Globalisation, since its conception has played an important role in the development of the world economy. It has helped build a better understanding between nations via trade. The very seeds of this phenomenon had been laid long ago, in the pre-medieval times. Although the origin is debated amongst historians and economics, we can attribute its birth to Alexander the Great.
He took the initiative to establish links eastwards with Chandragupta Maurya for overland routes between the Mediterranean, Persia, India, and Central Asia. Following that, the first ‘trans-world trade’ appeared in the 1st century of the Common Era in the empire of China. In the proceeding centuries, the spread of Islam and trade relations between the Indian sub-continent and the Mediterranean region flourished.
But it was not until the time the American and French revolution occurred in or timeline, which resulted in the creation of Modern state. Additionally, with the contribution of the industrial revolution, the 18th Century thus marked the beginning of the modern-era globalisation.
With the merging of modernity and globalisation, the socio-economic scenario across the world saw the creation of international trade laws. These laws were the foundation of a revolutionary economic policy that brought with it a whole bunch of merits and demerits- The Special Economic Zone (SEZ).
The World Bank in 2008 defined an SEZ as an area which typically included- “geographically limited area, usually physically secured (fenced-in); single management or administration; eligibility for benefits based upon physical location within the zone; separate customs area (duty-free benefits) and streamlined procedures.” SEZs are therefore areas within the boundaries of a nation, comes under the jurisdiction of the nation, but the trade and business laws are completely separate from the country.
History of SEZ in India
In the 1990’s, India was suffering a huge blow due to the economic crisis it faced. It was during this time, that the wake of globalisation was first felt around the nation. The then finance minister of the UPA led central government, Dr. Manmohan Singh had introduced the economic liberalisation plan in 1991. Huge reforms were undertaken by the government to improve the financial and social condition of our country and uplift the citizens of India.
While this led to opening of a large number of export processing zones (EPZ), India was yet to get itself an SEZ. EPZs failed to attract any kind of investment, even though the basic idea was similar to that of SEZ. It was not until the beginning of the new millennium, under the leadership of Prime Minister Atal Bihari Vajpayee, the first SEZ emerged in India.
In April, 2000, the government introduced SEZ. It was structurally similar to the model that China had implemented to boost investments and trade with the world. The Chinese policy had existed since 1978, when the 3rd Plenary Session of the 11th Central Committee of the Communist Party of China, initiated its policy of reforming and opening up in response to the failed Maoist economic reforms.
The model had four principle factors- the construction caters to attracting and utilising foreign capital, primary economic forms are either Sino-foreign joint ventures or wholly foreign enterprises, focus on export-oriented products, economic activities are driven by market forces. Building on these ideas, the Indian model of SEZ had targeted to simulate both foreign and domestic investment, boost India’s exports, and create new employment opportunities.
The Special Economic Zone Act, 2005 was passed under the tenure of Prime Minister Manmohan Singh. This act, aptly amended India’s foreign investment policies and also converted all of the existing EPZs into SEZ. This change was largely noticed in major zones of the likes of Santa Cruz, Cochin, Kandla and Surat, Chennai, Visakhapatnam, Falta, Noida and Indore.
Furthermore, the government has also accepted proposals for ancillary smaller SEZs which were to be presented before the Indian Board of Approval. The complete procedure to develop a proposed SEZ or to build a unit in an SEZ has been laid down in SEZ Rules, 2006. Ever since then, the Indian SEZ project has been expanding gradually.
SEZ’s as a part of Indian Economy
Special Economic Zones in our country are broadly categorised into four types on the basis of their size. SEZs bigger than 1000 hectares of area are termed as Multi-sector SEZs while the ones that range in 100 hectares are called sector-specific SEZ. Free Trade and Warehousing Zones (FTWZ) are the kind of SEZs that are around 40 hectares in size while the smallest ones that have a spread of 10 hectares are the SEZs for Technology, handicraft, non-conventional energy, gems & jewellery.
Another way to classify them is on the basis of the nature and function of the SEZs. There are Free Trade Zones (FTZs), ), export processing zones (EPZ), free zones (FZ), industrial estates (IE), free ports, urban enterprise zones and others. Usually the goal of a structure is to increase foreign direct investment by foreign investors, typically an international business or a Multi-National Corporations.
The Department of Commerce has an official list of SEZ locations where a company can build their outlets. With 30% of the operational SEZs involved in manufacture, a lot of companies wish to directly be engaged with manufacturing in India. The coastline provides ample raw materials as well as steady export services, is therefore a major attraction to such companies. If a company wishes to build a SEZ in India, it has to apply for it using the Form-A available on the Department of Commerce website.
The proposal will be first considered by the respective state government where the SEZ is to be located, before it receives formal backing from the Board of Approval. The basic objectives that India wants to achieve using this policy are- to encourage the manufacturing sector, attract substantial foreign direct investments (FDI), boost infrastructure development and most importantly, generate employment.
