PERFORMANCE EVALUATION OF SPECIAL ECONOMIC ZONES (SEZs) IN INDIA

PERFORMANCE EVALUATION OF SPECIAL ECONOMIC ZONES (SEZs) IN INDIA No nation was ever ruined by trade -Benjamin Franklin, England Introduction The evolution of international trade has a very tedious timeline and it s still evolving. The traced out history on international trade reveals that it has been practiced even before 19 th century BC 1. It has a profound place in the human agenda for livelihood. This livelihood process started as exchange of goods and services in the form of barter system. The barter system was the long standing form of trading practice. The barter form of trade travelled through various trade routes even before the emergence of civilization. It lost a bit of its scope after the invention of minted coins. The coin was first invented in the form of minted gold and silver in the 6 th Century BC 2. Soon after a major bottleneck arose in the working of barter system which was the induction of paper money into trading arena during the 11 th Century 3. The paper money started making in-roads into the trading community. The livelihood process that started became a source to accumulate National wealth with the increasing importance of currencies. Through its growing importance the currencies gave rise to the next phase in the evolutionary process of international trade in the form of Mercantilism in the 16 th Century. This stressed the need for positive balance of trade and accumulation of foreign exchange reserves (Gold). Mercantilism paved way to the theories of the international trade. Absolute Cost Advantage theory by Adam Smith (1776), Comparative cost advantage theory by David Ricardo (1817), Factor endowment theory by Eli Hecksher and Beril Ohlin (1919), Product life Cycle theory by Raymond Vernon (1966) and New trade theory 4 were the major theories that stressed the need and working of international trade as a formidable weapon to earn foreign exchange reserves. These theories provoked the 1 Stearns, Peter N, William L. Langer (2001), The Encyclopedia of World History: Ancient, Medieval and Modern, Chronologically Arranged, Houghton Milton Company, United States, ISBN: 0-395- 652375. 2 http://rg.ancients.info/lion/article.html 3 Daniel R. Headrick (2009), Technology: A world History, Oxford University Press, pp.85. 4 C. Jeevanandam (2008), International Business, Sultan Chand and Sons, New Delhi, pp. 2.2 2.14. 1

fine-tuning of the existing trade pattern to suit the international trade for the globalised world. The globalised era made the world countries to realise the importance of foreign exchange reserves which started to promote international trade through establishing various international organisations and various promotional measures. The promotional measures involved both the monetary and non-monetary aspects. One such promotional innovation that was introduced to enhance international trade was SEZ. The SEZ was known to be existed in 18 th century in various forms but the modern SEZ was established in the year 1959 in Ireland in the form of Special Economic Zones (SEZ) 5. The SEZ can be defined as Demarcated geographical areas contained within a country s national boundaries where the rules of business are different from those that prevailed in the national territory. These differential rules principally deal with investment conditions, international trade and customs, taxation and the regulatory environment: whereby the zone is given a business environment that is intended to be more liberal from a policy perspective and more effective from an administrative perspective than that of national territory 6. - Thomas Farole The SEZ was introduced with prime purpose of increasing the international trade especially exports and to attract Foreign Direct Investment (FDI) which involved exemptions from monetary and non-monetary barriers when compared to the normal exporting community. The various forms of SEZ are Export Processing Zones (EPZ), Free Trade Zones (FTZ), Enterprise Zones, Free ports, Specialised Zones, etc,. The SEZ were established all over the world but China s SEZs started in 1980 s which was able to taste higher success rates in exports and attracting FDI when compared to other world countries 7. Even though the first SEZ in India was started as an EPZ at Kandla in the year 1965 it did not yield expected results which halted the progress of SEZ in India. After the success story of China, India established five major EPZ during the period 5 Dr. A. Elangovan and S.K.P.Palanisamy (2013), Performance Evaluation of Special Economic Zones, Indian Journal of Applied Research, Vol. 3(10), pp. 73 6 Thomas Farole and GokhanAkinci (2011), Special Economic Zones Progress, Emerging Challenges and Future Directions, World Bank Publications, pp. 3. 7 Ibid, pp.11. 2

