ECONOMIC GEOGRAPHY AND SEZs IN INDIA

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1 Indian Development Review, Vol. 9, No. 2, (July-December, 2011) : ECONOMIC GEOGRAPHY AND SEZs IN INDIA T. Raghu * INTRODUCTION India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia s first EPZ set up in Kandla in With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April Kandla Special Economic Zone (KASEZ) in Gujarat was the first Indian SEZ. It was set up in 1965 and in fact KASEZ was the first SEZ to be set up in Asia. Kandla SEZ is also the largest multi-product SEZ in India, spread over 1.2 sq miles. Kandla SEZ is located just 9 km away from the modern-all-weather Indian port of Kandla. SEZ IN INDIA India over the past decade has progressively opened up its economy to face the challenges and opportunities of the 21st century. To instill confidence in investors and to signal the Government s commitment towards a stable SEZ policy regime the Special Economic Zones Act, 2005 was passed by the Parliament in May, The Act came into effect on February 10, Out of the 234 formal SEZ approvals given till date, 80 approvals are for Textiles and Apparels, Leather Footwear, Automobile components, Engineering and other sector specific SEZs which would involve labor intensive manufacturing. The employment projected in the 63 SEZs notified so far is over 1,575,452 additional jobs. SEZs are thus going to lead to creation of employment for large number of unemployed rural youth. Investment of the order of Rs. 100,000 crore including FDI of US $ 5 to 6 billion is expected by the end of December ,000 direct jobs are expected to be created by December Information Technology (IT) Parks, on the other hand are an important tool of industrial development. Creation of IT Infrastructure is being given emphasis so that Industry can utilize this * Asst. Professor of Economics, Ramakrishna Mission Vivekananda College, (Autonomous), Mylapore, Chennai-04, (raghu9083@gmail.com)

2 284 T. RAGHU infrastructure for modernization to increase productivity. India has emerged as the 21st century s information technology powerhouse, offering many advantages as a global sourcing hub, especially for IT enabled services (ITeS) and Business Process Outsourcing (BPO). State-of-the-art infrastructure in countrywide IT Parks, highly skilled manpower, low development costs and a time zone that allows round-the- clock operations establishes India as world s preferred supplier of information technology services. Feedback Ventures provides a wide array of services to large and small SEZs and IT Parks across the country. HISTORY OF SEZs IN INDIA The world first known instance of SEZ have been found in an industrial park set up in Puerto Rico in In the 1960s, Ireland and Taiwan followed suit, but in the 1980s China made the SEZs gain global currency with its largest SEZ being the metropolis of Shenzhen. From 1965 onwards, India experimented with the concept of such units in the form of Export Processing Zones (EPZ). But a revolution came in 2000, when Murlisone Maran, then Commerce Minister, made a tour to the southern provinces of China. After returning from the visit, he incorporated the SEZs into the Exim Policy of India. Five year later, SEZ Act (2005) was also introduced and in 2006 SEZ Rules were formulated. The History of SEZs in India suggests that the seeds of the basic concept of Special Economic Zone (SEZ) were sown in the mid sixties. Further, the History of SEZs in India suggests that the basic model of the present day Indian Special Economic Zone was structured with the establishment of the first Export Processing Zone (EPZ) at Kandla in the year Several other Export Processing Zones were set up at various parts of India in the subsequent years. The lack of good Government of India economic policy and inefficient management soon became the detrimental factors for the success of these Export Processing Zones. Thus, the performance of these Export Processing Zones of India fell short of expectations. The modern day Special Economic Zone came in to existence because the economic reforms incorporated 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 growth attained in the early The economic reforms incorporated during the 1990s did not produce the desired results. The Indian manufacturing sector witnessed a sudden dip in the overall growth of the industry, during the second-half of 1990s. The History of SEZs in India suggests that red tape, lengthy administrative procedures, rigid labor laws and poor physical infrastructural 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 facilitate easy entry of Foreign Institutional Investors (FIIs) in to the Indian economic system. Furthermore, the legal framework of Indian economy was not strong enough to prevent misuse of Indian markets by the foreign investors. Thus, the

