Indian Economy | Export-LED Growth Strategy—SEZs Download PDF
India as part of this strategy has set up the following exclusively for promoting exports from the country.
(1) Special Economic Zones (SEZ).
(2) Agriculture Export Zones (AEZ).
(3) Electronic Software Technology Parks (ESTP).
(4) Electronic Hardware Technology Parks (EHTP).
(5) Export-oriented Units (EOU).
The most important or the driver of the export-led growth strategy is being followed first by China and then also by India. It is for promoting SEZs for increasing exports and also accelerating the overall growth rate of economies.
Special Economic Zone (SEZ)
As mentioned previously, export-led growth strategy involves dedicated geographies exclusively for exportables from the country. SEZ is a defined geographical area clearly demarcated with boundary, within the domestic economy, but insulated, known as SEZ.
To provide with a crude example something like a prison insulated from the outside world. Or it is almost like having another country within the same country from an economic perspective. The SEZs are only physically located in the country but for all practical purposes they are as if outside the country and are deemed foreign areas.
With the concept of SEZ, two other concepts emerge—one is the domestic tariff area (DTA) which is the rest of the domestic economy and the other, rest of the world (ROW). The SEZs have world-class infrastructure for manufacturing goods and service providers exclusively for exports. No duties or taxes are payable in the SEZs. All goods coming into the SEZs either from the DTA or ROW would not attract any duty or taxes. No import duty is payable on any imports into the SEZs.
Private and foreign companies can set up industries without any restrictions from the government, except for a small negative list which would not be allowed. Producers in the SEZs would enjoy tax holiday for five years on profits earned and 50 per cent taxes would be payable for the next five years. Labour laws are flexible and contractual employment is permitted. A slight modification to the provisions of the SEZ act has been imposition of minimum alternate tax (MAT) on profits earned inside SEZs.
The basic logic is allowing production without any hindrances of either infrastructure or the government or labour issues. The other is to attract private sector and foreign investment. Ideally, the entire production structure in an economy should operate similarly. However, it may not be possible for large economies as a whole thus the need to create pockets of ideal conditions.
Lack of such conditions lead to delayed production, increased cost of transactions and excessive documentation required for exports, which would all be resolved at the SEZs. SEZs in China have largely been responsible for increasing their exports and overall growth besides attracting significant foreign investment.
Key Features of Special Economic Zones (SEZs)—China and India
|1.||Nature||Manufacturing hubs, integrated townships with commercial, residential, complete with all facilities.||Same, except that apart from manufacturing also processing. Separate SEZ for service sector.|
|2.||Infrastructure||Government provided.||Private developers.|
|3.||Location||Strategic coastal areas.||Coastal and land-locked areas.|
|4.||Decision on location||Government||Private sector.|
|5.||Size||Big over 20,000 hectares.||Small minimum of 500 hectares for multi-products.|
|6.||Number||5 (all operational).||579 (formally approved)|
|7.||Tax holiday||Selective.||All. SEZ developers, units in SEZ.|
|8.||Drivers||Government-driven, well thought out locations.||Private sector-driven.|
|9.||Government||Active and direct.||Passive only in giving approval remaining by the private sector.|
It may be observed that there are notable differences between the Chinese and Indian SEZs. China took a lot of time in deciding the locations of SEZs after considering all aspects such as strategic and proximity to important centres. SEZs are driven by the Government in China while their counterparts in India are being driven by the private sector.
SEZ and EPZ
The government prior to SEZs had the concept of export processing zones (EPZs) also known as free trade zones, first one being the following:
Kandla Free Trade Zone (KFTZ) during 1965, followed by seven other EPZs in the country.
Santa Cruz Electronic Export Processing Zone (SEEPZ), Mumbai.
Visakhapatnam Export Processing Zone (VEPZ), Andhra Pradesh.
Surat Export Processing Zone (SEPZ), Gujarat.
Noida Export Processing Zone (NEPZ), Uttar Pradesh.
Falta Export Processing Zone (FEPZ), West Bengal.
