Special Economic Zones: New legislation on the anvil to give fresh impetus to the sector
The new law aims at arresting ‘premature de-industrialisation’ and ‘stagnancy’ in Indian manufacturing
Special Economic Zones (SEZs) are very critical for leveraging the manufacturing potential of the country. Faced with the issues of non-operational SEZs, a high proportion of unutilised land, de-notification of SEZs, and addition of few new SEZs, the government of India has proposed to bring a new SEZ law in the upcoming Winter Session of Parliament.
While these are primarily meant for export promotion, the proposed changes in the law would allow SEZs to sell products in the domestic market by paying import duties on inputs consumed. The new law would thus allow integration between domestic tariff areas and SEZs, a move that would go a long way in realising the ‘Make in India’ initiative of the government and arresting ‘premature de-industrialisation’ and ‘stagnancy’ in Indian manufacturing.
HOW DO SPECIAL ECONOMIC ZONES WORK?
SEZs are geographical regions with liberal economic laws in comparison to the rest of the country. These are deemed to be foreign territories for the purpose of trade operations, duties and tariffs. They have been developed with the main objective of export promotion. At the same time, promotion of additional economic activities, employment, and investments are also envisioned through SEZs.
The report card of SEZs is not disappointing either. Around 35 percent of the exports from the country move from SEZs. In FY 2021-22, exports from these zones were to the tune of USD 133 billion; this increased to USD 156 billion in FY 2022-23. Between 2006 and 2022, around INR 6500 billion has been invested in these zones with employment generated to the extent of 2.8 million persons.
Quality infrastructure and attractive fiscal packages both from the centre and states are the hallmarks of these zones. The developer is supposed to provide the serviced plots to the units to start functioning for which the developer gets various incentives and benefits. At present, SEZs enjoy the benefit of duty-free import/domestic procurement of goods for development, operation and maintenance of SEZ and SEZ units. Supplies to SEZ and SEZ units are also zero rated under IGST Act 2017. They are also given exemption from levies and duties such as electricity, stamp, etc by state governments.
KANDLA EXPORT PROCESSING ZONE SET THE TONE FOR THE FUTURE
India has been farsighted in envisioning export zones way back in 1965. The first export zone in Asia called the Export Processing Zone (EPZ) came up at Kandla in Gujarat. By 2000, India had eight EPZs. Between 2000 and 2005, when the SEZ Act was enacted, 11 new SEZs came into being.
The SEZ Act gave a real boost to the development of SEZs. There was a rush to set up SEZs in the country then. In 2006 for example, 235 SEZs were given formal approval. As per the latest data, in December 2022, India formally approved creation of 425 SEZs; of these, 377 were notified. Again, of the 377 notified SEZs, 270 are operational. A majority of the existing SEZs were set up by 2009, with the maximum number being notified in the year 2007.
However, the initial enthusiasm for SEZs appears to have eroded in later years. Though formal approval was granted when the developer possessed the minimum land required, the fear of acquisition of fertile cultivable land was very rampant. There was a huge backlash from people as well as political parties manifested by conflicts such as in Nandigram, West Bengal.
The Imposition of Minimum Alternate Tax and Dividend Distribution Tax are considered as factors for the waning interest in SEZs but the real reason may have been the interest in land for hoarding and speculative use rather than manufacturing. The government data shows a high proportion of unutilised land, a high number of non-functional SEZs, and de-notification of SEZs in the country. The return of unused land has been made in the wake of non-setting up of SEZs due to problems in acquisition such as in Kakinada SEZ (Andhra Pradesh), and Maha Mumbai SEZ (Maharashtra).
It is worthwhile noting that of the 34 states and Union Territories in the country, only 20 states and one Union Territory, namely Chandigarh, have SEZs. Tamil Nadu and Telangana lead in the number of SEZs. Both the states house 58 SEZs each, followed by Karnataka and Maharashtra with 52 and 44 SEZs, respectively.
If one at this district wise, only 100 of the 700-plus districts in the country have a presence of SEZs. It is Ranga Reddy district in Telangana that excels when it comes to the number of SEZs. The district has 41 SEZs, followed by Bengaluru (Karnataka) with 32 SEZs, Pune (Maharashtra) with 21, Kancheepuram (Tamil Nadu) with 18, and Gautam Budh Nagar (Uttar Pradesh) and Gurgaon (Haryana) with 17 each. SEZs in India are mainly IT based. As many as 242 of the 377 SEZs are in this sector, covering 64 percent of the total SEZs in the country.
Telangana, Karnataka and Tamil Nadu are the states that house a majority of these SEZs. To illustrate, of the total 58 SEZs in Telangana, 47 are related to IT. In Tamil Nadu, it is 35 SEZs of a total 58 that pertain to the IT sector. The minimum area requirement for IT/ITES was originally 10 hectare which was subsequently dispensed with.
Area-wise, only 0.01 percent of the area in the country is under SEZs. The total SEZ area is 397.33 square km. Considering that the urban area stands at over 0.1 million sq km, the SEZ area makes up only 0.4 percent of the total urban area in the country. Gujarat accounts for over one-third of SEZ area (140.02 sq km) in the country, followed by Andhra Pradesh (18 percent), Maharashtra (11 percent) and Tamil Nadu (11 percent). All other states have an area share under 5 percent with most having under 1 percent.
Within Gujarat also, it is the Adani SEZ in Kutch that accounts for 82.34 sq km area. This is the largest SEZ in the country. The area of the SEZ is greater than the SEZ area under all other states considered individually. This SEZ is a multiproduct SEZ that caters to two or more sectors. Initially, the multi product SEZs were required to be depending upon location of minimum 1000 and 500 hectares. The area requirement was later reduced incrementally and now stands at 50/25 hectares.
In view of the fact that SEZs are spread across 20 states and one UT, encompassing 397.33 sq km area, and a majority of the SEZs are in the IT sector, there is a need to give more impetus to the SEZs to make them engines of economic growth. The larger issue with the SEZs had been the way policy was formulated and implemented. There was no clarity about the extent of land required for specific SEZs, which kept on reducing over time. As SEZs have largely been developed on land transferred by the government, the high extent of unused land indicates misuse of land and inefficiency on the part of the developers.
Under the SEZ Act, the SEZs have been developed either by the state government or private developers. The new law should be clear on the aspects of misutilisation of land. The energies should be directed to make SEZs the manufacturing hubs. To attain the objective of export growth within the framework of WTO rules, the incentives should be linked to location of SEZs in underdeveloped, inaccessible, poor-quality land as well as the quantum of exports, and investment achieved. The states without SEZs or without large manufacturing may set up these zones for their traditional manufacturing be it agriculture or handicraft or handloom. Such a development would further the objective of developing ‘District as Export Hubs' and ‘One District One Product Initiative’ of the government of India.
(The writer is an Assistant Professor at ISID, New Delhi; views expressed are her own)