of 1980-1990. This gave a major fillip to the growth of EPZ in India which laid the foundation for the separate legal policy in the form of SEZ policy in the year 2000 to provide stable fiscal regime. This policy enabled the conversion of the existing EPZ to SEZ in India. There were 19 SEZs in India before the enactment of the Special Economic Zones Act (2005) 8. Statement of the Problem The SEZ policy (2000) in India gave rise to SEZ where all the EPZ in the country were converted to SEZ. This SEZ policy was put forth to promote the establishment of SEZs in India. This policy assistance enabled vivid growth of SEZ in India. At this juncture, realising the importance of SEZ and the need for a stable administration, the government has passed legislation for the governing of SEZ in the name of SEZ Act (2005). With the SEZ Act coming into force, all the SEZs operating in the country were brought under the purview of SEZ Act. This enabled to create accountability and served as a monitor to assess the performance of the established SEZ. There were only 19 SEZs in the country before the introduction of SEZ Act. The SEZ Act has given major boost for the exporting community which paved way in the increase of SEZs in the country. Within a span of eight years, from 2005 to 2013 there were 192 exporting SEZs established in the country 9. The growth and the transformation of SEZ were evident with the enactment of the SEZ Act (2005). There are 565 formal approvals that have been given to form SEZ in the country as on 06 th August 2014 10.Even though the SEZ growth was on the rise there has not been any substantiation for the promotion of SEZ in the country. The enormous growth of the SEZ has created mayhem mainly among the agricultural community where most of the agricultural lands were converted into SEZ. The productive lands have been utilized to establish SEZs all over the country and also this has paved way for the real estate business to expand their growth. The reasons behind this large scale promotion of SEZ was not exhibited and also not validated by the performance of exporting SEZ. 8 http://sezindia.nic.in/writereaddata/pdf/listofoperationalsezs.pdf 9 SEZ India (2014).State-wise distribution of SEZ.30 th September 2013. Retrieved from http://www.sezindia.nic.in/writereaddata/pdf/listofoperationalsezs.pdf 10 Ibid, retrieved from http://www.sezindia.nic.in/writereaddata/pdf/listofformalapprovals.pdf. 3

Moreover the SEZs performances are to be measured analytically rather than using percentages to check out the growth. There is a need for framing a framework to measure the performance of SEZs. The performances of SEZs have to be assessed by the use of scientific analysis. The scientific analysis can only quantify the real contribution of the SEZs and can provide exclusive support for the operation of the SEZs. This research study aims to bring out the contribution made by SEZ as a whole in the overall economic growth of the country in general as well as regionally in particular. The collective performance of the SEZs all over the country may seem to create a shadow that the SEZs are working well. Even if it is working well on that basis, it has to be sorted out to bring out the performance of the SEZs individually based on the regional specification. Generally these portfolio approaches do not help to bring out concrete evidence on the real performance of the SEZs. The individual contribution of each SEZ has to be measured separately in-order to understand the real performance of the SEZs in the country. Further, this attempt will substantiate the promotion of the SEZ on a large scale on the basis of the performances of these SEZs over a period of time. This will also help at the micro level where the policy implications are to be brought to fine-tune the performances of the regional SEZs. Importance of the Study The cross border trade is a must to earn foreign exchange to meet the import needs of the country. No country is bestowed with all the resources to meet the needs of the people. In this context the exchange of resources among the countries is inevitable. The external trade affairs are given prime importance when it comes to improve economic indicators and foreign exchange reserves. The external trade will improve only if exports from the country are increased. The SEZ were formed with the prime objective of promoting external trade of the country. Realising this, the government of India had started establishing a number of SEZ s in the country. As on August 2014, there were 192 exporting SEZ s all over India 11.All these SEZ have their own rules and regulations in the form of special exemptions, subsidies, incentives etc. which is governed by Special Economic Zones Act, 2005 11 http://en.wikipedia.org/wiki/special_economic_zone 4

These Indian SEZs in the year 2012-2013 has made an export of Rs. 4, 76, 159 Crores which forms 29.12 percent of the total exports that were made from the country. The investment made in the SEZs has been Rs. 1, 82,750 Crores. The direct employment opportunities provided by the SEZs accounts to 10, 74, 904 persons 12. These SEZs operations not only help in trade performances and the employment opportunities but also extend the certainty for the creation and development of infrastructural facilities. These industrial enclaves provide the possibility of utilizing local resources that pave way for the regional development. The SEZs play a vital role in the export performance of the country with the resources and specific regulations rendered to them. But there have been no initiatives to measure their export performances at micro level. It is tough to lay down the importance of SEZs in the economic development of the country without knowing the level of contribution made, though they contribute towards the global trade of the country. The lack of yardstick lets the economic and export contributions made by the SEZ go unnoticed. To address this issue, the research assumes importance which is an attempt that delves as a critical study that brings out the quantum of economic contribution made towards the export performance by SEZs. Objectives of the Study The following are the objectives of the study: a. To study the origin and growth of Special Economic Zones in India. b. To analyse the export, import performances and sector-wise export growth made by the Special Economic Zones. c. To illuminate the contributions made by the Special Economic Zones towards the Balance of trade, Foreign Direct Investment and the growth of employment opportunities. d. To explore the growth of the Special Economic Zones with the help of Exclusive Trade Performance Index built for this study. 12 http://pib.nic.in/newsite/printrelease.aspx?relid=97625 5

