An Unique Economic Zone (SEZ) is a geographically bound area in a country that possesses unique financial regulations that are different from other locations in the same country.The purpose of SEZ to motivate industrialization specially to facilitate FDI for export oriented production for the function of trade. The classification ‘SEZ’ covers a broad series of more particular zone types, including Free Trade Zones (FTZ), Export Processing Zones (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Ports, Urban Enterprise Zones and others.
According to Ministry of Commerce and Market they are specified as: “Unique financial zone is a particularly task complimentary enclave and shall be considered to be foreign area for the function of trade operations and tasks and tariffs.”
The Rationale of the SEZ
The SEZ is a subset within the geographical limits of the state. They are needed to:
- develop infrastructure
- Boost work by adhering to the concepts of free markets
- Minimise distortions triggered by effective administration and low or no taxes
Traditionally, SEZs are developed as open markets within an economy that is controlled by any type of distortion in trade, macro and exchange policy and other regulative governmental controls.
SEZs are believed to create a conducive environment to promote financial investment and exports. And for this reason, lots of establishing countries are developing the SEZs with the expectation that they will provide the engines of development for their economies to achieve industrialization.
Creation of SEZ
The Unique Economic Zones Act, 2005′ was handed down the 23rd June, 2005, in an attempt to offer a framework to the implementation of SEZs in India.
India was one of the very first in Asia to recognize the efficiency of the Export Processing Zone (EPZ) design in promoting exports, with Asia’s first EPZ established in Kandla in 1965. With a view to conquer the drawbacks experienced on account of the multiplicity of controls and clearances; absence of world-class facilities, and an unsteady financial program and with a view to bring in larger foreign investments in India, the Unique Economic Zones (SEZs) Policy was revealed in April 2000.
The Special Economic Zones (SEZs) Act 2005 is the culmination of a Government Policy, which was introduced as a vision to impart a globally conducive platform for a competitive structure of Indian exports. According to the policy, the units to be set up in the zones were required to be net foreign exchange earners, although devoid of any restriction as pre-determined value addition or minimum export performance requirements. Payment of full custom duty and import policy was mandatory for sales in the Domestic Tariff Area by these units, with the provision for setting up of offshore banking units in those special economic zones. After considerable success and much speculation, the Parliament passed the Special Economic Zones Bill 2005 in May 2005 and with the assent of the Honorable President of India, it became an Act on June 23rd, 2005..
Salient Features of the SEZ Act (2005)
- Creation of SEZs and general administration:
The myth of SEZ’s being created to accelerate only exports were then proven false as it not only helped in growth but also accelerated the employment opportunities.
The objectives of the government, as stated by the Act:
- to generate additional economic activity,
- promote exports of
- goods and services,
- create employment opportunities, and
A body called “Board of Approval” is created looks into applications to set up SEZs and gives approval to them if they meet the required criteria. This acts as a single-stop-shop for investors (called ‘developers’) to get the required regulatory permission to set up an SEZ.
- Tax Exemptions, Finance and Banking
The Act specifies all those taxes and duties that the developers would be exempted from in the SEZs. There is exemption from Custom Tariff Act, 1975, Central Excise Act, 1944, Central Excise Tariff Act, 1985 and other similar laws.
100% Income Tax exemption on export income for the first 5 years, and 50% for the next 5 years is offered. Provisions have also been made to make sure that safeguarding duties, anti-dumping regulations and other instruments are checked when goods moved from the SEZ to the DTA.
- Law Enforcement
In case of illegal activities, Act states that the regulatory bodies would have the cases investigated and heard at the court(s) appointed by the State Government and the Chief Justice of the state High Court.
The Act also explicitly states that in case there is any inconsistency of this law with other laws, than this Act would have an overriding effect over others.
Several amendments made to the act primarily revolved around specifying the provision of infrastructure and requirements for establishment of SEZs. The minimum area requirements vary across industries and regions.
They also provide:
- Generation, transmission and distribution of power within an SEZ.
- 24 hours of uninterrupted power supply with reliable connectivity
- the generation of positive net foreign exchange earnings
The Act maintains its silence on land acquisition and labor laws, which has become the bone of contention on the implementation of the policy.
