Economy Industrial Sector – Special Economic Zones: Article Analysis

Introduction

• A Special Economic Zone (“SEZ”) is a specified, delineated and duty-free geographical region that has different economic laws from those of the country in which it is situated. In some countries, such a region is even treated as a deemed foreign territory. An SEZ is a trade capacity development tool, with the goal to promote rapid economic growth by using tax and business incentives to attract foreign investment and technology.
• Today, there are approximately 3,000 SEZs operating in 120 countries, which account for over US$ 600 billion in exports and about 50 million jobs. By offering privileged terms, SEZs attract investment and foreign exchange, spur employment and boost the development of improved technologies and infrastructure.
• Most developing countries in the world have recognized the importance of facilitating international trade for the sustained growth of the economy and increased contribution to the GDP of the nation.
• As part of its continuing commitment to liberalization, the Government of India (“GoI”) has also, since the last decade, adopted a multi-pronged approach to promote foreign investment in India. The GoI has pushed ahead with second-generation reforms and has made several policy changes to achieve this objective.

Time Line

• The SEZ policy was first introduced in April 2000, as a part of the Export-Import (“EXIM”) policy of India. The objective was to provide an internationally competitive environment for exports that would in turn earn precious foreign exchange for India.
• However, in its initial form the concept was not able to inspire sufficient confidence in the investors. To provide a stable economic environment for the promotion of export-import of goods in a quick, efficient and hassle-free manner, GoI enacted the SEZ Act, The SEZ Act is expected to give a big push to exports and consequently to the foreign direct investment (“FDI”) inflows into India, and is considered to be one of the finest pieces of legislation that may well represent the future of the industrial development strategy in India.
• The new law is aimed at encouraging public-private partnership to develop world-class infrastructure and attract private investment (domestic and foreign), boosting economic growth, exports and employment.

REGULATORY FRAMEWORK – SETTING UP OF A SEZ AND AN SEZ UNIT

• The Ministry of Commerce and Industry lays down the regulations that govern the setting up and administering of the SEZs.
• The Central Government is involved in notifying SEZs and in overseeing their functioning, while the State Governments play a significant lead role in the development of SEZs in their respective States by stipulating the conditions to be adhered to by an SEZ and granting the necessary approvals.
• The policy framework for SEZs has been enacted in the SEZ Act and the supporting procedures are laid down in SEZ Rules.

The main objectives of establishing SEZs are

• Generation of additional economic activity
• Promotion of exports of both goods and services
• Generation of employment opportunities
• Promotion of investment from foreign as well as domestic players
• Development of infrastructure facilities

SEZ approval mechanism

• The developer of the property has to submit a proposal to the state government for approval. The state government will then forward this proposal, along with its own recommendation, to a Board of Approval within 45 day
• This Board of Approval was constituted by the Central government in accordance with the SEZ Act. It has 19 members and all decisions are taken by consensus. It is chaired by the Secretary of the Department of Commerce. It is to be noted that the developer can also submit his proposal to the Board of Approval directly.

Why SEZs are Needed

• The SEZ’s are important in today’s context for the third world countries which have been in the race for rapid economic growth. There are many positives which emerge out of establishing an SEZ. Let us have a look on these factors.
• For undertaking any kind of massive development program the government requires huge amount of funds. So it looks out for potential partners to help the government carry out the program. Now say for setting up an SEZ, the government may tie up with a private partner whose willing to invest in that area, thus a win-win situation for both.
• As in the government gets the capital needed to establish the required infrastructure and also the expertise. The private player on the other hand gets the right to market and use the SEZ’s with relaxed tax laws, thereby increasing its revenue generating capacity and also carrying out the economic growth of the company in a more efficient way with the better tax policies.
• Actually SEZ’s with relaxed import tariffs help the Import dependent and export driven industries to flourish by helping them develop manufactured goods at competitive prices.
• SEZ’s create immense employment opportunities. The setting up of SEZ’s creates lot of indirect employment in terms of labour required. Then after the completion it enables employment in the relevant industries operating in the SEZ. Then there are lots of indirect employments generated wherein people start investing around SEZ. For example SEZ’s are townships of their own; thereby there are shopping malls, restaurants, amusement parks setup around to attract people, thus resulting in more economic development in that area.
• Moreover SEZ’s improve the country’s foreign export. Because of the increased FDI and Private Equity presence, the local manufacturers get to tie up with these big names and export their products which now carry a better brand value, therefore helping in creating a greater demand for the goods of local manufacturers. Moreover the massive capital required for expansion is brought in form of FDI resulting in increased economic activity.
• The increased exports from the country bring in more revenue for the country which improves the economic growth.
• SEZ’s help in creating a balanced economic growth in a country if they are properly located and implemented leading to tapping of local talent and contributing to increased economic activity in the area.

