211. Genesis & Distinguishing Features 2312. SEZ Approval Process 2713. SEZ Act 2005 3414. Foreign Investment & Finance 3815. The Key Issues 3916. Performance Analysis 4117. Comparative Study – India & China 4418. Findings 5319. Suggestion 54
  • 8. TABLE OF CONTENT20. Conclusion 5521. Bibliography 5622. Annexure 57
  • 9. A Project Report on“Capableness of SEZs on Promoting Export from India”
  • 10. OBJECTIVE OF THE STUDY1) Effectiveness of SEZs on Promoting Export from India.2) A Comprehensive Evaluation of Provisions.3) Comparative Study – India & China4) Fruits of SEZ for Indian economy. 1
  • 11. Executive SummarySpecial Economic Zones (SEZs) are set to change the entire Indian economic landscape.They are said to be the engine of the economic growth. With Asian economies competing fora pie in the international capital flows, tax breaks and hassle-free environment are muchneeded to attract investors in the infrastructure and industrial development. The Indian SEZAct, announced in May 2005, is a right move in this direction. India is gearing up with thenew act that aims at attracting FDI and domestic investments, to corner benefits of newbusiness opportunities. The act facilitates single-window clearance, timely disposal ofapplications, and tax break for 15 years (instead of the previous 10 years). Learning lessonsfrom the past failures of SEZs, the government is taking concrete steps to transform currentSEZs into new age Indian factories. Not only are the big industrial houses and real estatedevelopers taking part, but state government bodies are also a part in the current SEZs wave.The recent rush to set-up SEZs could fuel the economic growth and provide the costadvantage to industry in the rapidly changing global market.SEZs, being islands of opportunity, are offering business opportunity across the sectors. FDIin SEZs is set to rise rapidly once the development completes. Attractiveness of these SEZswould depend on products that have low import tariff and high volume products that have adomestic and international market.Like anywhere else in the world, the three pillars of the SEZ Act are fiscal incentives,regulatory freedom, and world-class infrastructure. In the latest SEZ Bill, government has nottalked about the much awaited flexible labor laws. However, state governments have beengranted permission to adopt flexible labor laws, if necessary. If SEZs are to bring desiredbenefits to the country, it needs to set-up the right infrastructure. It will help in retaining theindustries, even after the end of tax breaks. Competition is heating up among states to attractinvestments into SEZs. Indian SEZs can attract investments from foreign SEZs too. As partof the de-risking strategies, global textiles and auto component firms could set-up theirfacilities in Indian SEZs. Indian SEZs should aim at emulating favorable investmentdestinations such as China, Singapore, Malaysia, and Dubai, to pave way for buildingcompetitive advantages gradually. 2
  • 12. IntroductionSpecial Economic Zones (SEZs) have been established in many countries as testing groundsfor the implementation of liberal market economy principles. SEZs are viewed as instrumentsto enhance the acceptability and the credibility of the transformation policies, to attractdomestic and foreign investment and also for the opening up of the economy. SEZs in Indiaseek to promote the value addition component in exports, to generate employment as well asto mobilize foreign exchange. Special Economic Zones (SEZ) have occupied a center stage in the nationalconsciousness for the past few months due to the events unfolding in Singur and subsequentlythe occurrences in Nandigram (a proposed SEZ). Many economies including India have usedthe concept of SEZ in one or the other form to promote exports and boost economic growth.The Indian experiment began in 1965, complemented by new policies regarding exports, FDIetc to attract investments and boost exports. Since the implementation of these reforms beganthere has been a spate of criticisms from a number of quarters on different aspects of the SEZpolicy. Some of the economic issues raised about the SEZ policy have been improper usageof arable land, food security, loss of low skilled jobs in agriculture, forestry, and small scaleindustries. Despite the opposition the government is determined to go ahead with rapidcreation of new SEZs. At the same time the government also claims to follow a policy ofeconomic growth that enhances both equity and efficiency. In light of these issues, this papertries to analyze some economic facts related to the creation and working of the SEZs in orderto arrive at the ground realities which would help in effective decision making about SEZs. The concept of SEZs -- Special Economic Zones -- as special engines of rapideconomic prosperity and all round societal development, did spur the flow of FDI and FIIinvestments into Indian infra structure and manufacture industry. Markets showed growth andthe economy was buoyant. Growth of employment opportunities are growing. India was one of the first in Asia to recognize the effectiveness of the ExportProcessing Zone (EPZ) model in promoting exports, with Asias first EPZ set up in Kandla in1965. With a view to overcome the shortcomings experienced on account of the multiplicityof controls and clearances; absence of world-class infrastructure, and an unstable fiscalregime and with a view to attract larger foreign investments in India, the Special Economic 3
  • 13. Zones (SEZs) Policy was announced in April 2000. This policy intended to make SEZs anengine for economic growth supported by quality infrastructure complemented by anattractive fiscal package, both at the Centre and the State level, with the minimum possibleregulations. SEZs in India functioned from 1.11.2000 to 09.02.2006 under the provisions ofthe Foreign Trade Policy and fiscal incentives were made effective through the provisions ofrelevant statutes. To instill confidence in investors and signal the Governments commitment toa stable SEZ policy regime and with a view to impart stability to the SEZ regime therebygenerating greater economic activity and employment through the establishment of SEZs, acomprehensive draft SEZ Bill prepared after extensive discussions with the stakeholders. Anumber of meetings were held in various parts of the country both by the Minister forCommerce and Industry as well as senior officials for this purpose. The Special EconomicZones Act, 2005, was passed by Parliament in May, 2005 which received Presidential assenton the 23rd of June, 2005. The draft SEZ Rules were widely discussed and put on the websiteof the Department of Commerce offering suggestions/comments. Around 800 suggestionswere received on the draft rules. After extensive consultations, the SEZ Act, 2005, supportedby SEZ Rules, came into effect on 10th February, 2006, providing for drastic simplificationof procedures and for single window clearance on matters relating to central as well as stategovernments. It is expected that this will trigger a large flow of foreign and domesticinvestment in SEZs, in infrastructure and productive capacity, leading to generation ofadditional economic activity and creation of employment opportunities. 4
  • 14. RESEARCH METHOLODOGYSecondary Data:Any data, which have been gathered earlier for some other purpose, are secondary data in thehands of researcher. Those data collected first hand, either by the researcher or bysomeone else, especially for the purpose of the study is known as primary data.The data collected for this project has been taken from the secondary source. Sources ofsecondary data are:- Internet Magazines Publications 5
  • 15. LIMITATIONS OF THE STUDY1) Limited knowledge about operations , as most of the study was done only by secondarydata.2)Limited exposure to the operations of offices. 3)Non-discloser of their procedures and methods on the way they operate. It was anobservation based study.4)Limited availability of data by the finance department.5)Non availability of recent datas. 6
  • 16. Economic ZonesCountries all over the world create fenced-in, geographically delimited ‘enclaves’ within theirsovereign territories. Such enclaves have become known as ‘zones’ in economic and businessparlances. These zones are distinguished from the rest of the land in the terms of theirspecific administrative authority, benefits enjoyed by industries located in them andavailability of better business facilities. Some of the zones are often deliberately conceived as‘foreign’ territories functioning with a different set of economic laws compared with thoseapplicable to the rest of the country. Being ‘foreign’ also implies that zones are differentcustoms areas. Depending upon their specific purposes, benefits offered, economicregulations and administrative frameworks, the zones are called industrial zones (or estate),free trade zone (FTZ), export processing zone (EPZ), enterprise zone, special economic zone(SEZ) or free economic zone (FEZ).Types of ZonesThe different types of economic zones found around the globe are:-Special Economic Zone (SEZ)A special economic zone usually covers a distinct administrative region (e.g. province,municipality) and is more than 100 sq km in size. It can be located anywhere. It is residentPopulation.Objectives – Integrated development, deregulated economic conditions for encouragingprivate enterprise.Incentives – Duty-free imports, lower business taxes compared with other parts of thecountry, liberal labour laws and limited foreign exchange controls.Activities – Multi-purpose, includes all industries and services, domestic sales are permittedbut foreign markets and exports are thrust areas.Example – China (Shenzhen), India (Surat), Philippines (Subic Bay), Poland (Kotawicka),Ukraine (Donetsk) 7
  • 17. Export Processing Zone / Free Trade Zone (EPZ/FTZ)The export processing zone or free trade zone is an enclave or park, usually less than 200hectares in size. It is usually located close to seaports and airports.Objectives – Increasing of manufacturing exports, broader range of products usually includeslight industry and manufacturing.Incentives – Duty-free imports of imported inputs particularly raw materials and capitalgoods, export profits are tax exempted, liberal foreign exchange rules and labour laws.Activities – Main emphasis on exports with units having minimum export obligations,restricted sales in domestic markets.Example – Bangladesh (Chittagong), Jamaica (Kingston), India (Kandla), Kenya (AthiRiver)Industrial ZoneIndustrial zone is an enclave or industrial park which can be located anywhere. The size isusually up to 100 hectares.Objectives – Industrial development, usually targeted at small and medium manufacturingenterprises, infrastructure development can also be a priority.Incentives – Duty-free imports of imported inputs particularly raw materials and capitalgoods, export profits are tax exempted, liberal foreign exchange rules and labour laws.Activities – Producing for domestic market as well as exports.Example – Bulgaria (Rakovski), Vietnam (Quang Phu), China (Xinzhuang in Shanghai)Enterprise ZoneEnterprise zone is usually found in inner city areas. It might be an entire city as well.Objectives – They are meant for urban area renewal (US). But might be for promoting localarea development also through private participation.Incentives – Duty free imports are not allowed. The main incentives include zoning relief,reduced local taxes and relief from licensing. However, labour laws are flexible.Activities – Manufacturing, trading and various other commercial activities.Example – Japan (Kobe), UK (Tyne Riverside), US. 8
