Special Economic Zones (SEZs)

The Special Economic Zones Policy was announced in April 2000 with the intention of making the Special Economic Zones an engine for economic growth supported by quality infrastructure and an attractive fiscal package both at the Central and State level, with a single window clearance. The experience in last 55 years with the Industrial areas and Industrial clusters has been that large slums come up in the neighbourhood of these areas. Besides, the additional population creates pressure on the Municipal System. The SEZ concept recognizes the issues related to economic development and provides for developing self-sustaining Industrial Townships so that the increased economic activity does not create pressure on the existing infrastructure. The Special Economic Zone Act, 2005 along with SEZ Rules, 2006 came into effect on 10th February, 2006.

The main objectives of the Act are generation of additional economic activity; promotion of exports of goods and services; promotion of investment from domestic and foreign sources; creation of employment opportunities and development of infrastructure facilities.

Avalon Building at Madras EPZ

Current Status of Approvals for Setting up of Special Economic Zones

Seven Export Processing Zones set up by the Central Government at Kandla (Gujarat), Santa Cruz (Maharashtra), Cochin (Kerala), Noida (U.P.), Chennai (Tamil Nadu), Falta (West Bengal) and Visakhapatnam (Andhra Pradesh), were converted to SEZs upon announcement of the SEZ Policy. Another EPZ set up in the private sector in Surat was also converted to SEZ. In addition to these, 11 more SEZs were set up by the State Governments/private sector during the period 2000-2005 in the States of West Bengal (2), Gujarat (1), Madhya Pradesh (1), Uttar Pradesh (1), Rajasthan (2) and Tamil Nadu (4).

Baird Textile Unit at Cochin SEZ

After the coming into force of the SEZ Act, 2005 on 10th February 2006, 439 formal approvals have been granted for setting up of Special Economic Zones, out of which 201 SEZs have been notified and are in various stages of operation. The fact that the approved SEZs are spread over 19 States and 3 Union Territories indicates that these are not concentrated in any particular region. The total land area involved in the 439 formally approved SEZs is about 60168 hectares out of which approximately about 20,000 hectares are for the 97 approvals given for State Industrial Development Corporations/State Government ventures. In all these cases either the land was already available with the State Industrial Development Corporations (SIDCs) or was in possession of the private companies setting up the SEZs.

State-wise and Sector-wise Distribution of Approved SEZs

Benefits derived from Special Economic Zones

At present, 1277 units are functioning in the SEZs set up prior to enactment of the SEZ Act, 2005. These units are providing direct employment to over 2 Lakh persons, out of which 40% are women. Private investment in these SEZs is of the order of over Rs.7104.46 crore.

In a short span of time, there has been visible gains from the Special Economic zones Scheme by way of generation of employment opportunities, creation of world class infrastructure and investment including Foreign Direct Investment. Sriperumbudur in Tamil Nadu is a leading

hardware hub in the world with investments from companies like Nokia, Foxconn, Motorola, Ericsson, Samsung and Dell. Nokia SEZ is already providing employment to 9645 persons, majority of whom are women. The Mahindra World City SEZ in Tamil Nadu is another SEZ cluster wherein three SEZs for IT, Auto and Apparel have been set up in adjoining areas. Similarly in Andhra Pradesh in addition to a large number of IT/ITES SEZs, several successful sector specific SEZs for manufacture of textiles, leather items and Gem and Jewellery are in full operation. Apache shoes in Nellore district is employing about 4500 workers, of which majority are women from local villages, who have been imparted training before employing. Hyderabad Gems SEZ have employed over 2000

people, with a future projection of employing 30,000 persons. Brandix Apparel SEZ being set up in Vishakhapatnam, expects to employ 60,000 persons by March 2009. In Maharashtra several newly notified SEZs, viz., M/s Serum Bio-pharma, EON Kharadi, Wipro, Infosys Technologies etc. have commenced exports during this current year. The multi product SEZ to be set up by Maharashtra Airport Development Corporation Limited in Nagpur has been notified in May 2007 and is expected to provide a direct employment of over 1,20,000 persons. In the short span of their commencement of operation, already 1200 persons are employed. Some of the leading companies of India which have set up or are in different stages of setting up of SEZs in various parts of the country are: Infosys, Wipro, Satyam, HCL, L&T, Reliance, Adani Group, Suzlon, Welspun, DLF, Parsvnath, Wockhardt, K. Raheja Ranbaxy, TCS, etc. Even in the services sector, 12.5 million sq meters space is expected to be created in the IT/ITES SEZs which is estimated to translate into 12.5 lakh jobs. The benefits derived from multiplier effect of the investments and additional economic activity in the SEZs along with the employment generated on account of tax exemptions given to the SEZs. These SEZs are freshly developed industrial clusters and are not relocated from elsewhere.

NeST Plant at Cochin SEZ

Employment and Investment from Special Economic Zones

The details of employment and investment generated in the Special Economic Zones are given in Box 7.1 and 7.2.