3 ECONOMIC GEOGRAPHY AND SEZS IN INDIA 285 lack of investor friendly environment in India prevented growth of Indian industry, in spite of implementation of liberal economic policy by the central government. This resulted in the formation of a much larger 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 of India are well complimented by the provisions of the Acts and Rules of Special Economic Zone. A number of meetings were held across India for the formulation of - The Special Economic Zones Act, 2005, which was subsequently passed by Parliament in May The SEZ Act, 2005 and SEZ Rules became effective on and from 10th February The SEZ Act 2005 defines the key role for the State Governments in Export Promotion and creation of infrastructural facilities. A Single Window SEZ approval mechanism has been facilitated through a 19 member interministerial SEZ Board of Approval or BOA. And the decision of the SEZ Board of Approval is binding and final. Some of the Important SEZ in India are as follows Karnataka Biotechnology and Information Technology Services SEZ on biotechnology sector in Bangalore s Electronics City, over an area of 43 acres. Shree Renuka Sugars Limited SEZ on sugarcane processing complex covering 100 hectares, comprising a sugar plant, power station and distillery, at Burlatti in Belgaum district. Ittina Properties Private Limited and three other SEZs in IT sector, covering electronics, hardware and software sectors in Bangalore, over an area of hectares. Wipro Infotech SEZ on IT/ITES at Electronics City, Sarajpur Bangalore Hewlett Packard India Software Operation Pvt. Ltd. SEZ on IT. Food processing and related SEZ services in Hassan, over an area of hectares. SEZs on pharmaceuticals, biotechnology and chemical sectors in Hassan, covering of hectares. SEEPZ Andheri (East), Mumbai. Khopata Multi-product, Mumbai. Navi Mumbai Multi-product, Mumbai. Salt Lake Electronic City, West Bengal. Manikanchan Jems and jewelery, West Bengal. Calcutta Leather Complex, West Bengal. Falta food processing unit, West Bengal. 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. SEZs in India functioned from to under the provisions of the

4 286 T. RAGHU Foreign Trade Policy and fiscal incentives were made effective through the provisions of relevant statutes. To instill confidence in investors and signal the Government s commitment to a stable SEZ policy regime and with a view to impart stability to the SEZ regime thereby generating greater economic activity and employment through the establishment of SEZs, a comprehensive draft SEZ Bill prepared after extensive discussions with the stakeholders. A number of meetings were held in various parts of the country both by the Minister for Commerce and Industry as well as senior officials for this purpose. The Special Economic Zones Act, 2005, was passed by Parliament in May, 2005 which received Presidential assent on the 23rd of June, The draft SEZ Rules were widely discussed and put on the website of the Department of Commerce offering suggestions/comments. Around 800 suggestions were received on the draft rules. After extensive consultations, the SEZ Act, 2005, supported by SEZ Rules, came into effect on 10th February, 2006, providing for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments. The main objectives of the SEZ Act are: (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. The SEZ Act 2005 envisages key role for the State Governments in Export Promotion and creation of related infrastructure. A Single Window SEZ approval mechanism has been provided through a 19 member inter-ministerial SEZ Board of Approval (BoA). The applications duly recommended by the respective State Governments/UT Administration are considered by this BoA periodically. All decisions of the Board of approvals are with consensus. The SEZ Rules provide for different minimum land requirement for different class of SEZs. Every SEZ is divided into a processing area where alone the SEZ units would come up and the non-processing area where the supporting infrastructure is to be created. The SEZ Rules provide for: Simplified procedures for development, operation, and maintenance of the Special Economic Zones and for setting up units and conducting business in SEZs; Single window clearance for setting up of an SEZ;