Objectives of the SEZ Act
(a) generation of additional economic activity
(b) promotion of exports of goods and services;
(c) promotion of investment from domestic and foreign sources;
(d) creation of employment opportunities;
(e) development of infrastructure facilities;
It is expected that this will trigger a large flow of foreign and domestic investment in SEZs, in infrastructure and productive capacity, leading to generation of additional economic activity and creation of employment opportunities. This policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at the Centre and the State level, with the minimum possible regulations.
Over 234 companies received formal approval, 162 companies received in-principle approval and 100 companies received notification to set up SEZs. The Indian government is expecting an investment to the tune of Rs.53,561 crores (USD 13274 million) and an additional job creation for 15,75,452 individuals in SEZs by December 2009. Despite all the efforts, SEZ development has become the most controversial issue for India today.
- Locally procured or imported goods are duty free with an approval for a 5 year utilization period. Also, an exemption from Central Excise duty on the procurement of capital goods, raw materials, and consumable spares, etc. from the domestic market.
- Any good that is manufactured outside a Sez, but is purchased by units within sees is eligible for deductions and would be deemed to be exports.
- External Commercial Borrowings up to $ 500 million a year allowed without any maturity restrictions.
- Exemption by the government in payment of stamp duty and registration fees on the lease/license of plots.
- Sez as ‘Public Utility Services’ : Strikes are not allowed in companies without giving the employer 6 weeks prior notice in addition to the other conditions in the Industrial Disputes Act, 1947.
- The above mentioned exemptions and incentives results in loss of revenues.
- Few of the traders just consider this as an another business opportunity where they are interested in acquiring Sez at cheaper rates and hold on to it until its profitable for them to sell.
- The number of units applying for setting up EOU’s is not in proportion to the number of applications for setting up SEZ’s leading to a belief that this project may not match up to expectations.
- Large amounts of speculative capital drawn in by the lure of quick profits can suddenly leave the country, causing serious disruptions in the economy, including the collapse of financial markets.
- SEZs will displace and uproot lakhs of farmers and send land prices skyrocketing
SEZs in India
The SEEPZ or the Santacruz Electronics Export Processing Zone was established in the year 1973-74.Its geo-strategic position in the heart of the capital city of Mumbai, made it accessible to social, commercial and industrial infrastructure. The main advantage of this zone is its geo-strategic position in the heart of the capital city of Mumbai, which made the SEEPZ to access the vast social, commercial, and industrial infrastructure of the metropolis.
Liberal economic laws
- to promote rapid economic growth using tax and business incentives
- Attract foreign investment and technology s.
Initially, this EPZ was mainly formulated for the exclusive purpose of manufacture and export of electronic items. The Maharashtra Industrial Development Corporation gave a lease of a piece of 100 acres of land for the fulfillment of this. However, with time the high potentiality of the gem and jewelry industry in the global market and the pollution – free nature of it, the Indian government in the year 1987-88, permitted the manufacture and export of Gem and Jewellery items from the Santacruz Electronics Export Processing Zone. The key to the high returns from this zone lies in the basic infrastructure and in the Incentives of SEEPZ.
Some of the incentives offered by SEEPZ:
- The SEZ units of SEEPZ are permitted a tax holiday according to the provisions of the Income-tax Act.
- The units of the SEEPZ are provided with duty free import of capital goods and equipment from various sources.
- Certain items like capital goods, raw materials, spare components, consumables, tooling and packaging materials are exempted from paying customs duty.
- The products manufactured within the special economic zones are exempted from central excise duties and other related levies.
- Capital goods, computers, raw materials, and other spare components that are arranged from Domestic Tariff Area are also exempted from paying excise duties.
- The capital goods and raw materials that are supplied to the units from all over the country can be addressed as Deemed Exports, which are allowed to enjoy deemed export benefits including Duty Drawbacks, CST Reimbursement, and Terminal Excise Duty.
- All inputs are easily available at international price rate at Zero Inventory.
- Within the SEEPZ, there are service centers that look after all the necessary requirements of the zonal manufacturing units, including public utility services like post-office, public telex office, banks, canteens, dispensary, and ATM facilities.
- Incentives of SEEPZ include supportive administrative system to aid the new firms to start and get along with the production process in shortest possible time, along with accelerating their export activities.