Chennai Export Processing Zone (CEPZ), Tamil Nadu.
Cochin Export Processing Zone (CEPZ), Kerala.
The experience with EPZs has not been particularly good in terms of export performance and there are a number of inherent limitations. Activities were primarily processing in nature.They have played only a supplementary role in increasing overall exports from the country and have logistics issues. The SEZs are seen as a way out for the EPZs. There are some key differences between the earlier EPZs and the now promoted SEZs.
|Role||Supplementary in increasing exports.||Primary and dominant role in exports increasing exports and improving share in world trade.|
|Nature||Only export-oriented … * activities.||Integrated townships with all facilities.|
|Area norms||Not specified.||Minimum 500 hectares for multi products and 100 hectares for single products.|
|Infrastructure||Government provided.||Private developers.|
|Range of activities||Primarily processing and some manufacturing.||Manufacturing and IT, sector-specific.|
|Value addition norms||Yes.||No.|
|Foreign investment||Not permitted.||Permitted.|
|Sale to DTA||Up to a specified percentage of production.||Against foreign exchange only.|
|Domestic banks||No.||Yes. Would operate as off-shore banking units (OBU) and the same status as if operating outside the country.|
The SEZs are much broader and will play a more dominant role in increasing exports and also accelerating private and foreign investments, than EPZs.
Status of Special Economic Zones (SEZs) in India, a first step all the EPZs have now been designated as SEZs. Promotion of SEZs in India is through the SEZs Act 2005. The government has formally approved 579 SEZs, 363 notified of which 122 are operational. Though in recent times due to global slowdown and also problems of land acquisitions the pace in setting up of SEZs as slowed down. Once all the SEZs are operational, it would have come across an investment of over Rs. 5,00,000 crores, the highest ever in India outside the government and provide direct employment to over 10 lakh people and another 10 lakh as indirect employment.
It is likely to increase the exports exponentially and double our share from the present level of just over 1 per cent in world exports of goods over the next decade. SEZs in India are seen as a signal of the high degree of openness, innovativeness, unparallel, unprecedented, bold initiatives surpassing even China in terms of the number and expected wide impact of such SEZs in India. They are the next generation drivers of exports, investments and growth and also have the potential and power to transform the economy beyond the realms of reality.
Opposition to SEZs
There are a number of reasons for the SEZs model shrouded with controversies some
genuine, others mere apprehensions and some misplaced notions.
(1) First and foremost is the revenue loss to the government on account of various tax exemptions of over ? 1,00,000 crores.
This is true, however, but then the tax exemptions should be seen in the larger context of overall gains likely to accrue, that of increased exports, investments and employments generated. In any case, tax exemptions are not for ever but only for five years. Already MAT has been introduced recently.
(2) Lack of transparency in land acquisition,, exploitative tendencies of real estate developers, issues relating to resettlement and rehabilitation of those displaced. These are genuine concerns. But the recently passed land bill is likely to address these concerns.
(3) Arable and fertile land would be acquired for SEZs adversely affecting production and threatening food security. This is not brought out by facts.
All SEZs once operational will occupy only 0.015 per cent of the land area and onl.y 0.1 per cent of the arable land in the country. This is not any material shift away from agriculture to affect production or food security in the country.
(4) Private developers will view SEZs more as real estate project rather than the infrastructure projects. The government to obviate this has strict area norms and completion schedules.
(5) Units would get relocated from DTA into SEZs to take benefit of various tax exemptions. The objective of SEZs is to promote exports and only those units would get relocated who have sizeable export market and not those who view DTA as their markets (6) SEZs would create ‘islands of prosperity’ and ‘oceans of glooms’ accentuating inter- and intra-regional imbalances.
SEZs are supposed to be developed through private resources and as self-contained for all public utilities insulated from DTA. Investments being made in SEZs will definitely have multiplier effect beneficial for the area around SEZs.
(7) The heavy investment made by private developers would ‘crowd-out’ private investment in the manufacturing sector leading to their lesser growth. This is solely perceived but not borne out by facts.