  • 18. Information Processing ZoneInformation processing zone can either be part of a city or part of any other zone.Objectives – Development of information processing and IT.Incentives – Duty-free capital goods imports, easy access to telecom and othercommunication services and labour laws are flexible.Activities – Data processing, software development and computer graphics.Example – IT parks in India. UAE (Dubai Technology, Electronic Commerce and MediaFree Zone)Financial Services ZoneFinancial services zone can be either part of a city or part of any other zone.Objectives – Developing as a financial hub.Incentives – Relief from local taxes, Currency laws are liberal and there are no restrictions onprofit repatriation.Activities – Financial services.Example – Bahrain, UAE (Dubai), TurkeyCommercial Free ZoneCommercial free zone is usually meant for warehousing and is located close to air/sea ports.Its size is usually less than 50 hectares.Objectives – Facilitate exports and imports of goods.Incentives – Duty-free imports for re-export tax relief on reinvested profits and no restrictionon domestic sales.Activities – Warehousing, packaging, distribution and transshipment.Example – Iran (Kish Island), UAE (Dubai – Jabel Ali Free Zone), US (Miami Free Zone) 9
  • 19. Fee Port / ZoneFree port/zone is an island/province city or even a country. It can be part of a city or morecommonly part of international airports. The areas have resident population.Objectives – Facilitate export and import.Incentives – No customs duties, labour laws are very flexible and utilities are deregulated.Activities – All activities are permitted.Example – South Korea (Incheon), Japan (Nagasaki), Morocco (Tangier), Mauritius (PortLouis), Venezuela (Isla Margarita)Regional Distribution of ZonesZones abound all over the world in various forms and classification. There are several newzones coming up in different parts of the world. So, the number of zones at any point of timekeeps changing. During the financial year 2005-2006, the regional distributions of zones wereas follows.S. No. Region EPZ/FTZ (Nos.) Other Zones (Nos.)1. North Africa 18 492. Sub-Saharan Africa 77 133. Indian Ocean 1 34. Middle East 41 105. Asia (South, East and South-East) 173 6316. Transition Economies 69 3327. North America 272 Not Available8. Central America and Mexico 72 1709. South America 43 Not Available10. Caribbean 89 16011. Pacific 3 1312. Europe 45 1 TOTAL 903 1382 10
  • 20. Special Economic ZonesA Special Economic Zone (SEZ) is a geographical region that has economic laws that aremore liberal than a country’s typical economic laws. The category “SEZ” covers a broadrange of more specific zone types, including Free Trade Zones (FTZ), Export ProcessingZones (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Ports, Urban Enterprise Zonesand others. Usually, the goal of a structure is to increase foreign direct investment by foreigninvestors, typically an international business or a multinational corporation (MNC).There is empirical evidence to show the positive influence of SEZs in reducing the gapbetween developing and developed countries.  Objectives, features and benefits offered differ from country-to-country  Administrative mechanism and Regulatory framework also vary from country-to- countryIn the People’s Republic of China, Special Economic Zones were founded by the centralgovernment under Deng Xiaoping in the early 1980s. The most successful Special EconomicZone in China, Shenzhen, has developed from a small village into a city with a populationover 10 million within 20 years.Following the Chinese examples, Special Economic Zones have been established in severalcountries, including Brazil, Iran, Jordan, Kazakhstan, Pakistan, the Philippines, Poland,Republic of Korea, Russia, Ukraine, United Arab Emirates. Currently, Puno, Peru has beenslated to become a “Zone Economica” BY ITS President Alan Garcia.A single SEZ can contain multiple ‘specific’ zones within its boundaries. The most prominentexamples of this layered are approach are Subic Bay Freeport Zone in the Philippines, theAqaba Special Economic Zone Authority in Jordan, Sricity Multi product SEZ and MundraSEZ in India and According to the World Bank estimates, as of 2007 there are more than3000 projects taking place in SEZs in 120 countries.SEZs have been implemented using a variety of institutional structures across the worldranging from fully public (government operator, government developer, governmentregulator) to fully private (private operator, private developer, public regulator). In manycases, public sector operators and developers act as quasi-government agencies in that theyhave pseudo-corporate institutional structure and have a budgetary autonomy. SEZs are often 11
  • 21. developed under a public-private partnership arrangement, in which the public sectorprovides some level of support (provision of off-site infrastructure, equity investment, softloans, bond issues, etc) to enable a private sector developer to obtain a reasonable rate ofreturn on the project (typically 10-20% depending on risk levels).Export Processing ZoneA clearly demarcated industrial zone which constitutes a free trade enclave outside acountrys normal customs and trading system where foreign enterprises produce principallyfor export and benefit from certain tax and financial incentives - WEPZAForeign Trade Zone (USA)A designated site licensed by the Foreign-Trade Zones (FTZ) Board at which special customsprocedures may be used. These procedures allow domestic activity involving foreign items totake place prior to formal customs entry. Duty-free treatment is accorded items that are re-exported and duty payment is deferred on items sold in the U.S. market - Dept of Commerce, USGSpecial Economic Zone (Poland)An administratively separate part of Polish territory, in which a more favourable businessclimate is created. However, the zones are neither ex-territorial, nor fenced, nor isolated inany physical way. A SEZ offers preferential tax conditions, as well as special premises onwhich entrepreneurs may conduct business activities without being subject to the payment ofincome taxesSpecial Economic Zone (Philippines)Selected areas … to be developed into agro-industrial, industrial tourist/recreational,commercial, banking, investment and financial centers; may contain any or all of thefollowing: industrial estates (IEs), export processing zones (EPZs), free trade zones, andtourist/recreational centers - Philippines SEZ Act, 1995Types of SEZWide Area ZoneThe focus of Wide Area Zone is on scale predominantly in government domain.  Large zones with a resident population such as Chinese Special Economic Zones or new cities.  12 countries have adopted this Wide Area Zone concept (Notably Singapore, Russia, China and Brazil). 12
  • 22. Small Area ZoneThe focus of small area zone is on private participation.  Zones that are generally smaller than 1000 Ha. normally surrounded by a fence.  133 countries have adopted the Small Area Zone Concept.Industry Specific ZonesThe focus of Industry Specific Zones is to create or exploit industry competitiveness.  Zones that are created to support the needs of a specific industry such as banking, jewellery, oil and gas, electronics, textiles, tourism, etc. Companies invested in zone may be located anywhere and receive the benefits.  17 countries have experimented with Industry Specific Zone Concept (Notably USA, Taiwan, Japan, Hong Kong, France and Germany)Performance Specific Zones  Zones that admit only investors that meet certain performance criteria such as degree of exports, level of technology, size of investment, etc. Companies can be located anywhere.  Only 4 countries have adopted Performance Specific Zone concept (notably Mexico and Mauritius). 13
  • 23. History and Evolution of SEZ 1947 Puerto Rico, US seeks to industrialize, via industrial parks focused on import substitution, attracting investments from the US mainland and hefty tax breaks. 1960 The world’s first EPZ is set up near Shannon Airport, Ireland – duty free production zone for high value-added goods. 1965 Asia’s first EPZ created at Kandla. 1966 Kaohsiung, Taiwan designated as for new EPZ. 1980 China’s first Special Economic Zones, Shenzhen, Zhuhai, Shantou and Xiamenm set up. 1985 Jebel Ali Free Zone, UAE, set up by royal decree on 100 sq km. 2000 India announces its SEZ policy – focus on export promotion. 2005 Passage of India’s SEZ Act. Today The WEPZA estimates >1000 zones worldwide, across 120 countries, employing 40 million people.Puerto RicoWorld’s first Special Economic Zone came up in Puerto Rico in 1947.  In 1947, Puerto Rico, decided to attract firms from the mainland USA to invest  In 1951, it passed a tax exemption law as an incentive to foreign and mainland investors  It also created the Economic Development Administration (Fomento) and the Puerto Rican Industrial Development Company (PRIDCO) to build infrastructure  By 1963 it had attracted 480 manufacturing firms to its 30 industrial parks.Impact of SEZ in Puerto Rico  Per capita GNP grew over 45 times in 40 years  Employment grew by 9% per annum for 40 years  Life expectancy went up from 37 years to 75 years  Access to higher education went up from 2% to 60% in 40 years 14
  • 24. More notable examples are - Shannon, Ireland: 1960 - EPZA, Kaohsiung, Taiwan: 1960s - Mauritus: 1970s & 1980s - Singapore - Mexico: One million jobs in 10 years in “Maquiladoras” - Korea - Dubai - UAE - And of course, the Chinese successSEZ – International ExperiencesThe aim of creating special economic zones (SEZ) is to promote economic development indepressed regions. SEZ can be used to facilitate the process of attracting modern technologiesinto the national economy, promote competitiveness of goods and services, expand exports,and create new job opportunities.Creation and Operation of SEZ in the WorldSEZ are established through granting privileges to companies investing in particular activitiesin specific regions. Investors usually receive custom and tax privileges, rights for simplifiedregistration and customs procedures, and right for priority use of the SEZ infrastructure.Commonly, SEZ are divided into the following groups, according to their economicspecialization:  Free Trade Zones: Such SEZ are established to ensure free goods turnover and develop customs free trade. These areas are used for storing and primary processing of imported commodities (packaging, marking, assembling, etc.). Such zones include both international and free (e.g., Porto Franco) ports.  Technological Zones: These SEZ include areas where domestic or foreign firms conducting research and development or innovative activities are concentrated (techno parks, business incubators). 15
  • 25.  Service Zones: These SEZ are located in areas with preferential treatment of companies providing financial or non financial services (zones for banking and insurance services, offshore, and recreation zones).  Industrial Zone: These SEZ include areas where customs and tax privileges are granted to industrial companies producing export or import substituting products.  Combination Zones: These zones, with broad specialisation, combine the features of the previous types of SEZ (common in China, Brazil, Eastern European countries, and CIS).Goals of SEZ CreationEconomic Goals:  Enhancement and expansion of foreign economic and foreign trade activity  Attraction of foreign and national investments  Promotion of export of industrial products  Increasing of competitiveness of national production and its economic efficiencySocial Goals:  Creation of new work places and increasing employment  Training and increasing of qualification of employeesScientific and Technical Goals:  Active using of modern foreign and domestic technologies  Concentration of scientific and technical personnel, including foreign one, for development of priority sectorsIn creating SEZ, governments usually seek to attract foreign investment. One sector ofspecialization is chosen in each zone (except for combination zones). Mostly, investments arechanneled into electronics, light, food, and wood processing industries, where output isoriented at the final consumer and has high added value. 16