Drawbacks

• The biggest challenges faced by SEZ’s in today’s scenario are the taking away of agricultural land from the farmers. The farmers are being paid disproportionate money which is not in lieu of the current land prices. The best example could be seen in the case of farmers from Kalinganagar in Orissa where the money given was disproportionate to as high as 1:10 with respect to the market rates.
• Moreover SEZ’s are leading to decrease in crop production (arable Land Grabbing!) thus slowing down of agricultural activity in the country. (Though it may help boost it in other ways by increased export of local goods, both processed and non-processed).
• The SEZ’s if not properly located could lead to Supply Chain Management problems as well. Moreover improper planning could lead to unbalanced growth in the region giving an impression of pseudo-development.
• SEZ’s mostly if setup for the manufacturing sector should be carefully planned to carry out proper pollution monitoring and control mechanism. Stringent measures may prove to be expensive but are also extremely important. The measures should be taken to make surroundings livable for multitude of people living in the SEZ’s. Moreover care should be taken to properly treat effluents from industries not to affect surrounding rivers. Also the SEZ’s should be carefully planned not to affect the natural habitat around (Gurgaon SEZ affecting the Bharatpur bird sanctuary)

SEZs – India

SEZ Act 2005

• To provide a stable economic environment for the promotion of Export-import of goods in a quick, efficient and hassle-free manner, Government of India enacted the SEZ Act, which received the assent of the President of India on June 23, 2005. The SEZ Act and the SEZ Rules, 2006 (“SEZ Rules”) were notified on February 10, 2006.
• The SEZ Act is expected to give a big thrust to exports and consequently to the foreign direct investment (“FDI”) inflows into India, and is considered to be one of the finest pieces of legislation that may well represent the future of the industrial development strategy in India.
• The new law is aimed at encouraging public-private partnership to develop world-class infrastructure and attract private investment (domestic and foreign), boosting economic growth, exports and employment.
• The SEZs Rules, inter-alia, provide for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments.
• Heavy investments are expected in sectors like IT, Pharma, Bio-technology, Textiles, Petro-chemicals, Auto-components, etc.
• The SEZ Rules provides the simplification of procedures for development, operation, and maintenance of the Special Economic Zones and for setting up and conducting business in SEZs.
• This includes simplified compliance procedures and documentation with an emphasis on self-certification; single window clearance for setting up of an SEZ, setting up a unit in SEZs and clearance on matters relating to Central as well as State Governments; no requirement for providing bank guarantees; contract manufacturing for foreign principals with option to obtain sub-contracting permission at the initial approval stage; and Import-Export of all items through personal baggage.
• With a view to augmenting infrastructure facilities for export production it has been decided to permit the setting up of Special Economic Zones (SEZs) in the public, private, joint sector or by the State Governments. The minimum size of the Special Economic Zone shall not be less than 1000 hectares. Minimum area requirement shall, however, not be applicable to product specific and port/airport based SEZ.
• This measure is expected to promote self-contained areas supported by world-class infrastructure oriented towards export production. Any private/public/joint sector or State Government or its agencies can set up Special Economic Zone (SEZ).

ADMINISTRATIVE SET UP FOR SEZS

SEZs is governed by a three tier administrative set up

1. a) The Board of Approval is the apex body in the Department,
2. b) The Unit Approval Committee at the Zonal level dealing with approval of units in the SEZs and other related issues, and
3. c) Each Zone is headed by a Development Commissioner, who also heads the Unit Approval Committee.

Reforms needed in SEZs

• A commerce ministry-appointed panel has suggested that the Board of Approval (BoA), the highest decision-making body for SEZs, should be given additional powers to exempt units and developers from certain rules to promote these zones.
• Under the existing SEZ (special economic zones) rules, the BoA has no power to relax any rule.
• The inter-ministerial board BoA is headed by the commerce secretary.
• Submission of GST registration certificate instead of sales tax registration.
• Setting up of an SEZ Rules Interpretation Committee. The five-member committee would include officers from commerce and finance ministries. This measure will help in ease of operations.
• Cut in paper work for setting up of SEZ units. One copy of consolidated application seeking permission for setting up of a unit and other clearances shall be made to the Development Commissioner. Currently, there is requirement of five copies of application for setting up of unit in SEZ to the commissioner.

Conclusion

• The SEZ’s could drastically improve the economic activity in the country, make the country’s export competitive and globally noticeable, be net foreign exchange earner and provide immense employment opportunity.
• But this should not be done at the cost of bringing down the agricultural activities, Land grabbing and real estate mafia should be properly regulated so that the common man is not the net sufferer to get the net foreign exchange earner up and running.
• As compared to china where majority of the SEZ’s were setup by the government, similar should be adopted in India, if not fully it should be a public-private partnership and regulatory bodies should be properly managed to weed out fallacies. To be economically viable SEZ’s should be approved over a particular land area (greater than 1000 acres) for rapid economic growth in the area and for it to be profitable and self sustainable.
• Relaxed Tax norms, Labor laws and DTA regulations will surely attract foreign investment and major industries to setup industries in the SEZ’s making it profitable and meeting its desired results.

Source: Science direct, Word press and  Hindu Business line