Methodology of the Study The type of research involved in the study is analytical research. The performance evaluation of the SEZs does not deal only with the descriptive research where the existing state of affairs is presented but also needs critical and analytical thinking to bring out the concealed facts in their performances. The present study aims to evaluate the performance of the SEZs by employing the performance indicators framed for this study. The performance indicators would shed light on the performances as well as the rationale behind those performances of the SEZs and also aims to bring out problems that affect their performances. This study attempts to conduct a regional level analysis which involves established SEZs controlled by the Government of India. There are seven SEZ which controls the operation of the SEZs that are diversely situated all around the country. They are: Table 1.1 Summary of Central Government Owned SEZs in India S.No Name of the Zone Year of Establishment 1. Kandla Special Economic Zone, Kandla, Gujarat 1969 2. SEEPZ Special Economic Zone, Mumbai, Maharastra 1973 3. Noida Special Economic Zones, Noida, Uttar Pradesh 1981 4. Cochin Special Economic Zone, Cochin, Kerala 1983 5. MEPZ- Special Economic Zone, Chennai, Tamil Nadu 1984 6. Falta Special Economic Zone, Falta, West Bengal 1984 7. Visakhapatnam Special Economic Zone, Visakhapatnam, Telengana 1989 Source: Respective SEZ Websites. Among seven zones, only three zones and the private zones that work under the control of these three SEZs were selected for the study i.e, Cochin Special Economic 6

Zone (CSEZ), Madras Export Processing Zone (MEPZ - SEZ) and Vishakapatnam Special Economic Zone (VSEZ). The criteria behind such selection are: i. These three states combined from which these three zones operate have 107 Exporting SEZs (58 Percent) of the total 185 exporting SEZs in India. These 107 private zones operate under the control of these zones. ii. These three zones on the whole operates from the southern region but whereas the other zones cannot be brought under platform of regional level because each zone operates from different region. Performance Indicators identified for the Study The pictorial representations of the Performance Indicators that influence the performance of the Special Economic Zones which are going to be analysed through this study are presented below: Chart 1.1 Performance indicators of the study Exports Net Foreign E change Earnings Imports Evaluation of Performance Balance of Trade Employment Foreign Direct Investment 7

The promotion of exports and the imports have been considered the prime motive behind the working of the SEZs. These variables have been the major objectives behind the introduction of the SEZs. The above variables are analysed to study the growth of the Special Economic Zones. The performance indicators of these zones will indicate the attainment of growth over a period of time in the abovementioned zones. This will lay the foundation for measuring the performance of the SEZs selected for the study. The growth of these variables has to be measured inorder to identify the performance of the SEZs. EIBIFEF - Trade Performance Index The trade performance index was built for testing the efficiency and for measuring the performance of the SEZs. This index was built with the help of already existing indexes out of which certain major modifications have been made to attain the objectives of this study. The index takes into account all the factors that have the bearing on the performance of the SEZs. The previous indexes made by both the Trade Performance Index drafted by the International Trade Centre and the Zone Trade Performance Index by Malini L.Tantri have certain limitations on the base of limited factors which has been taken into consideration for measuring the performances. This will have subdued effect on the measurement of the performance. The Trade Performance Index created by the International Trade Centre was primarily focused on measuring the trade performance of the whole country. The need behind the creation of such index was to measure the exports and imports of the world countries. The focus was to create a disaggregated insight into their performances. It must be stressed that the performance of individual countries cannot be determined on the basis of a restricted sample of countries or products. The derivation of the relative export performance is achieved by including a significant number of countries, together with a detailed product breakdown. The index is divided into three parts: a. Current Performance deals with The yearly performance turnover of trade from the country. Country s share in the world market and the products and Market analysis 8

b. General Profile deals with the aggregate analysis of the national trade over a period of 5 years c. Decomposition of changes in the world market share the gains and losses of the world market share deals with respect to: Competitiveness effect Product Geographic specialization Adaptation effect Match of demands with the world market This elaborative and inclusive performance index was utilized to calculate the overall growth and the country. As such the index cannot be applied to measure the performance of Special Economic Zone where the number of variables used is less and it fails to catch the relationship between the variables and only concentrates on measuring the variables. The Zone Trade Performance Index developed by Malini L. Tantri was the only specialized index to measure the performance of the SEZ available in the existing literature. There are lot of studies that have measured the performances which involve exports and imports. But it is devoid of the inclusion of other variables such as employment and investment. The author s substantiation behind the creation of the index was the earlier studies (Kundra, 2000, Aggarwal 2004 and 2005) that analyzed the performance of SEZs at the disaggregate level through trends in exports, import value and its share in the total trade of SEZs. These studies, however, fail to analyse the issue within any particular framework encompassing different performance parameters like Exporting units, Sectoral concentration index, Value addition, Import intensity of exports and Growth rate of exports and imports. 9