Divis Laboratory, Andhra Pradesh

Export

Exports from the functioning Special Economic Zones during the last four years are given below:

While there was only a couple of newly notified SEZs which had commenced exports in the year 2006-07, in the current financial year (2007-08), 23 newly notified SEZs have commenced exports. It is estimated that exports in the current year (2007-08) from the SEZs as a whole would be Rs. 67088 crore. Exports worth Rs. 40,000 crore have already been affected in the current financial year, up to December 2007.

Foreign Direct Investment (FDI) in SEZs

In the Special Economic Zones notified under the SEZ Act, 2005 and SEZ Act, 2006 substantial amount of FDI has already been made. Some SEZs with major FDI component of investment are:

Infosys SEZ at Pune

• Apache SEZ Development India Private Limited, Andhra Pradesh
• Brandix India Apparel City Private Limited, Andhra Pradesh
• Emaar Hills Township Private Limited, Andhra Pradesh
• Zydus Infrastructure Private Limited, Gujarat
• Essar Hazira SEZ Limited, Gujarat
• DLF Limited, Haryana
• Tanglin Development Limited, Karnataka
• M/s Information Technology Park Ltd, Karnataka
• Quarkcity India Pvt. Ltd., Punjab
• Flextronics Technologies (India) Private Limited, Tamil Nadu
• SIPCOT SEZ , Tamil Nadu {Foxconn & Motorola (as co-developer) - Dell (unit)}

Studies on Special Economic Zones

According to a study conducted by the Institute of South Asian Studies (SAS), the fiscal environment available to SEZ developers and units have played a vital role in attracting export oriented foreign investment in areas such as hardware, apparel and shoes, which would have normally headed for other Asian destinations in its absence. This study also points towards the relief and rehabilitation packages in poor areas where people's lives have improved as a result of SEZ activity. The study has showcased some of the successful SEZs in manufacturing sector in some of the investor friendly states of India and also made suggestions on areas which need to be focused for the smooth execution of the SEZ Act in its spirit.

Footwear Unit - Apache SEZ, Nellore

The Indian Council for Research on International Economic Relations has also undertaken a study on Special Economic Zones which concludes that if the opportunities thrown open by globalization are to be grabbed, policies ensuring a business environment that is predictable and is in tune with the needs of the private sector need to be the top priorty of the policy agenda. The SEZ policy has been described as an attempt by the Government to turn around the domestic economy and find a niche in the global economy. According to this study, if implemented successfully, it can play a crucial role in promoting the manufacturing

sector. While highlighting the incremental benefits in terms of employment, the study goes on to state that the SEZ policy will make a positive impact on regional employment and human development by creating economic opportunities, especially for those without high levels of schooling. The fact that the SEZ Policy has encouraged many of the Developers such as Nokia, Apache etc. for setting up of their operations in India has been brought out in the study. SEZ Policy has also encouraged Indian companies like Mahindras, Wipros, Infosys etc. to set up SEZs and units.

Readymade Garments Unit, Celebrity Fashions, at Madras EPZ

Another study by the CUTS International has revealed that the new generation SEZs have created a tremendous local area impact in terms of direct employment, emergence of new activities, changes in consumption pattern and social life, human development facilities (such as for education, healthcare).

Yet another report of CLSA states that SEZs will help build up local infrastructure and reduce the burden on urban areas by housing 12.5% of the growth in the urban population. It projects generation of 14 million new jobs and support annual exports of US $ 350 billion on a cumulative investment of US $ 213 billion.

Misapprehensions about Issues on Special Economic Zones

There have been several misapprehensions on issues relating to Special Economic Zones, such as misuse of land in SEZs, diversion of domestic industries, tax losses on account of fiscal incentives given to SEZs etc., which have been raised from time to time. Misuse of land while creating infrastructure in the non-processing area such as housing, commercial and shopping complexes etc is often quoted. The concept of developing a non-processing area in SEZs is to provide support facilities to the SEZ processing area and the employees working therein. The authorised activities are to ensure that world class infrastructure is set up to facilitate the operation of manufacturing and service units in the SEZ. The scheme envisages that the SEZ Developer would be responsible for providing all civic amenities and infrastructure including roads, sewerage systems, open spaces, green spaces, education facilities, power, water supply and housing etc. At the zone level, the Approval Committee headed by the Development Commissioner which has representatives of State Government officials and Revenue Department, approves the activities of the Developer and the units. Only those authorized operations approved by the Board of Approval would be eligible for tax exemptions. In order to regulate usage of SEZ area by the developers, precautions have been taken by way of assessing the size requirement of infrastructural facilities like housing, commercial spaces, recreational amenities etc. based on the employment generation potential of the SEZ and granting approvals by the Board of Approvals. In respect of housing, it is allowed only in phases

Srinivasa Fashions

depending on the progress made in allotting/occupancy of the Units in the SEZs.