  • 26. In order to evaluate SEZ performance, experts use economic, social, environmental, and othercriteria, particularly: * ROI * The amounts of investment attracted * Production capacity and potential increase in the competitiveness of the products * Application of high technologies export volumes and changes in its structure * Level of employment in the region * Living standards of the population in the region * Level of environmental pollution in the region.International experience indicates that SEZ are not always effective. This is mainly caused byincoherent government policy, namely: 1. Unstable and non transparent legislative regulation of SEZ, resulting in low levels of investment, corruption, and privilege abuse for money laundering purposes 2. Lack of strict requirements concerning SEZ specialisation, leading to unjustified expansion of privileges for practically all activities in the zone; 3. Improper planning of SEZ, namely: a. Poor Selection of SEZ Location – Area with underdeveloped infrastructure, insufficient amounts of natural and labour resources, or insufficiently large market. In this case, SEZ is not attractive for investors. b. Improperly Determined Zone Size – For instance, in China, Malaysia, and Singapore large areas of SEZ turned to be the main source of industrial development; however, large zones require enormous initial investment into developing their infrastructure. Moreover, organization of proper management in these zones is quite complicated; this factor is very important for countries establishing SEZ for the first time and having no experience in their management.Operation of SEZ can give positive results, if it is properly planned. For example, in China 5combination zones, 14 open cities, and 10 research and development zones were established.These zones generate almost 40% of total exports and show an annual industrial productiongrowth of 70%. In the Philippines, 19 SEZ were introduced (including industrial, exportoriented, tourist recreation, and free trade zones). During 1994–1999, these zones achievedalmost 5.8 times increase in exports, and 2.7 times increase in employment (388,000 jobs). 17
  • 27. In Mauritius, improper planning was the source of the SEZ not accomplishing itspredetermined objectives. Thus, SEZ performance was poor. In India, the SEZ were giventoo many objectives, consequently privileges were extended to almost all activities in thezones. In Liberia, expenditures on the development of SEZ infrastructure ($15 million)significantly exceeded the amount of investment attracted ($60 thousand). 18
  • 28. SEZ in IndiaIndia is predicted to become one of the world’s leading economic powers. This poses newchallenges for international firms and others willing to take advantage of India’sdevelopment. It also increases the need for proper knowledge about India’s corporateenvironment – its strengths, constraints and the implications for Sweden, Europe and the restof the industrialized world.India’s share of the world’s population is 17 percent, but it accounts for less than two percentof the global GDP and only one percent of world trade. It lags behind China and otheremerging East Asian economies in key indicators such as per capita income, adult literacyrates, quality of infrastructure endowment and volume of foreign trade and investment.However, it must be noted that India’s economy predominantly continues to concentrate onabsorption of existing technology rather than development of new R&D or innovation at theglobal knowledge frontier. The country has much to gain from increased absorption ofexisting knowledge by promoting economy wide transfer and diffusion of local andinternationally available technology. There is considerable scope for more effectiveabsorption of existing knowledge by expansion of foreign investments and trade, buildingeffective capacity among Indian corporations, public education and research institutionscoupled with various forms of collaboration between Indian and foreign partners.The Indian economy is expected to grow at a rapid rate of 6–10 percent between 2007 and2012 and beyond. By the year 2032, China will have the world’s largest economy, followedby the U.S. and India. In terms of purchasing power parity (PPP), even today India’s GDP isalready the third largest in the world after the U.S. and China. While much of the country islikely to remain poor and industrially backward, other parts have the potential to grow as fastas China or other East Asian economies. 19
  • 29. Facts about Special Economic Zones in IndiaNumber of Formal 585approvalsNumber of Notified 381 (out of 585)+(7 Central Government+12 State/PrivateSEZs (as on 5 SEZs)October 2011)No. of Valid In- 39Principle ApprovalsOperational SEZs 143 (Break up: 17 are multi product SEZs, remaining are(as on 30th June IT/ITES, engineering, electronic hardware, textiles,2011) biotechnology, gem & jewellery and other sector specific SEZs)Units approved in 3,245SEZs (as on 30thJune 2011)Land for SEZs Notified SEZs Formally Approved (FA) including notified SEZs 45,897 Hectare 67,066 Hectare Land is a state subject. Land for SEZs is procured as per the policy and procedures of the respective State Government.Investment (as on Incremental Investment Total Investment30th June 2011)SEZs Notified under US$ 37.42 billion US$ 37.42 billionthe ActState/Pvt. SEZs set US$ 1.16 billion US$ 1.49 billionup before 2006Central US$ 1.59 billion US$ 2.03 billionGovernment SEZsTotal US$ 40.18 billion US$ 40.94 billionEmployment Incremental Employment Total Employment(as on 30th June2011)SEZs Notified under 4,33,876 persons 4,33,876 personsthe ActState/Pvt. SEZs set 54,718 persons 67,186 personsup before 2006Central 91,114 persons 2,13,350personsGovernment SEZsTotal 5,79,708 persons 7,14,412 persons 20
  • 30. History of SEZ in IndiaThe History of SEZs in India suggests that the seeds of the basic concept of SpecialEconomic Zone (SEZ) were sown in the mid sixties. Further, the History of SEZs in Indiasuggests that the basic model of the present day Indian Special Economic Zone wasstructured with the establishment of the first Export Processing Zone (EPZ) at Kandla in theyear 1965. Several other Export Processing Zones were set up at various parts of India in thesubsequent years. The lack of good Government of India economic policy and inefficientmanagement soon became the detrimental factors for the success of these Export ProcessingZones. Thus, the performance of these Export Processing Zones of India fell short ofexpectations.The modern day Special Economic Zone came in to existence because the economic reformsincorporated in the early 1990s did not resulted in the overall growth of the Indian economy.The SEZ policy of India was devised to act as a catalyst to promote the economic growthattained in the early 1990. The economic reforms incorporated during the 1990s did notproduce the desired results. The Indian manufacturing sector witnessed a sudden dip in theoverall growth of the industry, during the second-half of 1990s. The History of SEZs in Indiasuggests that red tape, lengthy administrative procedures, rigid labor laws and poor physicalinfrastructural facilities were the main cause of deterioration of Foreign Direct Investments(FDI) inflow in to India. Further, the Indian markets were not mature enough to facilitateeasy entry of Foreign Institutional Investors (FIIs) in to the Indian economic system.Furthermore, the legal framework of Indian economy was not strong enough to preventmisuse of Indian markets by the foreign investors. Thus, the lack of investor friendlyenvironment in India prevented growth of Indian industry, in spite of implementation ofliberal economic policy by the central government. This resulted in the formation of a muchlarger and more efficient form of their predecessors with world-class infrastructural facility.The History of SEZs in India suggests that the present day Special Economic Zone policies ofIndia are well complimented by the provisions of the Acts and Rules of Special EconomicZone. A number of meetings were held across India for the formulation of - The SpecialEconomic Zones Act, 2005, which was subsequently passed by Parliament in May 2005. TheSEZ Act, 2005 and SEZ Rules became effective on and from 10th February 2006. The SEZ 21
  • 31. Act 2005 defines the key role for the State Governments in Export Promotion and creation ofinfrastructural facilities. A Single Window SEZ approval mechanism has been facilitatedthrough a 19 member inter-ministerial SEZ Board of Approval or BOA. And the decision ofthe SEZ Board of Approval is binding and final.India’s Economic Potential and SEZWith a population of 1.1 billion and a GDP per capita of US$3,400, India is a rising powerthat no international company can afford to ignore. In 2005, the International Monetary Fund(IMF) reported India’s GDP to be US$3.63 trillion in terms of purchasing power parity,ranking fourth in the world. By some definitions, India’s middle class consists of 300 millionpeople and its expansion will raise consumption and make economic growth faster and moresustainable. As is well-known, India has developed a world-class information technology andbusiness process outsourcing (“BPO”) sector that exports its services globally. Yet for all ofIndia’s achievements, the country is still wrestling with high poverty and unemploymentrates. India may have excelled in BPO, but when it comes to export manufacturing, India isthe poorer cousin of China. Hence, there is great interest within India to promote the export-oriented manufacturing sector through Special Economic Zones or SEZs. Objectives of SEZ  The primary objective of SEZ is to facilitate exports.  The secondary objective is to o Attract export-oriented Foreign Direct Investment o Transfer of state-of-art technology o Enable Indian entrepreneurs to operate under international conditions, i.e., world class infrastructure facilities  The tertiary objective includes creation of global industries and practices which would eventually spill over to the mainland through backward linkages and generation of employment 22
  • 32. Genesis and Distinguishing FeaturesThe new law is aimed at encouraging public-private partnership to develop world-classinfrastructure and attract private investment (domestic and foreign), boosting economicgrowth, exports and employment. Investment of the order of Rs.100, 000 crores over the next3 years with an employment potential of over 5 lakh is expected from the new SEZs apartfrom indirect employment during the construction period of the SEZs. Heavy investments areexpected in sectors like IT, Pharma, Bio-technology, Textiles, Petro-chemicals, Auto-components, etc.The SEZ Rules provides the simplification of procedures for development, operation, andmaintenance of the Special Economic Zones and for setting up and conducting business inSEZs. This includes simplified compliance procedures and documentation with an emphasison self certification; single window clearance for setting up of an SEZ, setting up a unit inSEZs and clearance on matters relating to Central as well as State Governments; norequirement for providing bank guarantees; contract manufacturing for foreign principalswith option to obtain sub-contracting permission at the initial approval stage; and Import-Export of all items through personal baggage.Indian SEZ policy has following distinguishing features:  The zones are proposed to setup by private sector or by state Govt. in association with Private sector. Private sector is also invited to develop infrastructure facilities in the existing SEZs.  State Governments have a lead role in the setting up of SEZ.  A framework is being developed by creating special windows under existing rules and regulations of the Central Govt. and State Govt. for SEZ.The salient features of the Indian SEZ initiative further include the following points:  Unlike most of the international instances where zones are primarily developed by governments, the Indian SEZ policy provides for development of these zones in the government, private or joint sector. This is meant to offer equal opportunities to both Indian and international private developers. 23