5 ECONOMIC GEOGRAPHY AND SEZS IN INDIA 287 Single window clearance for setting up a unit in a Special Economic Zone; Single Window clearance on matters relating to Central as well as State Governments; Simplified compliance procedures and documentation with an emphasis on self certification APPROVAL MECHANISM AND ADMINISTRATIVE SET UP OF SEZs The developer submits the proposal for establishment of SEZ to the concerned State Government. The State Government has to forward the proposal with its recommendation within 45 days from the date of receipt of such proposal to the Board of Approval. The applicant also has the option to submit the proposal directly to the Board of Approval. The Board of Approval has been constituted by the Central Government in exercise of the powers conferred under the SEZ Act. All the decisions are taken in the Board of Approval by consensus. The Board of Approval has 19 Members. ROLE OF STATE GOVERNMENT IN ESTABLISHMENT OF SEZ UNITS A Special Economic Zone in short SEZ is a geographically bound zones where the economic laws in matters related to export and import are more broadminded and liberal as compared to rest parts of the country. SEZs are projected as duty free area for the purpose of trade, operations, duty and tariffs. SEZ units are self-contained and integrated having their own infrastructure and support services. Within SEZs, a units may be set-up for the manufacture of goods and other activities including processing, assembling, trading, repairing, reconditioning, making of gold/silver, platinum jewellery etc. As per law, SEZ units are deemed to be outside the customs territory of India. Goods and services coming into SEZs from the domestic tariff area or DTA are treated as exports from India and goods and services rendered from the SEZ to the DTA are treated as imports into India. BENEFITS OF SEZ Apart from providing state-of-the-art infrastructure and access to a large welltrained and skilled work force, the SEZ also provides enterprises and developers with a favorable and attractive framework of incentives which include 100% income tax exemption for a period of five years and an additional 50% tax exemption for two years thereafter. Similarly, 100% FDI is also provided in the manufacturing sector. Exemption from industrial licensing requirements and no import license requirements is also given to the SEZ units. VARIOUS SEZ UNITS IN INDIA The area under SEZ covers a wide range of zones, including Export Processing Zones (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Trade Zones (FTZ),

6 288 T. RAGHU Free Ports, Urban Enterprise Zones and others. Usually the goal of an SEZ structure is to increase foreign investment in the country. At present there are fourteen functional SEZs located at Santa Cruz (Maharashtra), Cochin (Kerala), Kandla and Surat (Gujarat), Chennai (Tamil Nadu), Visakhapatnam (Andhra Pradesh), Falta and Salt Lake (West Bengal), Nodia (Uttar Pradesh), Indore (Madhya Pradesh), Jaipur (Rajasthan), etc. ADVANTAGES AND DISADVANTAGES OF SEZ A SEZ unit which has been set up for carrying on manufacturing, trading or service activity has both advantages as well as disadvantages. SEZ advantages are quite far more as compared to its disadvantages which are almost negligible. ADVANTAGES 15 year corporate tax holiday on export profit 100% for initial 5 years, 50% for the next 5 years and up to 50% for the balance 5 years equivalent to profits ploughed back for investment. Allowed to carry forward losses. No licence required for import made under SEZ units. Duty free import or domestic procurement of goods for setting up of the SEZ units. Goods imported/procured locally are duty free and could be utilized over the approval period of 5 years. Exemption from customs duty on import of capital goods, raw materials, consumables, spares, etc. Exemption from Central Excise duty on the procurement of capital goods, raw materials, and consumable spares, etc. from the domestic market. Exemption from payment of Service Tax. The SEZ unit is 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 unrealized export bills is permitted up to an annual limit of 5% of their average annual realization. No routine examination by Customs officials of export and import cargo. Setting up Off-shore Banking Units (OBU) allowed in SEZs. OBU s 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. The Government has exempted SEZ Units from the payment of stamp duty and registration fees on the lease/license of plots. External Commercial Borrowings up to $ 500 million a year allowed without any maturity restrictions.

7 ECONOMIC GEOGRAPHY AND SEZS IN INDIA 289 Enhanced limit of Rs crores per annum allowed for managerial remuneration. DISADVANTAGES Revenue losses because of the various tax exemptions and incentives. Many traders are interested in SEZ, so that they can acquire at cheap rates and create a land bank for themselves. 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. POLLUTION AND DEVELOPMENT Sustainable Development is closely linked with environment and depleteable resources. In a mad rush for Market Economy the developed countries forgot to honour nature and environment. More than two hundred years of industrial development and very recently the theory of development at any cost have made the existence of life (men, animals, plant) in this planet uncertain or precarious. Polluted air, water and land and global warming have now appeared to be hurdle to sustainable development. We the human being often thinks that the earth is mean solely for us i.e. for human being. Summary of Physical Exports from SEZs during (Values Rs. in crore) Year Central Govt. SEZs State Govt/pvt. SEZs established prior tosez Act, SEZs notified under SEZ Act, Total The growth rate of Exports from SEZs in is % as compared to The amount of exports of Central Government was Rs Crores and State Govt. private was export the amount of Rs crores. Export SEZs notified under Act, 2005 is amount of Rs Total amount of export during the year of is Rs EXPORT PERFORMANCES Exports from the functioning SEZs during the last three years are as under: Year Value (Rs. crore) Growth Rate (over previous year) ,854 39% ,314 32% % ,615 52% ,638 93% ,689 93% ,20, %