Trade Performance Index International Trade Center Table 1.2- Comparison of Trade Performance of Indexes Zone Trade Performance Index MaliniTantri EIBIFEF Index I. Current Performance I. Indicators of General Profile I. General Profile. P.1. Value of Net Exports G1. Geographical Area GP-1. Geographical Area P.2. Per Capita Exports G2. Total Exporting Units GP-2. Area Lying Vacant P.3. Share in World Market G3. Concentration of Units GP-3. Total Exporting Units P.4.a. Product Diversification G4. Employment GP-4.Concentration of Units P.4.b. Product Concentration G5. Investment P.5.a. Market Diversification P.5.b. Market Concentration II. General Profile II. Indicators of Trade Performance II. Performance Index G.1. Value of Exports TP1. Total Exports A. Export Performance G.2. Trend Growth of Exports TP2. Total Imports EP-1. Total Exports to Investment Ratio (Last 5 Years) TP3. Net Foreign Exchange Earnings EP-2. Total Exports to Employment Ratio G.3. Share in National Exports TP4. Value Addition EP-3. CAGR of Exports G.4. Share in National Imports TP5. Per Capita Exports EP-4. Per Capita Exports G.5. Growth in Per Capita Exports TP6 &7. Share in Total Exports and Imports of SEZs EP-5. Share in Total Exports G.6. Level in Relative unit values TP8.Sectoral Concentration Index EP-6. Total Exports to FDI Ratio III. Decomposition of Changes in World Market Share TP9. Geographical Concentration Index TP10. Import Intensity of Exports TP11 & 12. CAGR of Exports and Imports TP13. Growth Rate of Exporting Units B. Import Performance IP-1. Total Imports to Investment Ratio IP-2. Total Imports to Employment Ratio IP-3. CAGR of Imports IP-4. Per Capita Imports 10

(Last 5 Years) C.1. Relative Change of World Market Share Decomposed into: C.1.a. Competitiveness Effect C.1.b. Initial Geographic Specialisation C.1.c. Initial Product Specialisation C.1.d. Adaptation Effect C.2. Matching with the dynamics of world demand Source: Compilation by the Author IP-5. Share in Total Imports IP-6. Total Imports to FDI Ratio III. Balance of Trade Performance (Computed) BT-1. Balance of Trade to Investment Ratio BT-2. Balance of Trade to Employment Ratio. BT-3. CAGR of Balance of Trade BT-4. Per Capita Balance of Trade BT-5. Share in Total Balance of Trade BT-6. Balance of Trade to FDI Ratio IV. Investment Performance INP-1. Per Capita Investment INP-2. Share in Total Investment INP-3. CAGR of Investment IV. Foreign Direct Investment (FDI) FDI-1. Per Capita FDI FDI-2. Share in Total FDI FDI-3. CAGR of FDI V. Employment E-1: Per Capita Employment E-2:Share in Total Employment E-3: CAGR of Employment VI. Foreign Exchange Earnings (Computed) FEE- 1: Per Capita Foreign Exchange Earnings FEE-2: Share in Foreign Exchange Earnings FEE-3: CAGR of Foreign Exchange Earnings 11