  • 33.  100 per cent FDI is permitted for all investments in SEZs, except for activities included in the negative list. SEZ units are required to be positive net foreign-exchange earners and are not subject to any minimum value addition norms or export obligations. Goods flowing into the SEZ area from a domestic tariff area (DTA) are treated as exports, while goods coming from the SEZ into a DTA are treated as imports. In addition to the duty exemptions, the units in the Indian SEZs do not have to pay any income tax for the first five years and only pay half their tax liability for the next two. SEZ developers also enjoy a 10-year “tax holiday”. The size of an SEZ varies depending on the nature of the SEZ. At least 50 per cent of the area of multi-product or sector-specific SEZs must be used for export purposes. The rest can include malls, hotels, educational institutions, etc. Besides providing state-of the-art infrastructure and access to a large, well-trained and skilled workforce, the SEZ policy also provides enterprises and developers with a favorable and attractive range of incentives. Facilities in the SEZ may retain 100 per cent foreign-exchange receipts inv Exchange Earners’ Foreign Currency Accounts. 100 per cent FDI is permitted for SEZ franchisees in providing basic telephone services in SEZs. No cap on foreign investment for small-scale-sector reserved items which are otherwise restricted. Exemption from industrial licensing requirements for items reserved for the small- scale-industries sector. No import license requirements. Exemption from customs duties on the import of capital goods, raw materials, consumables, spares, etc. Exemption from Central Excise duties on procurement of capital goods, raw materials, and consumable spares, etc. from the domestic market. No routine examinations by Customs for export and import cargo. Facility to realize and repatriate export proceeds within 12 months. Profits allowed to be repatriated without any dividend-balancing requirement. Exemption from Central Sales Tax and Service Tax. 24
  • 34. Types of SEZThe Special Economic Zones in India can be categorized into three main types:-  Sector – Specific SEZ o Manufacture one or more goods in a particular sector o Render one or more services in a particular sector  Multi – Product SEZ o Manufacture multiple goods in one sector or across multiple sectors  Trading & Warehousing o Render two or more services in a sector or multiple sectors  SEZ in a Port or Airport o SEZ in an existing port or airport for manufacture of goods falling in two or more sectors or for trading and warehousing or rendering of services. 25
  • 35. Layout of SEZ Notified Area of SEZ Processing Area Entry/Exit FTWZ Points IFSC Non-Processing AreaThe whole SEZ Area may be divided into two parts:- 1. Processing Area 2. Non-Processing AreaProcessing Area – Processing area is the demarcated area in SEZ where units can be locatedfor manufacture of goods or rendering of services. Minimum processing area has beenuniformly fixed depending upon the type of SEZ i.e. multiproduct or product specific.Non – Processing Area – Non-processing area is intended to provide support facilities toSEZ processing area and may include educational institutions, hospitals, hotels, recreationand entertainment facilities, residential and business complexes.Facilities such as Free Trade & Warehousing Zones, International Financial Services Centremay be approved for establishment within the Processing Area.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 centres, crèches, etc.  To a person desiring to create infrastructure facilities for use by prospective Units 26
  • 36. SEZ Approval ProcessDevelopers and units have different approval processes. Developers have to fill the specificform for applying and submit it to the state government depending upon the location of theplanned zone. Then, states have a maximum time of 45 days for forwarding the applicationwith their recommendation to the board. Before giving the recommendation, the states needto ensure that some key facilities will be available for developers and units in the proposedzone. The states have to also equip the prospective Development Commissioners of the zonewith powers. And while recommending the states must clarify to the Board whether the arearequired by the zone is reserved or ecologically fragile.However, the developers can also send their proposals directly to the Board. In such cases,following the Board’s decision to approve the proposal with or without modification, thedeveloper needs to obtain the state government’s nod within six months. So, either throughthe state government or otherwise, the BoA has the final say in deciding the SEZs in thecountry.Within a month of receiving the formal go ahead from the BoA, developers are handed over aletter of approval (LoA) by the Central Government. The LoA allows developers three yearsfor carrying out their plans. Armed with the LoA, the developers move ahead for acquiringland. Such land can be either freehold or leasehold. Following land acquisition, developerssubmit to the Central Government evidence of legal right over the land along with otherparticulars. They also provide certificated from state governments saying that land is freefrom encumbrances. Thereafter, the Central Government notifies the areas as SEZs.Appointing Development commissioners (DC) for the zones follows immediately, as does thesetting of Approvals Committees for judging the proposals from units keen on moving in theSEZs.The main work of the zone begins only after notification. The DC has the responsibility ofdemarcating processing and non-processing areas within zones. Operations commence in theprocessing zone after demarcation. For building SEZs, developers enjoy exemption from allpossible taxes that businesses in India attract otherwise. 27
  • 37. The Board of ApprovalsA Board of Approval (BoA) for granting formal approval to proposals for setting up SEZswas constituted by the Government of India.The Board is empowered to carry out the following functions:- 1) Approve, reject or modify proposals for setting up SEZs. 2) Approve authorized operations to be carried out in SEZs. 3) Approve Developers or Units in SEZs for foreign collaborations for developing and maintaining the Special Economic Zone. 4) Approve, reject or modify proposals for creating infrastructure in SEZs. 5) Grant a license to industries for being set up in SEZs. 6) Suspend approval of a Developer and appoint an Administrator for discharging functions in an appropriate manner. 7) Dispose of appeals and perform any other functions as may be assigned to it by the Central Government.The Board has 19 members. It is chaired by Special Secretary, Department of Commerce,Ministry of Industry, Government of India. The Director or Deputy Secretary from the samedepartment or ministry is the Member-Secretary of the Board. Among the others, 14members are from the Government of India. The other three members include a nomineefrom the concerned state government, the concerned development commissioner and aprofessor from Indian Institute of Management (IIM) or the Indian Institute of Foreign Trade(IIFT). The Board can co-opt other members if it feels so.Beginning from 17th March 2006, till 11th August 2009, the Board has met on 35 occasionsfor considering SEZ proposals. The approvals issued by the Board are of two categories. In-principle approval is granted for one year during which the developer is allowed to obtainlegal rights over the proposed land in which the zone will be set up. During this time,developers are to take approvals from various statutory authorities in Central, State and localgovernments, provide for rehabilitation of displaced persons, satisfy environmentalrequirements and mobilize funds for the project. Formal approvals are granted only afterproviding documentary evidence of rights over land and satisfying other requirements. TheBoard also grants co-developer approvals for building infrastructure facilities in SEZs. 28
  • 38. Authorized Operations in SEZsThe different operations which are authorized in SEZs depend on the nature of SEZ.IT / ITES, Biotechnology, Gems and Jewellery SEZs 1. Roads with street lighting, signals and signage. 2. Water treatment plant, water supply lines, sewage lines, storm water drains and water channels of appropriate capacity. 3. Sewage and garbage disposal plant, pipelines and other necessary infrastructure for sewage and garbage disposal, sewage treatment plants. 4. Distribution network for electricity, gas and petroleum natural gas, including necessary substations of appropriate capacity, pipeline network, etc. 5. Security offices and police posts at entry, exit and other points within and along the periphery of the site. 6. Effluent treatment plant, pipelines and other infrastructure for effluent treatment. 7. Office space. 8. Parking including multi-level car parking. 9. Telecom and other communication facilities including Internet connectivity. 10. Rain water harvesting plant. 11. Electricity generation. 12. Air conditioning. 13. Swimming pool. 14. Fire protection system with sprinklers, fire and smoke detectors. 15. Recreational facilities including clubhouse, indoor and outdoor games, gymnasium. 16. Employee welfare facilities like automated teller machines, crèche, medical centres, etc. 17. Shopping arcade and/ or retail space. 18. Business and / or convention centre. 19. Common data centre with inter-connectivity. 20. Housing or service apartments. 21. Playground. 22. Bus bay. 29
  • 39. 23. Food services including cafeteria, food court(s), restaurants, coffee shops, canteens and catering facilities. 24. Landscaping and water bodies. 25. Clinic and medical centres. 26. Wi Fi and / or Wi Max Services. 27. Drip or micro-irrigation systems. 28. Such other operation(s) specified above from 1 to 27 which the BoA may authorize from time to time.Sector Specific SEZs 1. Roads with street lighting, signals and signage. 2. Water treatment plant, water supply lines, sewage lines, storm water drains and water channels of appropriate capacity. 3. Sewage and garbage disposal plant, pipelines and other necessary infrastructure for sewage and garbage disposal, sewage treatment plants. 4. Distribution network for electricity, gas and petroleum natural gas, including necessary substations of appropriate capacity, pipeline network, etc. 5. Security offices and police posts at entry, exit and other points within and along the periphery of the site. 6. Effluent treatment plant, pipelines and other infrastructure for effluent treatment. 7. Office space. 8. Parking including multi-level car parking. 9. Telecom and other communication facilities including Internet connectivity. 10. Rain water harvesting plant. 11. Electricity generation. 12. Swimming pool. 13. Fire protection system with sprinklers, fire and smoke detectors. 14. Recreational facilities including clubhouse, indoor and outdoor games, gymnasium. 15. Employee welfare facilities like automated teller machines, crèche, medical centres, etc. 16. Shopping arcade and/ or retail space, construction of multiplexes. 17. Playground. 18. Bus bay. 30