(8) Resources available within DTA would get diverted from DTA into SEZs adversely impacting investment in DTA.
All the SEZs together constitute a very small part of the DTA and can at best have very limited impact on domestic resources. However, SEZs would also provide for local employment and market for local goods.
(9) Even a country like China which has pioneered the concept of SEZs has only five SEZs, whereas in India there will be more than five hundred SEZs. The government has been criticized for acting in abundance haste rather than a cautious approach in approving SEZs in India.
On first look the criticism is well-taken. However, it is better to understand each SEZs in China is spread over 30,000 hectares. The largest SEZ in China at Shenzen is over 49,000 hectares.
Even the largest SEZs and only a few of them in India would not be over 10,000 hectares. Many of them will be in the range of 1000—2000 hectares. India’s topography does not permit bigger SEZs without encroaching arable land and the already endangered forest cover.
The other is the fact that there has been tremendous positive response from the private sector and confidence in the success of SEZs in India. The government did not want to dampen the spirits of the private sector Moving Forward in SEZs
Most of the issues around SEZs have now been resolved and the government is committed to ensure timely completion of the projects which are already notified. Notifications of those already approved ensure that the developers do not violate area norms. However, still there are deeper issues in going forward in SEZs in India.
(1) So far, all the work relating to SEZs is being handled by the Ministry of Commerce, Government of India.
, It may be difficult for the Ministry to address the operational bottlenecks, exercising effective control and supervision on private developers. This may increasingly become difficult in future.
There will be a need for an independent government body to have complete responsibility of development, growth of SEZs in India. Something like the IRDA, SEBI and other regulators in the economy. But therein lies the catch of the regulator not bringing back ‘regulations’. It is to play the role of a facilitator, providing oversight mechanism ‘permitting’ rather than ‘preventing’.
(2) From the approvals given by the central government, SEZs is concentrated in Southern states (44 per cent) and western India (29 per cent) and are mostly in the area of IT and allied areas. This could have implications both for inter- and intra- regional imbalances.
Over 66 per cent of the approval provided is for IT, ITeS, biotechnology and other services and not for manufacturing hubs as in the case of China.
(3) Similarly many SEZs are in landlocked areas in UP, Punjab and Haryana. How do they find an exit route for export of products?
(4) There would be a need to upgrade infrastructure around SEZs especially road, big enough to accommodate the increased traffic coming out of SEZs.
Similarly ports and airports would need to be upgraded which would not come in the domain of SEZs developers. China has constructed huge warehousing facilities near the ports and airports. India needs to construct similar warehouses and also augment capacities of existing warehousing facilities at all the major ports and airports.
The above would need to be addressed urgently by the government going forward. One thing is sure that there cannot be any rethinking on SEZs. It is too late to debate on its need or the model adopted. The SEZs model in India has to be made a workable and as a viable proposition and more importantly it has to deliver. That should the broad approach to be followed collectively by all concerned. SEZs in India as mentioned previously, has the potential to transform the economy but issues raised above would also need resolution.
This strategy in India, even though similar to the concept used in China, but strikingly different in the model adopted by India. As the first of its kind in the world in terms of the large number of SEZs, their relative small sizes, many are landlocked, private sector- driven model.
In ‘its success in India’, will lie ‘its’ ability of being accepted and emulated as a strategy for export-orientation and rapid transformation of economies. The recent global slow down has impacted exports and also development of SEZs in India. But these are temporary and would reverse as economies begin to recover and so will the pace of growth of SEZ in future.
Agri Export/Economic Zones (AEZs)
Agricultural sector in India offers a great scope of producing exportables. This helps the farmer in getting a better price for his produce besides dispenses the complex middle¬men route. It is also seen as one of the ways for modernization, technology diffusion and promoting intensive research and development.
India is the largest producer of various kinds of agricultural produce, as discussed in the section on Agriculture, but not commensurate share in either total exports from the country or world exports of agricultural goods. Promoting agri exports would require handholding of the farmers by the government unlike exporters of manufactured goods, given their relative little knowledge of export markets for their produce.