Surat Special Economic Zone (SURSEZ)
It is one of the most important business units of Diamond and Gem Development Corporation Limited (DGDC). It is also the ‘First Operating Zone’ in the private sector units in India. The export-oriented units, which are non-polluting, enjoy the maximum benefits rendered by the Surat Special Economic Zone (SURSEZ). Surat special economic zone is one having the most efficient and revenue earning zones in the state. The units in Surat SEZ enjoy the maximum benefits and no hazards at the time of its operation SURSEZ enjoys the advantage of being set up in an excellent location which is pre-requisite to carry out any industrial activities. It facilitates all kinds of requirements such as water, power, roads, sewerage, drainage, and streetlights. Infrastructural facilities such as ICD, Offshore banking facility, Strong Room, etc are also available near the location of SURSEZ .The special economic zone has been set up just 14 kms from the center of Surat city. It is connected to the routes of Mumbai-Ahmadabad Road and Rail. Policies adopted
SURSEZ offers the total range of benefits on financial issues that are being provided by the state governments of India, including Gujarat and other states. All the units that come under the special economic zone and are approved by the development commissioner of the Surat SEZ are absolutely exempted from all the duties, levies, taxes, and other transactions.
Benefit enjoyed by SURSEZ:
- The location of the Surat SEZ is highly beneficial for the units.
- Cost-effectiveness is another very important facility enjoyed by the units of Surat SEZ along with an eco-friendly environment.
- A labor unit filled with highly potential workers and skilled working class for the execution of various industrial projects is another added perk enjoyed by SURSEZ.
Surat Special Economic Zone (SURSEZ) recently acquired more than 150 operational units; the operating units currently on the process include sectors such as gems and jewelry manufacturing, diamond processing, engineering and technology applications, textiles units, textile machinery, pharmacy and pharmaceuticals etc. These operating units in SURSEZ are growing leaps and
bounds and also bringing in large dividends to the state for the benefits it gets due to its superb location, low-priced activities, safe and secured environment, and competent as well as skilled manpower who are working devotedly in the zone for all industrial units.
An excellent and superior infrastructure is also one of the largest contributors for the Surat SEZ. All the units in Surat special economic zone enjoy total exemption from central sales tax and service tax. The units in Surat SEZ can estimate the cost of capital goods and also it can take up any job work for domestic exportation from the special economic zone in Surat. The three kinds of units that can be set up in Surat SEZ include manufacturing, trading, and service unit. Surat SEZ Units are known to be one of the most flourishing units in the state.
The huge number of welfare programs designed for the Surat SEZ has been playing a major role in its booming success. The special economic zone of Surat has witnessed a spectacular accretion in its export production unit. SURSEZ had a marked increase from about Rs.62 crores in 2000-01 to Rs.2400 crores in the year 2005-06. As a consequence, the projected turnover of the special economic Zone of Surat for financial year 2006-07 stood at Rs.4000 crores.
West Bengal was one of the early states to implement SEZ by setting up Manikanchan, the Gems and Jewellery SEZ in Salt Lake Kolkata. After that, a few more SEZs became operational. However, on 24th May 2012, the Trinamool Congress Government decided to repeal the SEZ Act who believes it is exploitative of workers. The reason for failure is only partly political. To understand what culminated in this decision, let us take the Falta SEZ in detail. What goes on in and around a functioning SEZ? What is the status of workers in an SEZ and what is the effect of an SEZ on the lives and livelihoods of people living in contiguous area? These are things that are needed to be known in order to approach the issue of SEZs by both activists and academics. The SEZ unit is believed to be exploitative of workers, and is accused of making women and children work under inhuman conditions. What was established by the government of India as the Falta Export Processing Zone (FEPZ) in 1984, turned into the Falta Free Trade Zone (FFTZ) and finally appeared in its current avatar as a Special Economic Zone (SEZ) under the West Bengal SEZ Act, 2003, the first SEZ act passed by any state government in India.