  • 40. 19. Food services including cafeteria, food court(s), restaurants, coffee shops, canteens and catering facilities. 20. Landscaping and water bodies. 21. Clinic, medical centres and building hospitals. 22. Wi Fi and / or Wi Max Services. 23. Drip or micro-irrigation systems. 24. School and / or technical institution and / or educational institution. 25. Rail head 26. Access control and monitoring system. 27. Such other operation(s) specified above from 1 to 27 which the BoA may authorize from time to time.Multi – Product SEZs 1. Roads with street lighting, signals and signage. 2. Water treatment plant, water supply lines, sewage lines, storm water drains and water channels of appropriate capacity. 3. Sewage and garbage disposal plant, pipelines and other necessary infrastructure for sewage and garbage disposal, sewage treatment plants. 4. Distribution network for electricity, gas and petroleum natural gas, including necessary substations of appropriate capacity, pipeline network, etc. 5. Security offices and police posts at entry, exit and other points within and along the periphery of the site. 6. Effluent treatment plant, pipelines and other infrastructure for effluent treatment. 7. Office space. 8. Parking including multi-level car parking. 9. Telecom and other communication facilities including Internet connectivity. 10. Rain water harvesting plant. 11. Electricity generation. 12. Swimming pool. 13. Fire protection system with sprinklers, fire and smoke detectors. 14. Recreational facilities including clubhouse, indoor and outdoor games, gymnasium. 15. Employee welfare facilities like automated teller machines, crèche, medical centres, etc. 31
  • 41. 16. Shopping arcade and/ or retail space, construction of multiplexes. 17. Housing or service apartments and construction of hotels. 29. Playground. 30. Bus bay. 31. Food services including cafeteria, food court(s), restaurants, coffee shops, canteens and catering facilities. 32. Landscaping and water bodies. 18. Clinic, medical centres and building of hospitals. 19. Wi Fi and / or Wi Max Services. 20. Drip or micro-irrigation systems. 21. School and / or technical institution and / or educational institution. 22. Rail head 23. Access control and monitoring system. 24. Such other operation(s) specified above from 1 to 24 which the BoA may authorize from time to time.Additional activities which are allowed are:- i. Port. ii. Airport and / or air cargo complex. iii. Inland container depot. iv. Banks.Land RulesThe minimum land requirement for the SEZ depends upon the nature of the SEZ. The landrules for different SEZs are:-Multi-Product SEZFor a multi-product SEZ, a contiguous area of 1000 ha is the minimum requirement.However, in the states of Assam, Meghalaya, Nagaland, Arunanchal Pradesh, Mizoram,Manipur, Tripura, Himachal Pradesh, Uttaranchal, Sikkim, Jammu & Kashmir, Goa and in aUnion territory, it can be 200 ha.Processing Area – At least 35% of the total area will be earmarked for developing theprocessing area. However, this may be relaxed by the Central Government up to 25% ifrecommended by the Board of Approvals. 32
  • 42. Sector-Specific / For One or More Services / In a Port or AirportFor a sector-specific / for one or more services / in a port or airport, a contiguous area of 100ha is required. However, i. The minimum area will be 10 ha foe electronics hardware and software including IT enabled services, biotechnology and non-conventional energy sectors (including solar energy equipments/ cells but excluding non-conventional energy production and manufacturing) and gems and jewellery. ii. The minimum area will be 50 ha in Assam, Meghalaya, Nagaland, Arunanchal Pradesh, Mizoram, Manipur, Tripura, Himachal Pradesh, Uttaranchal, Sikkim, Jammu & Kashmir, Goa and in a Union territory, unless they belong to specific sectors mentioned above.Processing Area i. For electronic hardware and software, including IT-enabled services, the minimum built-up processing area will be 1 lakh sq m. ii. For biotechnology and non-conventional energy sectors, the minimum built up area will be 40000 sq m. iii. For gems and jewellery, the minimum built-up processing area will be 50000 sq m. iv. In Assam, Meghalaya, Nagaland, Arunanchal Pradesh, Mizoram, Manipur, Tripura, Himachal Pradesh, Uttaranchal, Sikkim, Jammu & Kashmir, Goa and in a Union territory, at least 50% will be earmarked for processing area unless they figure in sectors mentioned above.Free Trade and Warehousing Zone (FTWZ)For free trade and warehousing zone, the minimum area will be 40 ha. However, a standaloneFTWZ can also be set up as a part of multi-product SEZ, as well as that of a sector-specificzone with no minimum area requirement. However, the maximum area of such FTWZ willnot be more than 25% of the processing area of the SEZ.Processing Area – A FTWZ must have a minimum built-up area of 1 lakh sq m. Instandalone FTWZs, at least 50% of the area will be earmarked for processing area. 33
  • 43. Special Economic Zones Act 2005The policy relating to SEZs was earlier contained in Foreign Trade Policy. However, to givea long term and stable policy framework with minimal regulation, the SEZ Act was enacted.In 2005, a comprehensive Special Economic Zones Act 2005 was passed by Parliament inMay 2005. The SEZ Act 2005 and the rules of the SEZ Act came into force from February10, 2006. Investment of the order of Rs 100,000 crore over the next three years with anemployment potential of over 500,000 was also expected from the new SEZs, apart fromindirect employment during construction period of the SEZs.The SEZ Act 2005 is mainly divided into 7 different chapters and 3 schedules.Chapter I PreliminaryChapter II Establishment of Economic ZoneChapter III Constitution of Board of ApprovalChapter IV Development CommissionerChapter V Single Window ClearanceChapter VI Special Fiscal Provisions for Special Economic ZonesChapter VII Special Economic Zone AuthorityChapter VIII MiscellaneousSchedule I Enactments (See Section 7 and 54)Schedule II Modifications to Income Tax Act, 1961Schedule III Amendment to Certain Enactments (See Section 56)Key IssuesThe SEZ Act deals primarily with the following matters:- * Establishment of the SEZ and the various authorities constituted in this connection. * Appointment of the Developer, Co-developers and approval for units to be located in the notified area. * Exemptions, drawbacks and concessions including exemptions from customs duty (on goods brought into or exported from the SEZ), excise, service tax, securities transaction tax, sales tax and income tax. 34
  • 44. * Offshore Banking Unit & International Financial Services Centre. Setting up of offshore banking units / International Financial Services Centre in SEZs. * Notified Offences & Civil Suits. A single enforcement agency/officer for certain notified offences as well as the designation of courts by the state governments for such offences committed in and for civil suits arising in SEZs.Salient Features of SEZ ActThe SEZ Rules provide for:• Single window clearance for setting up of an SEZ;• Single Window clearance on matters relating to Central as well as State Governments;• Single window clearance for setting up a unit in a Special Economic Zone;• Simplified compliance procedures and documentation with an emphasis on selfcertification.GovernanceAn important feature of the Act is that it provides a comprehensive SEZ policy framework tosatisfy the requirements of all principal stakeholders in an SEZ – the developer and operator,occupant enterprise, out zone supplier and residents. Earlier, the policy relating to the EPZs/SEZs was contained in the Foreign Trade Policy while incentives and other facilities offeredto the SEZ developer and units were implemented through various notifications and circularsissued by the concerned ministries/departments. This system did not give confidence toinvestors to commit substantial funds for development of infrastructure and for setting upunits.Another major feature of the Act is that it claims to provide expeditious and single windowclearance mechanisms. The responsibility for promoting and ensuring orderly development ofSEZs is assigned to the board of approval. It is to be constituted by the central government.While the central government may suo motu set up a zone, proposals of the stategovernments and private developers are to be screened and approved by the board. At thezone level, approval committees are constituted to approve/reject/modify proposals forsetting up SEZ units. 35
  • 45. In addition, the Development Commissioner (DC) and his/her office is responsible forexercising administrative control over a zone. The labour commissioner’s powers are alsodelegated to the DC. Finally, clause 23 requires that designated courts will be set up by thestate governments to try all suits of a civil nature and notified offences committed in theSEZs. Affected parties may appeal to high courts against the orders of the designated courts.InfrastructureProvisions have been made for:- 1. The establishment of free trade and warehousing zones to create world class trade- related infrastructure to facilitate import and export of goods aimed at making India a global trading hub. 2. The setting up of offshore banking units and units in an international financial service centre in SEZs. 3. The public private participation in infrastructure development. 4. The setting up of a “SEZ authority” in each central government SEZ for developing new infrastructure and strengthening the existing one.Fiscal BenefitsChapter 6 of the SEZ Act of 2005 deals with the special fiscal provisions for SEZs. On thebasis of this chapter, the available benefits are as follows:-The benefits available to the Developers are:-  Income tax exemption for ten years (in a block of 15 years) from the date of commencement of operations. Entire profits from developing SEZs are eligible for tax concession. The developers have to choose their block period of 10 years.  Exemption from payment of Minimum Alternate Tax (MAT).  Developers are exempted from paying taxes on dividend declared out of the current income.  Exemption from payment of service tax on taxable services provided to a developer.  Sales taxes are not charged on sale or purchase of goods (other than newspapers) by developers. 36
  • 46.  Exemption from customs duty on goods imported by developers for carrying on authorized operations.  Exemption from payment of central excise on goods brought from outside the SEZ (that is Domestic Tariff Area) by developers for authorized operations.  Drawback or such other benefits on goods brought or services provided from the Domestic Tariff Area by the developer for authorized operations.The benefits available to the Units are:-  Income tax exemption on 100% export profits for the first five years from the date of commencement of production, 50% of profits for the next five years, and finally, deduction up to 50% of the ploughed back export profits for another five years.  Offshore banking units (OBUs) in the SEZs are allowed complete tax holidays. 100% exemption is permitted for the first five years and 50% for the next five years.  No taxes are imposed on interest income received by a non-resident on a deposit made in an OBU situated in an SEZ.  No taxes are imposed on OBU for interest paid on deposits to non-residents, as well as on those for borrowings by non-residents.  Units are exempt from payment of taxes on capital gains during transfer of assets involved in shifting from urban areas to SEZs. However, such exemption requires that one year or before, or three years after the transfer o Machinery/ plant was purchased for operations in SEZ o Building or land was acquired or constructed in the SEZ o The original asset was shifted and the establishment was transferred to the SEZ o Other expenses as indicated by the Central Government were notified.  Exemption from paying of service tax.  Exemption from securities transaction tax (STT) on transaction of taxable securities entered into by non-residents through the International Financial Services Centre.  Exemption from customs duty on goods imported by units for authorized operations.  Exemption from payment of central excise on all goods purchased from the DTA.  Exemption from payment of sales taxes. 37