The concept of having similar zones like SEZs for agriculture-related products was mooted in the EXIM policy 2001-2002 (this policy is now known as the foreign trade policy), to play the role of key facilitator in boosting agri exports of the country and also a mechanism for increasing income levels of farmers.
Agriculture being a state subject implied a large role of the state governments. Development of such zones is largely the responsibility of the respective state governments in identification of the specific products over clusters and in geographical contiguous areas. AEZs in India presently have been ‘product-specific’ spread across a number of clusters in different states are as follows:
(1) Fruits exports zones.
(2) Flowers export zones. ~
(3) Dry fruits exports zones.
(4) Spices export zones.
(5) Onion export zones.
(6) Potato export zones.
(7) Cereal export zones.
The above zones have achieved the first set of objectives of identification of‘agri exportables’ from India. However, their performance in terms of their increased exports has not been encouraging so far. Probably it is the apathy of the state government in their promotion or lack of vision in promoting agri exports.
Farmers also need to be sensitized, imparted knowledge and encouraged to export. However, as explained in the section on Agriculture, our traditional methods, absence of modernizing, technological advancements and R&D are some of the stumbling blocks in making AEZs really effective in increasing agri exports from the country.
The state governments also need sensitizihg in playing their due role in making the AEZs a successful model and also for other economies to follow.
Technology Parks and EOUs
Besides, SEZs and AEZs, as a way to promote the government has dedicated parks catering to needs of various sectors and assist in increasing their exports. Some of these parks are detailed below:
Software Technology Parks of India (STPI).
Electronic Hardware Technology Parks (EHTPs).
Biotechnology Parks (BTPs).
Export-oriented Units (EOUs).
All of these are a miniature version of the SEZs model in terms of being dedicated for exports with similar facilities. Even the foreign trade policy does not distinguish separately for purposes of their promotion but treated as one category of STPI/EHTP/BTP/EOU and the other category as SEZs addressed not by the policy but by the SEZ act.
These can also be seen as a part even though small part of India’s overall efforts at export-led growth strategy. These technology parks are also dedicated to promote exports of hardware, software and the emerging area of biotechnology from the country. These parks come under the Ministry of Information and Technology, Ministry of Biotechnology, respectively, of Government of India and can be set up by the private sector or even . through foreign investment.
The units located in these parks enjoy similar benefits as those in SEZs such as tax holiday reviewed every year in the foreign trade policy but do have a sunset clause i.e., a time period by which the tax exemption would be withdrawable.
A certain percent can be sold in the DTA by the STPIs, EHTPs and BTPs as notified from time-to-time. Similarly, all these are also permitted to do inter unit sales and undertake sub-contracting. They also have to fulfill norms of positive Net Foreign Exchange Earnings (NFE) which is earning foreign currency over and over that paid through their imports.
These dedicated technology parks try to tap the immense overseas market for export of both hardware as well as software and also combine the inherent advantage which India enjoys in the services sector. Much of the increased exports of the services can be attribute . to these technology parks in recent times. At present, there are thirty-three STPI and twelve EHTPs spread throughout the country.
Export-oriented Units (EOUs)
As a concept, EOUs were units which had a great export potential but for logistics issues or circumstances, could not be located in any SEZ or EHTP or STPI, and were accorded the status of EOUs which entitled them to all the benefits available to any unit holder ‘ in an SEZs. EOUs are not location-r.specific and can be located anywhere in the country.
The concept of EOUs was mooted way back in 1981 and was seen as playing an important role in export reorientation till the SEZs came into the picture.
An EOUs should have a minimum investment in plant and machinery of Rs. 100 lac. The status of an EOUs also has similar pre-conditions like positive NFE which is exports greater than imports and earning foreign exchange like units in STPIs, EHTPs and BTPs.
The foreign trade policy from time-to-time has laid down norms for EOUs such as minimum export performance, NFE to exports ratio. They are also permitted to sell in the DTA certain quantities as may be prescribed by the policy.