8 290 T. RAGHU The status of Exports from the functioning of SEZs during the last few years as follows, Exports from SEZs in was Rs. 13,854 crores. It is 39% increase compared to previous year. In and register in Rs. 18,314 Crores and Crores respectively. It is compared to past years, the growth rate of Export from functioning SEZ is decreased to 32% and 25% respectively. After the periods of , , and the value of Exports increased to 34,615 crores, 66,638 crores, 99689crores and crores respectively and the growth rate of these years were 52%, 93%, 93% and India over the past decade has progressively opened up its economy to face the challenges and opportunities of the 21st century. To instill confidence in investors and to signal the Government s commitment towards a stable SEZ policy regime the Special Economic Zones Act, 2005 was passed by the Parliament in May, The Act came into effect on February 10, 2006.Out of the 234 formal SEZ approvals given till date, 80 approvals are for Textiles and Apparels, Leather Footwear, Automobile components, Engineering and other sector specific SEZs which would involve labor intensive manufacturing. The employment projected in the 63 SEZs notified so far is over 1,575,452 additional jobs. SEZs are thus going to lead to creation of employment for large number of unemployed rural youth. Investment of the order of Rs. 100,000 crore including FDI of US $ 5 to 6 billion is expected by the end of December ,000 direct jobs are expected to be created by December Information Technology (IT) Parks, on the other hand are an important tool of industrial development. Creation of IT Infrastructure is being given emphasis so that Industry can utilize this infrastructure for modernization to increase productivity. India has emerged as the 21st century s information technology powerhouse, offering many advantages as a global sourcing hub, especially for IT enabled services (ITeS) and Business Process Outsourcing (BPO). State-of-the-art infrastructure in countrywide IT Parks, highly skilled manpower, low development costs and a time zone that allows round-the- clock operations establishes India as world s preferred Supplier of information technology serviceces. CONCLUSION Global environmental deterioration is continuing. It has to be arrested for men s future. Intergenerational equity is to be achieved. This quality is to be achieved. This equity has been endangered by environmental disorder. This generation should see or leave its house in order so that future generations inherit an earth that is at least as environmentally soothing and as livable as it is today. Development through SEZs is a temporary phenomenon. SEZs have proved to be a menace to human society and environment: unplanned undemocratic, uneconomic, environment destroying SEZ s have not only damaged nature in several countries but also exposed man s unsatiable greed and helplessness again nature forces.

9 ECONOMIC GEOGRAPHY AND SEZS IN INDIA 291 References Amitendu Pandit and Subhomoy Bhattacharjee (2008 ), Special Economic Zones in India: Myths and Realities, Anthem Press Data: SEZs Deliver on All Counts, Business Standard, May 30, Ministry of Commerce and Industry, Last accessed 26th Aug, Ministry of Commerce and Industry, Statewise Distribution, sezindia.nic.in/htmls/statewisedistribution-sez.pdf, Last accessed 20th Aug, Aradhna Aggarwal (2007), SEZs in India A Quantitative Assessment of Costs and Benefits, May Aradhna Aggarwal (2006), Special Economic Zones Revisiting the Policy Debate, Economic and Political Weekly. The Best Policy would be to have no SEZs, the-best-policy-would-be-to-have-no-sezs/175628/0, last accessed 10th Aug., Vinayak Chatterjee (2008), The Ongoing SEZ Saga, Business Standard, June Chee Kian Leong (2007), A Tale of Two Countries: Openness and Growth in India and China, June 2007.