Don’t Scrap the SEZ Act

• IAS NEXT, Lucknow
• 18, Feb 2022

Reference news

The FM’s Budget-speech announcement that new legislation would replace the SEZ Act came as a shock amid reports that the government was considering a new lease of life for SEZs.

What is a SEZ?

• A special economic zone (SEZ) is an area in a country that is subject to different economic regulations than other regions within the same country.
• Asia’s first Export Processing Zone (EPZ) was established in 1965 at Kandla, Gujarat state.
• In India, the Special Economic Zones (SEZs) Policy was announced in 2000.
• SEZs in India functioned from 2000 to 2006 under the provisions of the Foreign Trade Policy and fiscal incentives were made effective through the provisions of relevant statutes.
• The Special Economic Zones Act was passed in 2005.

Objectives

• generation of additional economic activity
• promotion of exports of goods and services
• promotion of investment from domestic and foreign sources
• creation of employment opportunities
• development of infrastructure facilities

What is the status of SEZs in India?

• With 425 formal approvals, 376 SEZs have been notified in the country. Of this, 268 are in operation.
• SEZs host over 5,600 units and provide employment to 2.6 million.
• They also contribute around 20% of exports.
• Vast industrial infrastructure covering 57,000 hectares of land is already up in the country developed chiefly with private investments.

Why are SEZs so significant?

• Provides employment opportunities
• Promotes export
• Supports  FDI and industrial growth
• Aids in diversification
• Provides scope for spatial rejuvenation,
• Contributes to urbanisation and border development
• Promotes regional integration and international relations

What is the Budget proposal on SEZs?

• The Budget says that the SEZ Act will be replaced by a new legislation that will enable large existing and new industrial enclaves to optimally utilise available infrastructure and enhance competitiveness of exports.
• It will enable the States to become partners in development of enterprise and service hubs.
• It also says that customs administration in SEZs will be fully IT-driven.
• An infra cluster approach is proposed rather than one based on export subsidies which will be open to WTO challenge.
• The new SEZ legislation will have single window clearance and provide high class infrastructure.
• The new dispensation for SEZ, being considered by the government, could allow domestic units to come up in the unutilised area of SEZs and co-exist with SEZ units with proper monitoring.
• The suggestion of permitting SEZ units to do job work for DTA units for better capacity utilisation may also now be implemented.

What are the criticisms against replacing the SEZ Act?

• The promise of a distinct set of rules is appealing as it encompasses
  • single-window governance
  • high-class infrastructure
  • a secured environment in a geographically delineated area
• Leveraging the SEZs requires a strong bureaucratic understanding of the philosophy and prerequisites underlying the SEZs and strategic competencies to make the right choices to implement the policy effectively.
• In the policy circles of India, SEZs are still seen from the conventional lens of direct tax incentives.
• It is assumed that the SEZs have lost relevance and identity after the sunset clause has set in.
• Following orthodox thinking, the government’s focus is on improving India’s ranking in the World Banks’ ease of doing business index.
• Various SEZ firms rated security, government inference, and corruption as obstacles.
• One of the most serious obstacles is the policy restrictions on domestic sales.
• This is not allowing firms to avail economies of scale and insure against the export market risks.

Way forward?

• The way forward is not to replace the SEZ Act but to make SEZs favourable investment destinations.
• Domestic sales– There is a need to allow SEZ firms to sell domestically after refunding the duties foregone on imported materials.
• Local sales strengthen SEZs’ linkage with regional industries due to the incentive to localise and facilitate technological transfer from SEZs to domestic companies.
• China used this policy very effectively to create domestic production capability.
• Local currency– The IT firms must be allowed to provide domestic market services in rupee rather than the foreign currency.
• Incentives– Production/investment/employment-linked incentives can be offered to firms in the SEZs to incentivise growth, and create a level playing field with the rest of the firms.
• The competition can be unleashed in the domestic markets instead of protecting from SEZ firms.