Therefore, the Falta SEZ earned the dubious distinction of being the first SEZ in India. After the government of India passed the SEZ Act in 2005, the Falta SEZ came under the purview of this act, becoming the pioneer of the 500 odd SEZs set up all over India, becoming the epitome of the neo-liberal capitalist policies of the central and the nominally “leftist” West Bengal state governments. The Falta SEZ is located in the southernmost part of the South 24 Parganas district, near Diamond Harbor. It is located on the bank of the river Ganga, not far from where it joins the Bay of Bengal. The deltaic alluvial land in the area is one of the most fertile in the world, and fishing is also a major source of livelihood of most people in the area. The rationale of setting up the EPZ, and later the SEZ in this locale, was supposedly that the proximity of the river and the sea would allow the export of the goods manufactured in the SEZ at low cost, earning foreign exchange in the process.
Therefore the SEZ was set up over 280 acres of land, 193 acres of which belonged to Calcutta Port trust and 87 acres was acquired land. Most of this land was river silt that had been deposited as land-fill during the widening of the river channel, which is the best land for agriculture, whereas the rest was agricultural land already in use. Four sectors (Sectors I-IV) have already been set up, whereas Sector V is in the process of establishment. People who had already been living in the area prior to river widening were displaced and resettled in the area now called Highlands. They are facing displacement for a second time because of the expansion of the SEZ.
There a number of densely populated villages all around the SEZ such as Nainan, Neela and Karaghata from where people go to work in the industries located within the SEZ. In Karaghata village, most people belong to the Ruidas (leatherworkers), Bauri (boatmen) and Muslim communities. The Ruidases traditionally work with leather but also play the ceremonial drum, the dhaak, and also make cane utensils and furniture. However, these professions are slowly dying out as people from nearly every family now go to work in the SEZ. Work conditions
About 60% of the workforce in the SEZ is women, and many of the local inhabitants knowingly observed that the reason behind such a large number of female workers is that they are easier to exploit. Wages for female workers are uniformly around Rs 10 less than that for male workers. The dominant system of employment is contractual, and on a daily basis. Many people assemble near the gates of the SEZ every morning, and they are employed if there is work for that day. Some people have regular jobs on a contractual basis and very few are direct employees of the industries. The daily wagers get Rs 81 per working day, although the official wage is Rs 100 to Rs 110, depending on the type of work. Workers in some industries are paid as low as Rs 50-60 per day. The contractors get the difference.
The permanent employees get Rs 3000 a month. A certain part of the wages (Rs 450 for permanent workers and Rs 150 for contractual workers) is deducted per month in lieu of ESI and provident fund. But nearly no worker has ever received a receipt for these deductions, and has no hope of utilizing ESI or provident fund. The companies in the SEZ hire and fire workers as they like. As there are no trade union rights of workers in SEZs under the SEZ Act, there are no registered trade unions. There were reports of horrendous working conditions in many industries. The SEZ has 271 companies, of which 107 are closed. Many which are open are also sick. Many industries which close down reopen under new names, denying all dues to workers who had previously worked in them.
Some factories were reportedly burnt down deliberately by the owners to escape paying back bank loans taken for setting up the industry. These seem to comprise quite a widespread practice to deny workers their rightful dues. Many of the industries have hazardous working conditions and nearly no protection is provided to the workers. Many people who work in the cotspin industry or quilt-manufacturing industries complained about cotton dust which they have to inhale and which gives rise to respiratory problems. They are not provided with masks; rather they bind handkerchiefs around their noses. Sometimes, when there are inspections from the Development Commissioner’s office, they are provided masks and helmets, which are taken back when the inspectors leave. Another major industry in the SEZ is waste plastic recycling.
Waste plastic is shipped in from all over the world and women are employed to sift through and clean these waste plastics, often contaminated with hazardous chemical and biological waste, with their hands. Many women reported that they are unable to continue in this job for long because of the horrible working conditions, but many are forced to get back to this job because they have no other means of income. Sexual exploitation of women workers by supervisors is also widespread, but is kept under wraps. Women workers often have to tolerate sexual harassment in order to retain their jobs, many even have to cook and take food from their home for the supervisors.