  • 47. Foreign Investments & FinanceAttracting FDI is also one of the objectives of the SEZ policy. The background note onSpecial Economic Zones in India put up on the departmental Website of the Ministry ofCommerce for SEZs mentions: ‘With a view to overcome the shortcomings experienced onaccount of the multiplicity on controls and clearances, absence of world class infrastructureand an unstable fiscal regime, and with a view to attract larger foreign investments in India,the Special Economic Zones (SEZ) Policy was announced in April 2000’.FDI under the ‘automated’ route, that is, the route which does not require foreign investors totake prior permission for investing in India, is allowed up to 100% for developing SEZs andFTWZs. The guidelines for FDI in townships, housing and construction-development projectsin India are prescribed in Press Note no. 2 issued by Department of Industrial Policy andPromotion (DIPP), ministry of Commerce and Industry, Government of India, on 3 March2005. As a result, the appeal of SEZs has increased that much more for prospective investors.As far as units in SEZs are concerned, foreign investors are eyeing these needs to apply to theDevelopment Commissioner of the concerned zone. In most cases, these are likely to qualifyunder the automatic approval route, unless they attract compulsory licensing or areincompatible with the location norms.On 2nd July 2007, The RBI has come out with clear instructions mentioning that for setting upbranch offices or new units in SEZs, it is not necessary for foreign investors to take priorpermission. In a decision that enables SEZ units to dig into capital markets for mobilizingresources, they have been permitted to issue equity shares to non-residents against import ofcapital goods. On a purely ‘stand alone’ basis these units can enter into contracts incommodity exchange markets with the objective of hedging against price risks. Andaccording to regulation 6A of the Foreign Exchange Management Act (FEMA), SEZ unitscan open, hold and maintain foreign currency accounts with authorized dealers (AD) offoreign exchange. There are two main restrictive provisions on the operations of the account.First, no foreign exchange purchased in India against Rupees can be credited to the accountwithout the approval of the RBI. Second, the funds will not be lent to any equity resident inIndia that is not a unit in SEZ. 38
  • 48. The Key Issues1. Loss of Livelihoods – Inadequate Employment OpportunitiesThere has been no Cost-Benefit analysis conducted for SEZ projects or assessment ofeconomic losses as a result of diversion of agricultural land to non-agricultural purposes andresultant impacts on local livelihoods.SEZs will not create employment for local population but will lead to distress migration oflocals since the jobs created will need education and skill levels unreachable for most of thepeople. Therefore the communities such as those of the fisher folks, farmers, landlesslabourers, women, Dalits and other marginalized will remain untouched by all newemployment opportunities arising out of the SEZs.2. Increasing Burden on Natural Resources and EnvironmentThe democratic spaces available to the people to voice their dissent or consent to the projectsmay not even be applicable to these industries under the available Environmental ClearanceRegulations because of the “Single Window Clearance’ provisions of the SEZ Act (Section13). There are no provisions for monitoring of the cumulative environmental impacts of allthe units coming under one SEZ.3. Creating Real Estate ZonesThe SEZs are but creation of –‘Real Estate Zones’ to compliment the rich and elite incountry. As per the SEZ Act, only 35% land would be for industrial set up while theremaining would be for other non-industrial purposes. Rest of the land could be left todevelop recreation centers and housing etc.4. Revenue Loss due to subsidizing SEZsThe Finance Minister himself has consistently raised the issue of loss of taxes stating that wewill loose almost 1, 00,000 Crore due to tax sops offered to SEZs. (TOI, 25th August 2006).Under the SEZ Act (Section 26 to 30) and SEZ rules, excessive Tax and Tariff concessionsare being given to companies for a consecutive period of 15 years. This would increase theburden of taxation on the common people. Once given the status of SEZs private industries 39
  • 49. will simply reap the benefits of all leverages provided by the government, the most criticalbeing land acquisition in the name of ‘public purpose’. The disproportionate growth as aresult of SEZs will adversely hit the farming sector, small scale industries, manufacturers andentrepreneurs in the long run.5. Over Ruling of Local Self GovernmentsThe status of deemed foreign territory to SEZs will encroach upon the rights of the local selfgovernments like Gram Panchayats’ and will be violation of the 73rd ConstitutionalAmendment.The SEZ Act is taking away this power back to the center and bureaucracy (by creating‘Board of Approvals’ and ‘Development Commissioner’ and ‘SEZ Authority’, the mostpowerful in SEZs), the accountability of whose is not certain.The fact that the SEZs would have their own regulations, the rights for environmental andlabour related clearances, security arrangements, which actually means that they would be‘self contained privatized autonomous entities’. This is against the Indian Constitution andnationhood.6. Adverse Impact on Labour ConditionsIn India 93.2% of total work force still comes under the unorganized sector.Liberalizing of labour laws under SEZ Act (Section Sec.49) would adversely impact thesocial security and livelihoods of this large labour force. This would only worsen thecondition of labour in our country further. 40
  • 50. Performance AnalysisThe performance of SEZs is improving a lot as from the past. As Indian SEZ policy has beenintroduced in 2001, the potential of SEZs in India is still to be discovered. The exports fromSEZ grew by 16.4% from 2001-2004. In the same period the total exports in India grew by12.1%.Trend in Export Performance of SEZsThe export from SEZs in the year 2006-2007 was Rs. 13854 Crore and in the 2007-2008, itwent up to Rs. 18314 crore i.e. it grew at 39%. The most important fact to notice is that theexport from SEZs grew by 381% from 2005-2006 to 2010-2011. Interestingly, in the year2010-2011, the export went to Rs. 66638 crore from Rs. 34615 in 2006-2007 i.e. it grew at92% from the previous year. Year Export (Rs. Crore) Growth Rate(Over Previous Year) 2006-2007 13854 39% 2007-2008 18314 32% 2008-2009 22840 24.7% 2009-2010 34615 52% 2010-2011 66638 92% 41
  • 51. Contribution of SEZs in Country’s Total ExportIn the year 2006 – 2007, the contribution of SEZs in country’s total export was 4.72% and inthe next year, it just increased to 4.88%. The biggest increment was seen in the 2010 – 2011.In that year the contributions of SEZs were around 10.16%, which shows that thecontributions of SEZs are increasing. Year Export from SEZs Total Export Contribution of SEZs (In Rs. Crore) (In Rs. Crore) (%) 2006 – 2007 13854 293366.74 4.72 2007 – 2008 18314 375339.53 4.88 2008 – 2009 22840 456417.86 5.0 2009 – 2010 34615 571779.26 6.05 2010 – 2011 66638 655863.52 10.16Sector-wise Breakup of Physical Exports from SEZs Sector Export in 2008-09 Export in 2009-10 (In Rs. Crore) (In Rs. Crore)Biotech 33.4 159.45Computer/ Electronic Software 1854.46 3985.26Electronics Hardware 3846.342 11121.327Electronics 0.13 518.71Engineering 1389.17 1651.68Gems and Jewellery 16068.84 23006.065Chemicals & Pharmaceuticals 1106.29 1423.05Handicrafts 6.49 30.33Plastic and Rubber 393.22 657.66Leather, Footwear and Sports Good 168.47 237.02 42
  • 52. Ceramics 22.78 24Food and Agro Industry 573.08 645.58Non-Conventional Energy --------- 126.01Trading and Service --------- 20866.97Textile and Garments 133.87 1316.61Tobacco related Products 3.17 18.48Misc 4701.89 849.48 TOTAL 25358.45 66637.682Employment GenerationThe total direct employment in Special Economic Zones as of 30th June 2011 is 7, 14,412persons. The total incremental employment generated in SEZs since Feb., 2007 is 5,79,708persons. 199330 persons is the direct employment in 7 SEZs established by the CentralGovernment, whereas 48988 persons is the direct employment in private/ state governmentSEZs which came into force prior to SEZ Act 2005 and 100885 persons are employed innotified SEZs.Private Investment in Special Economic ZonesThe total private investment in Special Economic Zones as of 30th June 20010 is Rs. 81093crore out of which Rs. 77058 crore is the incremental investment since Feb., 2008. Theinvestment in notified SEZs is Rs. 73348 crore and the investment in private/ stategovernment SEZs which came into force prior to SEZ Act, 2005 is Rs. 3701.91 crore whereasRs. 4043.28 crore is the investment in 7 SEZs established by the Central Government. 43
  • 53. Comparative study – India and ChinaSEZs in ChinaSpecial Economic Zones (SEZs) are development zones established by the PRC to encourageforeign investment in China, bringing much need jobs, technical knowledge, and future taxrevenues in return for significant tax concessions at start-up of the operations and over anumber of years. They are not unlike SEZs in other part of the world.Current SEZs are located in: • Guangdong Province • Fujian Province • Hainan Province • Hunchun • Pudong Development Zone(Shanghai) Lessons from China’s SEZsChina’s opening has not been easy. It’s prudent choice of location, careful personnel andeconomic arrangements, local reform initiatives and leadership helped ensure the success ofthese SEZs. Chinese economic reformers’ key political challenge in setting up SEZs was toengineer a successful start of reform in localities. They understood that if a major area or SEZconducting experimental reforms succeeded, it would encourage other provinces to followsuit. They also wanted to sum up useful lessons from these experiments. They made carefullocation, personnel, and policy arrangements.First, they picked the provinces and areas with the strongest local political, economic, andsocial backings, a premium geographic location and the best external economic links to startthe reform experiment. Between the two provinces that hosted the earliest SEZs, Guangdongwas close to Hong Kong and Fujian to Taiwan. Both provinces had a large number offamilies whose relatives lived and worked overseas. These provinces had a long recenthistory of foreign economic contact and domestic commerce. Finally, the two provinces,especially Guangdong, had open-minded local leaders and population who would bereceptive to opening up and commerce. 44
  • 54. Second, national reformists headed by Deng shrewdly staffed Guangdong with committedliberals and experienced politicians for distinct purposes. Between late 1978 and late 1980,Deng sent Xi Zhongxun, an outspoken and liberal veteran, to cleanse the Maoist influence inGuangdong. As the cleanup mission ended, Deng replaced Xi with the moderate,consultative, yet politically skilful Ren Zhongyi. Ren stimulated and protected reforminitiatives in Guangdong until 1985.The Guangdong leaders, with the backing of national reformists, also picked able reformiststo lead the major SEZs. Wu Nansheng, an open-minded provincial party secretary, brieflyserved as the leader of Shenzhen SEZ. Liang Xiang, a Guangdong native with high seniorityin the province and strong ties with Premier Zhao, succeeded him. His determined, decisive,effective and brisk working style proved critical in rapidly transforming Shenzhen from arural backwater into a thriving industrial and trading base and a premier laboratory for theearliest reform in the nation. A bold and liberal leader, Liang Guangda, also headed theZhuhai SEZ.Third, the central government also granted Guangdong and Fujian privileges in economicreform. Until April 1984 the four SEZs enjoyed the exclusive right to host foreignenterprises, various preferential treatments for foreign enterprises, and free market prices.Similarly, SEZs enjoyed a low fiscal remittance rate and unparalleled leeway in reformingsystems of prices, employment, and circulation of goods. These “particularistic concessions”provided policy space, fiscal incentives, and insurance for reform experiments in the twoprovinces.Fourth, local initiatives helped stimulate local growth in SEZs. As stated, from the early yearson, the Shenzhen authority eagerly attracted talented people by offering high pay and goodwelfare. It also wisely used bank loans to rapidly develop urban infrastructure in the largelyrural city. It improved governmental efficiency, reformed political and economic institutions,and helped foreign investors to make high profits. Through these measures the city attractedtalent, foreign capital, and domestic entrepreneurs to the SEZ, and generated rapiddevelopment.These clever arrangements helped reforms and the Open Policy to take off in Guangdong andShenzhen. In fifteen years, Guangdong became the largest provincial economy, whereasShenzhen emerged as the most dynamic metropolis with the highest per capita GDP and the 45