Merits of SEZ’s
The SEZ model provides a number of incentives and facilities to companies functioning in an SEZ or proposes to construct one. On the basis of export profits, the government offers fifteen years of tax holiday. The first five years will be 100% exemption, followed by 50% exemption in the next five years and finally, up to 50% exemption in the final five years equivalent to the profits earned back for investments.
Imports and domestic procurement of goods will be duty free for development, operation and maintenance of the SEZ units. Further tax exemptions include exemption from Central Sales Tax, Service Tax and State sales tax. All of these have been put under the GST and supplies to SEZs are zero rated under IGST Act, 2017.
Other than the tax and duty exemptions, the Government of India also allows the SEZ units to carry forward losses incurred in a fiscal year. This allows the company to carry over a tax loss into the future years to offset a profit. The SEZ unit is also permitted to realize and repatriate to India the full export value of goods or software within a period of twelve months from the date of export.
“Write-off” of unrealised export bills is permitted up to an annual limit of 5% of their average annual realisation. No routine examination is conducted by Customs officials of export and import cargo. SEZs are also allowed to setup Off-shore Banking Units (OBU). OBU’s are allowed 100% income tax exemption on profit earned for three years and 50 % for next two years. Exemption from requirement of domicile in India for 12 months prior to appointment as Director is another major advantage that helps maintain stability and also allows a company to venture into a SEZ anytime they want to.
Since SEZ units are considered as ‘public utility services’, no strikes would be allowed in such companies without giving the employer 6 weeks prior notice in addition to the other conditions mentioned in the Industrial Disputes Act, 1947. The Government has exempted SEZ Units from the payment of stamp duty and registration fees on the leasing or license of plots too.
Finally, external Commercial Borrowings up to US$500 million a year is allowed without any maturity restrictions and enhanced limit of IN₹2.40 Crore per annum allowed for managerial remuneration.
With the massive amounts of benefits that SEZs have provided, there performance and contribution to the growth of the Indian economy has been significant. Exports worth IN₹22,840 Crore had been achieved in the fiscal year 2005-06. Within four years, the figures jumped to a whopping IN₹2,20,711 Crore in 2010.
Ever since that, there has been a steady growth in the exports. As on June 2011, the net investments in the sector almost reached US$40 billion. These include investments on central government, state and private SEZs. They were also able to generate FDI worth US$2.4 billion from Asian, European and North American Giants. We can safely say that SEZs, being a young entity in the economic scene, have done fairly well in the past decade.
Demerits of SEZ
The most visible disadvantage that our economy faced in the name of promoting SEZs is the loss of revenue that India has incurred due to providing the various revenue and tax exemptions. On top of that, due to this factor, many traders are much more interested in SEZs just to get cheap rates and create for themselves a land banks. Additionally, the number of units applying for setting up EOU’s is not commensurate to the number of applications for setting up SEZ’s leading to a belief that this project may not match up to expectations.
What aggravates the situation is the fact that these powerhouses of manufacturing and control-free industrial enclaves have turned into centres of corruption and scams. Even though there had been large scale development till 2012, the projected export rate that the SEZs were supposed to attain in the following years, were hardly achieved. Unlike China, India was not as successful in implementation of SEZs in the growth of its economy.
A research paper by Meir Alkon of Princeton University claimed that the reason for this lies in the fact that local Indian politicians failed to select SEZ sites that offer maximum development potential. Their criteria of selection were inclined more towards self-serving agendas than towards the growth and development of the region.
The lands were selected either to gain monetary profits or were targeted to create vote banks for the ministers of the area. This for sure, has negatively affected the prospective of SEZs as a tool to improve FDI and exports in India and has hurt the Indian Economy as much as it has contributed to.
Special Economic Zones are excellent centres of innovation and trade. As of January 2018, 423 SEZs have been formally approved by the Indian Approval Board, 31 are in principle approvals, 356 have been given the status of notified SEZs and zones exist as exporting SEZs. Ever since the EPZs were replaced by SEZs, a significant improvement in economic activity in the
Nation, most importantly the exports, as evident by the increase in India’s share of manufacturing exports across the globe with regard to what it was a decade ago.
The sector has reported strong growth, easily outdoing the overall growth in GDP, over the past few years. Yet due to the corrupt nature of many of our politicians, many of India’s SEZ’s now lie vacant, hurting not only economic growth but also equity. As real estate businesses have thrived under the guise of SEZs, rich fertile lands have been diverted away from farmers without any real development.
But every coin has two faces; the implementation of SEZs around the world has been mostly advantageous, China being the biggest and the most successful example. Even though we have similar model as them, the results are disparate, primarily due to external factors.
But just because of improper implementation, the whole idea of SEZ should not be blamed. This model has more positive points than negative ones; hence it is a model global economic philosophy which can definitely partake in the advancement of our country. India is a country where the idea of SEZ is very young. Hence a critical evaluation of the policy will help an ordinary citizen to have a better understanding of the ideology behind it and whether SEZs are actually a boon or a bane.