There is no mechanism for addressing workers’ grievances. Workers in Nainan village reported that a year ago there was a fast by workers to demand higher wages. The development commissioner who is the final arbiter of affairs in an SEZ didn’t agree to meet the workers. After a prolonged agitation when he met them, he guaranteed that no worker would lose his job as a result of this agitation. However, his guarantee was not kept and many workers were fired. For the workers in the SEZ a life of low wages, permanent job insecurity and hazardous and demeaning working conditions is the reality today. Effects of SEZ on surrounding villages
The SEZ has had immense adverse effects on the life in the surrounding villages too. With the initial land acquisition for the SEZ, agriculture was adversely affected in the area. The process of expansion is taking over more agricultural land. Notices for further land acquisition were served to landowners in Sundarika mouja last year. The loss of agricultural land and the setting up of industries in the SEZ have put agriculture in permanent decline in the area. Many of the local inhabitants now also work as casual labourers, driving cycle vans, working in construction etc. Pollution from the industries located in the SEZ is also causing tremendous damage to the environment of the surrounding villages and the livelihoods of people. In Neela village, black soot released from the Kohinoor paper mills is covering all plants and habitations, causing tremendous loss to agriculture.
Also, the steam boiler of the hydraulic press of the Kohinoor factory creates such a terrible noise that children are developing nervous disorders. In Nainan, periodic release of a red acidic effluent in the canals going through the village is polluting the groundwater and killing off the fish in the river, which is a major source of income for this village mostly inhabited by fisher folk. There is massive groundwater depletion too, and tube wells can only function if boosters are fitted. Lot of the waste generated in the factories is carried away by the inhabitants of the surrounding villages for recycling, and this garbage can be found to be littering the surrounding villages. The entire area is paying the price for being the locale of an SEZ set up without any environmental impact assessment and with the sole objective of generating profits.
- APSEZ is a Multi-Product SEZ in the State of Andhra Pradesh.
- Area 5595.47 acres
- Location Atchutapuram and Rambilli (M), Visakhapatnam
- The Government of India notified the SEZ on 12/04/2007 in the Gazette. It is the major SEZ Problems at APSEZ
- Ministry of Commerce has de-notified 905.21 hectares at AP Special Economic Zone at Atchutapuram.
- APSEZ area comes down to 1300.82hc
- Fifteen hundred acres allotted to HPCL at APSEZ was cancelled.
- Fails to achieve exports of Rs10,000 crores
- No response to invest after recession.
Reasons for failure for APSEZ
- Global market down fallout
- Pressure from industrialists’ lobby.
- Government fails to provide power and other basic amenities in the SEZ.
- Lease charge and annual rent was more than the prevailing rate of land outside the zone
Have SEZs failed to take off in India?
Many SEZs have failed to bring in foreign capital and create employment as per the latest reports. As a result, demands for ‘de-notification’ of SEZs have come up around the country. An enclosed piece of land becomes a legal entity – a Special Economic Zone – once a ‘notification’ is issued by the central government. Inspite of the fact that the developer of the SEZ is entitled to various tax and customs benefits, he is bound by prevailing SEZ rules for land use – a specified portion of the land can be used only for hosting export-oriented industrial units. On ‘De-notifying’ the Sez, the land would then be turned in to holding which could then be used for other purposes.
However the SEZ Act, framed in 2005, did not foresee such an eventuality. Land for SEZs has in many cases been acquired by state governments at depressed prices using the coercive provisions of the Land Acquisition Law under the guise of ‘public purpose’ and transferred to private promoters. A recent example of this form of state intervention is the acquisition of 50 acres of prime land near Visakhapatnam by the Andhra Pradesh Industrial Infrastructure Corporation and its subsequent sale to Satyam Computers Limited at a throwaway price for setting up an IT SEZ. Past performance: a reality check
According to government figures for 2007-08, the 206 Sez entities notified till March 2008 attracted a capital of Rs 69,000 crores including Rs 5,400 crores of Foreign Direct Investment (FDI); they provided direct employment to 98,000 workers; and exported goods and services valued at Rs 5,200 crores. However, it was a fallacy to include sectors like IT which were already enjoying special tax and customs treatment. So the purpose of including these sectors was to window-dress the reality. If the SEZ policy was framed with a view to promoting investments and exports in manufacturing and services other than IT/ ITES, as one was made to believe, then the relevant numbers look much worse.
Non-IT/ ITES zones accounted for direct employment of only 32,000 workers, exports of Rs 1,800 crores and FDI of Rs 3,800 crores in 2007-08.These exports were less than 0.3% of India’s exports, and less than 4% of total FDI inflows. The data for the next six months up to September 2008 show only a marginal increase of workers employed and capital deployed, though the number of SEZs had gone up sharply from 201 to 260. Against the backdrop of these numbers, it is obvious that the performance of the SEZs has not been in line with the stated policy goals so far.