  • 55. largest foreign trade volume in China. The meteoric rise of Guangdong and Shenzhendemonstrated to all the other provinces that reform and opening did pay off. This set off theirdemands for their own SEZs and reform experiments. Economic reforms thus spread acrossthe provinces.The Chinese Communist Party also used its power of appointing officials as a lever to pushforth reforms. In promoting young leaders, Deng favoured those who had a good record ofstimulating reform and generating economic development. As a result, local officials investedtheir energy in attracting foreign and domestic investment in order to generate economic andfiscal growth. The party’s nomenclature was turned into a powerful growth machine. Institutional Arrangements and Local Initiatives in SEZsOnly proper arrangements could motivate local efforts to promote reform, opening, anddevelopment. National administrative and economic arrangements helped lay an institutionalfoundation for the operation and development of SEZs. Given the institutional structure, theChinese did a good job of sustaining national institutional linkages with SEZs, whileproviding considerable economic incentives and leeway for local authorities to press aheadwith experimentation in local reform and development. Administrative ArrangementsIn September 1979 the Guangdong Party Committee decided to upgrade the administrativerank of Shenzhen and Zhuhai from counties to cities separately listed in the province’seconomic planning. In November both cities were made municipalities under the directjurisdiction of the province (MDJP). In June 1982, the State Council under Zhao’s leadershipcreated a Special Economic Zones Affairs Office (SEZAO). The office was led by PremierZhao and Vice Premier Gu Mu. Hence Shenzhen, along with other SEZs, could communicatedirectly with the office while also earning the support of leaders of their home province.During 1981 and 1982, the government of Shenzhen was downsized and its structure andorganization streamlined. First, oversized bureaucracy was trimmed. By early 1982 thenumber of party and governmental officials in the zones was cut by 65 percent and thenumber of vice-mayors dropped from seven to three. Second, the SEZ and non-SEZ portion 46
  • 56. of Shenzhen were clearly distinguished. Third, three new offices responsible for economicpolicies in the SEZ were placed under the jurisdiction of the Mayor’s Office: the GeneralOffice of the city government, the SEZ Development Company, and the SEZ ConstructionCompany. These changes installed the predominant control of the mayor (who was also theparty secretary) over the course of the city’s development. This centralized and efficienteconomic decision process in the hand of local leaders paved the way for rapid formation andoperation of the SEZ, which was much needed for the newly established zone in its very earlyyears. Economic ArrangementsSEZs enjoyed a number of special policies until April 1984. First, joint ventures and foreign-owned enterprises were allowed in the SEZs, but needed special approval outside them.Second, prices and distribution of goods were regulated by the market within the SEZs, butby central plans outside the zones. Third, SEZs had jurisdiction in approving much largerinvestment projects than non-zone localities. Fourth, SEZs enjoyed preferential treatment intax and tariff reductions and exemptions. For example, the corporate income tax at the SEZswas set at a preferential rate of 15 percent, even lower than the 18.5 percent in Hong Kong.Finally, SEZs were granted preferential fiscal arrangements. For example, according tonational and provincial provisions, Shenzhen did not have to remit revenue to the nationaland provincial governments until 1989, nor would the province and Beijing providesubsidies. Fiscal autonomy generated tremendous fiscal incentives and exerted heavypressure for Shenzhen to reform and develops. These privileges enabled investors to enjoythe lowest corporate income tax rates and tariffs on imports and exports, as well as a freerplay of markets in SEZs. SEZs become the premier place in China for attracting FDI. Local Initiatives in Shenzhen SEZSEZs also undertook initiatives to prepare the zones for operation and for investors. InShenzhen, Liang confronted a severe shortage in qualified talent and office floor space. Thiswas not surprising as the city was largely rural when an area inside the city was designated asthe first SEZ in China. To overcome the problem, Liang promised spacious apartments,generous wages, and easy urban residency to attract talent. He sent head hunters around the 47
  • 57. nation to recruit qualified professionals and workers. From 1979 to 1983, the number ofengineers grew from two to 732. Meanwhile, the average age of cadres declined from 43 to37, and the share of college-educated cadres rose from 8 percent to 21 percent.Building office space was another top priority for the city. Active recruitment allowed thenumber of construction workers to grow from several hundreds to 100,000. Some forty-fiveNationally-known construction firms set up branches in the city. The city also arranged for20,000 soldiers from the PLA Construction Corps to be demobilized and employed asconstruction workers in the city. These measures helped satisfy the thirst for floor space inthe city.In addition, Shenzhen was short of funds necessary for building streets and urbaninfrastructure. The city solved the problem by borrowing bank loans, investing in urbaninfrastructure such as roads, power, water, telephone, and sewage in new districts, andcharging rental on land use. It also reinvested earnings and loans in new urban developmentalprojects. Within four years, the city accomplished urban development worth 100 millionYuan with only 18 million Yuan of loans. It built two industrial districts as well as fifty-fivestreets of a total length of 100 kilometres.More importantly, Shenzhen became the experimental zone with the earliest and boldesteconomic reforms in the nation. The city carried out the nation’s first price reform in 1981. Itimplemented the first labour contract system among all enterprises and public and socialinstitutions in 1982. In 1983 the Shenzhen SEZ introduced social labour insurance foremployees in labour contracts as well as a wage reform. In 1984, the wage reform alsocovered employees of governmental agencies and public institutions. In 1982, the firstforeign bank in China was set up in Shenzhen; in 1985 China’s first foreign exchangeredistribution centre opened there.Liang also tried to help foreign firms in Shenzhen SEZ reap high profits, thereby attractingmore foreign enterprises to the SEZ. For this aim, the governmental agency reduced taxes andland use fees, lowered wage standards, and streamlined administrative approval proceduresfor foreign enterprises. In the same year a survey of 148 China-foreign joint ventures andforeign owned enterprises found that 80 percent of them made a profit and that their profitrate exceeded 20 percent. Liang also tried to expand the level of technology and the scale of 48
  • 58. production of foreign enterprises. In the first couple of years of the SEZ, the city had onlybeen able to attract small and medium size foreign businesses, mainly in processing,assembly, and compensatory trade. A few years later, the city started to attract technology-and knowledge-intensive foreign businesses. Shenzhen’s investment environment impresseda manager of a large Hong Kong power station company in 1982 as well as a Japanesedelegation sent by the Japanese prime minister in 1984. As the favourable impression of theSEZ became known, investors from fifty countries and areas other than Hong Kong alsoarrived in Shenzhen. Success of Shenzhen and Other SEZsFavourable institutional setups, bold and sound local initiatives, and steadfast support fromlocal and national leaders thus helped contribute to a rapid improvement in the economicconditions of SEZs, especially in Shenzhen. The investment in infrastructure in the city grewfrom 50 million Yuan in 1979 to 2,760 million Yuan in 1985. Meanwhile, the actual foreigninvestment in the city grew from $15 million to $180 million, with over 60 percent of thetotal from the SEZ. Shenzhen’s achievement in the early years stands up well against otherexport-processing zones (EPZs) in the region. Taiwan’s zones, which were regarded asamong the most successful in the world, rarely saw its foreign investment double on a year-to-year basis. In contrast, actual foreign investment in Shenzhen grew by eleven fold in fiveyears. In the first five years, the Bataan DPZ in the Philippines attracted $128.8 million inforeign investment and the Masan EPZ in South Korea $88.5 million. In its first four yearsand by 1982, Shenzhen attracted $234 million.Driven by miraculously fast expansion of investment, the economy of Shenzhen grewrapidly. Between 1979 and 1985 the gross value of industrial and agricultural output(GVIAO) of the city grew fifteen fold from 175 million Yuan to 2,862 million Yuan, and thatof the SEZ by forty-six fold from 50 million Yuan to 2,368 million Yuan. In this period theSEZ increased its share in the city’s GVIAO from 29 percent to 83 percent. Thus the SEZ hadbecome the predominant growth engine of Shenzhen’s economy. The rapid development ofShenzhen continued in the following decades. Each year between 1980 and 2004, the grossdomestic product (GDP) of the city grew by 28 percent and per capita GDP by 14 percent.This growth, the highest among the Chinese metropolises, was driven by three engines—investment, as fixed assets grew at 35 percent a year; domestic consumption, as retail sales 49
