SEZs or Special Economic Zones are the specially earmarked geographical zones which can be developed by public or private sector or by both public and private sector under PPP model. In these zones, units operate under rules and regulations which are different from those operating elsewhere in country.
In India, policy to set up SEZ was first introduced in 2000. SEZs are the modified version of Export Processing zones which were set up during 1960s. The causes of their failure were their small size, inadequate infrastructure, restrictive Government policies, location disadvantage and stringent labour laws.
To improve upon these drawbacks, SEZ Act was passed in 2005. The Act includes provisions like simplification of rules and single window clearance for projects, simplification of labour laws, income tax exemption for certain number of years, duty free procurement of goods and various other incentives.
SEZs policy was devised to further the growth of Indian economy post liberalization. Major objectives to set up these zones were to attract FDI, create employment and develop relatively less developed areas so as to contain socio-economic disparities.
Recent statistics gives a mixed picture about the materialization of the objectives to be fulfilled by SEZs. Of the 564 SEZs that have been formally approved so far, only 192 were operational in June this year. Total employment in these enclaves was 1,277,645 in 2014, as against an expectation of 1,743,530 by 2009. While the share of SEZs in total exports rose from six per cent in 2006-07 to 28 per cent in 2010-11, it is believed to have declined in subsequent years.
Experts have raised questions about the utility of SEZs. According to them, incentives sans competitive conditions is against the interests of the economy. It is also argued that developers have ignored backward states and set up SEZs in developed states where basic infrastructure is developed to an extent. Other issue is regarding land acquisition. SEZs are often cited as anti farmers. In India, the availability of waste or barren land at a stretch to develop huge size SEZs is limited. So the surrounding agricultural land was acquired for this purpose.
Despite this criticism, SEZs are there to stay in order to make new government’s ‘Make in India’ initiative successful. But several policy initiatives are required to make them economically viable.
With removal of tax exemptions under MAT ( Minimum Alternate Tax ) and DDT ( Dividend Distribution Tax ) in 2012, SEZs have stopped attracting investors; unpredictability of tax regime further creates doubts in minds of investors. Though the scrapping of benefits under MAT and DDT were due to misuse of benefits by real estate developers, onus to ensure a stable tax regime lies with the government.
There are serious infrastructure bottlenecks which are hampering the inflow of FDIs in SEZs. A major reason for the success of SEZs in China was the creation of complementary infrastructure, power, roads and ports; these are lacking in India.
Proper location, carefully evaluated incentives to attract investors, policies to create required infrastructure and trained human capital are all necessary for improving the viability of SEZs.