Missing competitive advantage?
The FDI inflow of about Rs 99,000 crores for 2007-08 was focused on goods and services for the domestic market, with the exception of IT and IT enabled services. FDI obviously looks at the competitive advantage of a country before investing. The fierce competition with China in exports in today’s tough environment is evident even in the case of traditional exports from India such as textiles and apparel. What one really needs to look at is “Can India come at par with China’s manufacturing competency in areas other than its traditional exports?”
Persisting with folly
But even in this situation where the existing SEZs are unable to sustain themselves and looking up to the government for support and concessions, the central government continues to entertain new SEZ proposals. State governments are also not far behind, with coercive land acquisition activities in full swing. In Karnataka, the state owned Karnataka Industrial Area Development Board (KIADB) has been acquiring land to turn the Mangalore SEZ from a petrochemicals zone to a larger multi-product zone in the face of strong opposition from local communities.
In Andhra Pradesh, the government has been working closely with a private developer, acquiring a major portion of the land for the Kakinada SEZ using the Land Acquisition Act, and employing the police to evict farmers who have resisted handing over their lands to the developer. In both places, the affected people are using multiple means – courts, environmental regulatory bodies, political parties and public protests – to resist the state. In West Bengal, the Trinamool Congress led by Ms.Mamata Bannerjee, recently repealed the Sez act in the state accusing the SEZ units of being exploitative of workers. The government should realize just providing cheap labor; raw materials and infrastructure for manufacturing cannot boost manufacturing output. It is necessary to understand that exemptions cannot substitute efficiency.
Though the Indian and Chinese economies are similar on various accounts, China owes its success of SEZs to certain special characteristics:
UNIQUE LOCATION OF ZONES
China: Shenzhen, Shantou, Zhuhai located near Hong Kong –the major export import facilitator; Xiamen, Fujian located near Taiwan. India: Major concentration was on the four states of Maharashtra, Karnataka, Andhra Pradesh and Tamil Nadu while the underdeveloped regions stay neglected.
China: Premier SEZ Shenzhen covering almost 20,000 hectares exports more than whole of India. India: Mini SEZs covering only 10 Ha also prevalent that cannot by any means lead to world class infrastructural facilities
DECENTRALIZATION OF POWER
China: Easy going decentralizing policy in favor of provinces and local authorities India: Authority delegation shared by Centre and State leading to lack of co-ordination
STRONG DOMESTIC MARKET
China: Focus on upliftment of subsistence economies along with basic SEZ objectives India: Main focus on export promotion with disregard to growth in the underdeveloped regions.
China: On contract basis, stand terminated on expiry of term India: Labor policy worker friendly rather than investor oriented
China: Easier borrowings due to low rates of interest (4-6%) offered by local commercial banks. India: Rate of interest as high as 11-13% making loans dearer; restrictions on borrowings from OBUs
Conclusion-The road ahead
The concept of SEZ started by the govt. in April 2000 is bringing a whole lot of boom in the Indian Economy, as it fetches foreign currency for the Indian pockets, thereby promoting trade between the nations. Also the SEZ’s are characterized by duty free imports. They have laws which are more lenient than the laws prevalent in the country. Because of these characteristics, the businesses of SEZ’s are touching great heights.
The following are some of the caveats that the Indian government should keep in mind with regard to Special Economic Zones: * Adequate compensation to be provided to the farmers or giving them a stake in the entire transaction * Acquisition of farmers’ land on lease as is the practice in some other sectors * Provision of policy for sectoral development keeping in mind India’s demography * Provision against formal land acquisition before complete sanction of the SEZ * Debilitation of the economy due to long time lags in revenue generation, contrary to the Chinese scenario * 53% of SEZs are in the sunrise sectors of IT/ITES which stand against the labor intensive requirement of the Indian economy * Newer sectors demand establishment incentives more than the already established IT
“SEZs are like many a good idea, which if distorted and corrupted, will cripple the exchequer, but which if done well can jump-start India’s global corporate forays.”
Cite this essay
Special Economic Zones and Indian Economy. (2016, Oct 11). Retrieved from https://studymoose.com/special-economic-zones-and-indian-economy-essay