  • 59. grew by 30 percent a year; and exports, which grew 38 percent a year. By 2004, the city’sGDP reached Y342 billion, and its GDP per capita of Y 59,271 was the highest in China. Itsexports amounted to $77.8 billion, the highest among the nation’s cities; and its actual FDIamounted to $2.4 billion, among the top tiers in the Chinese cities.Guangdong Province, with three of the four earliest SEZs, was a key base for China’sopening. In 1985, exports of its three SEZs totalled $970 million, an impressive record giventhe negligible amounts prior to the setup of the SEZs. The amount grew to $32.9 billion in1998. Their share in Guangdong’s total exports increased from 19.4 percent in 1985 to 44percent in 1997. Exports of Shenzhen grew from $500 million in 1985 to $26.4 billion in1998, increasing its share in the three SEZs from 51.5 percent to 80.2 percent. Since 1992,Shenzhen has become the city with the largest exports in China. Actual utilized foreigninvestment of the three SEZs totalled $170 million in 1983. It grew to $28.4 billion in 1998.In this period exports and foreign investment of the three SEZs in Guangdong grew by about33 fold and 166 fold, respectively.Among the first four SEZs, Shenzhen has been the most successful. The reasons are asfollows. First, Shenzhen’s location and external trading environment is the mostadvantageous. It is located close to Hong Kong and is connected to Hong Kong by rail. HongKong government and business also support close economic linkage with Guangdong. Eventhough Xiamen is the closest to Taiwan among all Chinese cities, the Taiwan governmentrestricts economic integration with the mainland. Second, Shenzhen has the largest areaamong the four SEZs—2.5 times as large as the second-largest SEZ (Xiamen), and over 20times as large as the smallest SEZ (Zhuhai). Third, as described, leaders of Shenzhen madethe best efforts to improve the investment environment and attract FDI.Over the years, the sectoral composition, technical content, and ownership of foreigninvestment in Shenzhen have also changed. In 1981, pledged foreign investment waspredominantly in real estate (40.8 percent of the total), tourism (29.2 percent), andsecondarily industry (16.9 percent). In the following years, investment into manufacturingsoared. By the end of 1991, 80 percent of the cumulative sum of foreign investment contractswent into manufacturing. In 1996, 86.6 percent of the foreign investment contracts remainedin the secondary sector, and only 12.4 percent went into the tertiary sector. By 2001, the 50
  • 60. former SEZs and Foreign Investment in China 85 share declined to 69.2 percent whereas thelatter increased to 30.6 percent. By 2004, the latter went up to 44 percent.The technical content of exports in Shenzhen has also improved over the decades. In the1980s manufactured exports of the city were mostly low-tech and labour intensive. As late as1991, only 2.8 percent of the value of the city’s manufactured exports was high-tech.Between 1991 and 2003, high-tech manufactured exports grew by 34 percent a year. By 2004they amounted to $30.6 billion and accounted for 51.2 percent of the manufactured exports.In particular, the share of electronics and information products in high-tech manufacturedexports grew from 53 percent in 1997 to 98 percent in 2003.Meanwhile, the number of foreign enterprises by contract grew from 139 in 1983 to 16,889 in2004. In 1983 foreign enterprises assumed the form of primarily joint equity, secondarilyjoint management, and next wholly foreign-owned. By 2004, foreign enterprises wereprimarily wholly foreign-owned and secondarily joint equity, and only a minority of themassumed the form of joint management.The change in the ownership of foreign investment is a natural outcome of foreign business.As years pass, foreign investors usually seek to obtain a larger say in the operation andmanagement of their ventures. Foreign ownership or joint equity, instead of jointmanagement, becomes a more-preferred form of enterprise. The change in the sectoralcomposition of foreign investment and technological composition of exports result both fromnatural upgrading of foreign investment and government encouragement. Comparison of SEZ of China and India China IndiaNumber 7 Above 500When Started 1980 Mostly after 1991Democratic Lot of discussion and No discussion. Parliament passed the lawDecision- debate preceded setting easilyMaking? up of SEZsSize Very large (Shenzhen: Small (3 – 14,000 hectares) 32,700 hectares) 51
  • 61. Ownership State Private corporationsKind of Land Mostly coastal Mostly fertile cultivated land wastelandExports Very good (Shenzhen: Poor so far (In 1998, a waiver of $1.67 Net exports 2006: $35 billion on customs duties was given to billion) earn $1.04 billion in foreign exchange)Employment Substantial number of Very limited so far: 100,650 in all the low-paid jobs SEZs till March 2005Tax Revenue Only selective tax Across-the-board tax holiday given toCollections incentives provided companiesOverall Shenzhen very Somewhat SuccessfulEconomic successful, but at least 2Success SEZs have failedEase of Land Land battles in some Bloody, bitter resistanceAcquisition areas still Comparison of SEZ policies of China and India Issue China IndiaSize Very big. Typically in hundreds Even 10 hectares will do. of hectares.Location Well thought out and located Anywhere. No restriction. only on coasts. To facilitate exports and imports easily.Labour laws Relaxed in the SEZs. Flexibility is totally absent.Policy regime Experimentation of liberal Based on fiscal sops. policies in the specified areas while insulating them from the rest of the country.Investors Basically foreigners who are Basically locals. Not foreign wooed with sops and promise investor driven; which should of stability in policy. 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, Anywhere and any number. So Shantou, Xiamen, Hainan and far 94 operational. About 500 Pudong received approvals.Tax holidays Present. Longer and steeper than in China. 52
  • 62. Findings• The union Govt has foregone a whopping Rs 39,704 crore of duty under export promotion schemes during 2003-2004 accounting for 82% of customs duty collected in that year.• The foreign exchange earned by all the 811 units in the 8 zones put together came to only Rs. 18,309 crores, a mere 5% of India’s exports during the fiscal year 2004-05.• During 1966-1980 average annual export growth rates of EPZs was over 77%, whereas during the post 2000 period (2001-03) it came down to 7%.• Total share of FDI investment in Noida SEZ in 1997 was 12.3% and it went up by a mere 0.4% in the six years. Total FDI share in 2003 was 12.7%.• A slew of tax exemption planned for SEZ to boost exports will erode Rs. 93,900 ($ 20.62 billion) in government revenue over the next four years.• Haryana Govt has offered over 1700 acres of land near Gurgaon to RIL (Reliance) for about Rs.360 crore while it is estimated that the land was worth 5000 crore and HSIDC had acquired this land by paying Rs. 300 crore in compensation to the farmer. 53
  • 63. Suggestion  There should be a vision in the design, establishment and operations of the SEZ.  It is necessary to develop zones as industrial clusters of specific products. The backward linkages would benefit the growth of accessories units as well.  The zones should specialize in terms of economic activities depending on the availability of human capital, resources and infrastructure in the region. They thus tend to transform into horizontally-integrated industrial clusters, which include industries that might share a common market for the end products, use a common technology or labor force skills, or require similar natural resources. It seems, therefore, that it would be desirable to develop zones as industrial clusters of specific products. This may encourage downstream industries also.  Zones in the long run need to give way to industrial clusters of horizontally and vertically integrated industries in general, high tech industries in particular. This would not only help to jump-start the manufacturing processes but would also improve export competitiveness with greater returns.  At present, there is no autonomous authority responsible for the development of zones and for providing single window clearances in India. The zone administration functions as a government department office.  Ideally, the SEZs should be managed by autonomous authorities, which should be constituted under specific Acts and should be assigned the responsibilities to promote the zones.The key elements for the success of SEZs are: Political will, better infrastructure, zerobureaucratic hassles, relaxed labour regulations, better fiscal incentives, and domesticand international linkages. 54
  • 64. ConclusionOn the basis of economic theory and history we can conclude that absorption of agriculturallabor is necessary for sustained economic development of a developing country. “SpecialEconomic Zones” constitute a medium for such sustenance. However, the SEZ policy inIndia has suffered from permission being granted for far too many sub-optimized SEZs. Thepresent ceiling on SEZ size at 5000 hectares does not facilitate the full exploitation ofeconomies of scale in service oriented SEZs and should be scrapped. There are other ways ofminimizing peasant unrest during the process of land acquisition for SEZ development.Employment generation, both direct and indirect, has thus far been the most importantchannel, through which SEZs have impacted on human development and poverty reduction inIndia. India’s SEZs are not dominated by assembly type operations. ‘Value addition’component and hence employment generation potential of zones is rather large. Much of thiswill be a net addition to employment as investment relocation/diversion in export orientedproduction is likely to be limited. 55
  • 65. Bibliographyhttp://www.sezindia.nic.in/http://commerce.nic.in/http://commerce.nic.in/tradestats/indiatrade.asp?id=1http://sezindia.nic.in/HTMLS/SEZ%20Act,%202005.pdfhttp://sez.icrindia.org/http://www.thehindubusinessline.com/2007/11/27/stories/2007112750070900.htmhttp://publications.worldbank.orghttp://www.britannica.com/EBchecked/topic/558530/special-economic-zone-SEZ 56
  • 66. Annexure SWOT Analysis of Indian SEZsStrengths  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.Weaknesses  Indian SEZs will have to comply with all Indian labour laws, giving SEZ’s no advantages on labor flexibility or addressing labour indiscipline (a. ray of hope may be that the Development Commissioner of the zone, who is appointed by the Ministry, will double up as the Labour Commissioner, which could cut the time taken to settle labour disputes);  Unlike India’s Export Processing Zones, which can sell up to 50 per cent of their exports in the Domestic Tariff Area (DTA) at half the rates of customs duties, SEZ manufactures can sell in DTA only on payment of full duties. The ability to sell in the DTA would be an important consideration for many Export- oriented units/EPZ/SEZ units, as an insurance against downturns in international markets;  Poor infrastructure;  High cost of capital;  Inadequate institutional support: he continuing lack of integration of the various departments involved such as customs, sales tax, and environment and pollution control. Without such integration, single window clearance schemes for SEZs cannot operate.Opportunities  To use SEZs to catalyse infrastructure development; 57
  • 67.  Realistically establish competitive advantages in SEZs;  A large NRI base who have traditionally invested less in Greenfield development in India;  Lower the high transaction /behind the border costs to exporters;  Tap the advantages of WTO/increase India’s small share of world trade;  To increase investments in core strength areas like IT and software products and services.Threats o There are signs of an increasing rejection rate for proposals to establish SEZs. This could be linked to the difficulty in reaching agreement between key ministries involved, especially those involved in export promotion or fiscal policy. This could lead to waning business confidence in SEZs. o Sops provided to the units in the SEZ’s could be disputed in the WTO – (eg, different tax treatment for goods specifically for export could give rise to charges of dumping) o The performance of SEZs will be monitored by a committee headed by the Development Commissioner and consisting of Director General of Foreign Trade (DGFT) officials and customs authorities will monitor the performance of SEZs. But with opposing interests (reducing tariffs to enhance trade for DGFT, maximising tariff revenue for customs authorities), how will these natural adversaries help deliver this mandate? o Prospect of even more restrictive labour laws being introduced (eg, “reservations” for socially disadvantaged groups in private sector jobs). 58
  • 68. Annexure – 2 59
  • 69. 60
  • 70. 61
  • 71. 62
  • 72. 63
  • 73. 64
  • 74. Annexure – 4 65
  • 75. Annexure – 5Sector Wise Distribution of SEZs 66
  • 76. Annexure – 6State Wise Distribution of SEZs 67