Another area of concern often cited was on shifting of domestic industries into SEZs. The objective of the Special Economic Zone Policy being generation of fresh investment and employment, conversion of any DTA unit or even 100% EOU or STPI unit is not allowed. In order to ensure that such conversions do not occur, the SEZ Act and Rules stipulate that SEZs can be set up only on vacant land. Further, the use of second hand capital goods from the DTA has also been made in line with the provisions of the 10AA of the Income Tax Act, which allows only 20% of used plant and machinery. Studies on SEZs have revealed the fact that there is no evidence to support the view that such relocation of units from other schemes or DTA to SEZs is actually happening.

That the Government would be incurring tax losses on account of the direct and indirect tax incentives being given to SEZs is yet another apprehension expressed from time to
time. However, evidence of employment and investment generated by the private sector SEZs in the short time span of two years of operation of the Act show that in the long run, the benefits accrued from SEZs would far outweigh the tax losses to the Government which are notional in nature. Since there are duty remissions provided for all exports and tax exemptions are available for infrastructural projects outside the SEZ, the loss of revenue cannot be attributed to only due to the fiscal incentives given under the SEZ Scheme. Unless suitable incentives are given, no developer would come forward to invest in such mega projects without any return. In any event, the direct and indirect tax income accruing to the Central/State Governments in times to come due to the increased economic activities in the SEZs and the surrounding areas would be far higher than the estimated tax loss.

Nestronics - Mahindra World City, Chennai

Land Acquisition and Purchase of Land for Setting up SEZs

In the wake of controversies on land acquisition, the Ministry of Commerce and Industry has advised all the State Governments that in case of land acquisition for setting up of Special Economic Zones, first priority should be for acquisition of waste and barren land and if necessary single crop agricultural land could be acquired for the SEZs. If perforce a portion of double cropped agricultural land has to be acquired to meet the minimum area requirements, especially for multi-product Special Economic Zones, the same should not exceed 10% of the total land required for the SEZ.

Subsequent to this, in pursuance of the decisions taken by the Empowered Group of Ministers, the State Governments have been informed on 15th June, 2007 that the Board of Approval will consider only those cases where the land has been allotted by the State Government or its undertakings out of the land acquired by them for industrial purposes before 5th April, 2007 or where the land was acquired by the State Government/ its undertakings pursuant to SEZ in-principle approval and the land acquisition proceedings are over on or before 5th April, 2007 and there are no disputes relating to such land; or where no land acquisition is involved and the applicant is in possession of the land. The State Governments were informed that the Board of Approval will not approve any SEZs where the State Governments have carried out or propose to carry out compulsory acquisition of land for such SEZs after 5th April, 2007. The Board of Approval only approves those proposals which are duly recommended by the State Governments.

Department Related Parliamentary Standing Committee on Commerce

The Department Related Parliamentary Standing Committee on Commerce had deliberated the "Functioning of SEZs" and submitted its report, wherein several recommendations which include suggestions for amendments to be made to Land Acquisition Act and R&R; amendments to be made to the SEZ Rules in terms of prescribing maximum land ceiling in multi product SEZs, increasing the processing area to 50%, inclusion of type and quality of land in the application form, etc.; involvement of representative of the Ministry of Agriculture in the Board of Approvals; provision of housing for workers; creation of posts in the new SEZs, etc. were made. A detailed Action Taken Report on the recommendations have been submitted to the Parliamentary Standing Committee.

Special Economic Zones in Goa

The Government of Goa has approached the Central Government stating that the setting up of SEZs in Goa would put undue strain on the resources of the State without commensurate benefits and will also lead to large scale migration of people and that Goa being a small state, making available huge lands for the SEZs would adversely affect its future development plans. Accordingly, the State Government has requested for withdrawal of their recommendation in respect of all the 7 formal approvals granted for setting up of SEZs. Other proposals from Goa are also to be treated as withdrawn. Government of Goa has also sought de-notification of the three SEZs which has been notified. In all the three notified SEZs, the land has been leased by the Goa Industrial Development Corporation and approvals were given on the basis of recommendation of the State Government.

Export Performance

(Rs. Crore)

(P) – Provisional data.

Withdrawal of notification/approval, after investment decisions have been made relying on them, will have revenue, contractual and legal implications including the issue of compensation to the developers/units who have already invested heavily. The issue of settlement of duty exemptions/benefits already claimed on the purchases of material for authorized activities would also arise.

Export Oriented Units (EOUs)

The Export Oriented Units (EOUs) Scheme introduced in early 1981, is complementary to the SEZ scheme. It adopts the same production regime but offers a wide option in locations with reference to factors like source of raw materials, ports of export, hinterland facilities, availability of technological skills, existence of an industrial base and the need for a larger area of land for the project. As on 31st December 2007, 2441 units are in operation under the EOU scheme.

Export

Exports during 2006-07 from EOUs were of the order of Rs.68,782.20 crore as compared to the export of Rs. 49462.35 crore during 2005-06 registering a growth of 39.06%.

EOUs are mainly concentrated in Textiles and Yarn, Food Processing, Electronics, Chemicals, Plastics, Granites and Minerals/ Ores. Chapter 6 of the Foreign Trade Policy and Handbook of Procedure (Vol-I) spells out the policy frame work for Export Oriented Units.