Thus, there seems to be a little basis for choosing performance parameters in their evaluation, which seems to have resulted in obtaining only a partial picture of the whole scenario 13. The author thereby has tried to create suitable index in the title of EIBIFEF Index that would measure the performance of the SEZ. The first part of the index deals with the general profile where the Area of the SEZ, Number of exporting unit and Concentration of units is measured along with the employment opportunities and investment made in the SEZs. The next part examines indicators of Trade performance which involves variable such as Exports, Imports, Foreign Exchange earnings and different permutations of the general profile variables and trade performance variables to highlight the efficient performance of the SEZs. This has thrown light on measuring the performance of SEZs with the help of a Performance Index. This also has some limitations when it comes to employment and investment where it has not been utilized to extract more meaningful combinations. This study keeping all the limitations of the above said two indexes tried to build an exclusive model for the measurement of performance. The general profile has been the same as the Zone Trade Performance Index except the Area Lying Vacant which will help to know the idle land that has been kept unproductive in the SEZs. The second part of the Index deals with highly structured performance indicators of Exports, Imports, Balance of Trade, Employment, Investment, Foreign Direct Investment and Foreign exchange earnings. The index has exclusiveness for the performance indicators involved. It has different permutations of involved variables to bring out the efficiency in the performance of the SEZs. Scope of the Study This study will provide an in-depth analysis of the performance of the SEZs. The study has taken up the three central government SEZs i.e. CSEZ, MEPZ and VSEZ and the other SEZs operating under the control of these SEZs.. It involves the export performance of the SEZs after the SEZ Act, 2005 and investigates the sectoral exports and growth of the selected SEZs. This study also aims to provide a 13 http://www.isec.ac.in/wp%20251%20-%20malini%20l%20t_2.pdf 12

detailed view of the FDI that is invested and also the rate of employment opportunities created by these SEZs. These analyses will help to bring out real contribution that is made by each SEZs in a scientific manner rather than providing the growth of overall picture of SEZs all over the country. The study on that note will provide the bureaucrats about the progress and the growth of the SEZs at micro level and also in understanding the hindrances to their growth and pave way for action oriented policy implications. The policy formulations made on the basis of micro level analysis make the benefits reach to the grass root level which will help the low performing or non-performing SEZs. Period of Study The study period is for eight years from 2005-2006 to 2012-2013. The study period was fixed based on the inception of the Special Economic Zone Act, 2005. The performance of the Special Economic Zones in this study is measured after the introduction of the SEZ Act, 2005. Sources of Data The study is carried out by using the secondary data collected from a. Development Commissioner s Office of respective SEZ i.e., Chennai, Cochin and Vishakhapatnam. b. Economic Survey of India. c. Export Import data bank. d. Export Promotion Council for Export Oriented Units (EOUs) and SEZ. e. SEZ and Department of Commerce Website. f. Reserve Bank of India Website. g. Department of Industrial Policy and Promotion Website. Statistical Tools Used in the Study The following are the statistical tools that are used in the study 13

a. Mean is used to measure the average growth of performance indicators of the study. b. Standard Deviation determines the variation of the performance indicators from its average growth. c. Compound Annual Growth Rate(CAGR) is used to calculate the growth rate of the selected variables over a period of time. d. JarqueBera Test will help to analyse the normality of the data among the performance indicators. e. Durbin Watson Test is used to identify the presence of autocorrelation among the performance indicators. The presence of autocorrelation in the performance indicators will affect the result of regression analysis. f. Multiple Correlation explains the correlation that exists between the selected variable of the study. It will help to extract the exact relationship among the variables. g. Multiple Regression Modelling determines the cause and effect relationship among the performance indicators of the study. Limitations of the Study A Due to the unavailability of data even after applying under the Right to Information Act (RTI), the researcher was forced to carry out with the available data which ultimately affects involving more number of parameters in measuring the performance of the SEZs and also resulted in unavailability of sector-oriented data for FDI and FEE. A The involved SEZ are hesitant to provide data which disabled the researcher to collect data beyond the performance indicators or else the study could have involved more number of performance indicators. A The Central Government owned SEZs are located diversely across the country which made it unfeasible to cover all the seven SEZs. A The minor errors caused by the nature of the data used in the study are unavoidable. 14

Chapter Scheme Chapter I explains the Statement of the problem, Importance, Objectives, methodology, scope, period of the study, sources of data collection, performance indicators that are to be analysed, Performance index to test the performance of the SEZs, Statistical tools used and limitations of the study. Chapter II charts out the Review of Literature which involves 72 research studies carried out at national and international level related to SEZs are reviewed which formed the basis for arriving at the Research Gap. Chapter - III reveals the Conceptual Background evolved by various theories that govern the operation of international trade. It discusses about the operation of the SEZs. This chapter also explains about the key highlights of the SEZs Act (2005), and give an account of the details about the profile of the SEZs operating all over the world and in India. Chapter IV explains the growth of the performance indicators selected for the study across the three zones which facilitated towards the measuring of growth of the SEZs. Chapter V utilizes the EIBIFEF Index built for this study and also the inferential statistics which are used to assess the Performance of the Special Economic Zones over the study period. Chapter VI wrap up with the Major findings of the study, Suggestions for policy implications based on the findings, scope for further research and Concluding remarks of the Study. 15