A special economic zone (SEZ) is a part of a country that is subject to different economic rules than the rest of the country. Special economic zones (SEZs) have economic laws that encourage and attract foreign direct investment (FDI). It is a crucial topic in the Economy syllabus for the UPSC Examination. This article will teach you more about Special Economic Zones.

What are Special Economic Zones?

• An SEZ is a part of a country that is usually duty-free (Fiscal Concession) and has its own set of business and commercial rules, with the goal of attracting investment and creating jobs.
• SEZs are also formed to improve the administration of these areas, making doing business easier.

Objectives of the SEZ Act

The objectives of the SEZ Act are

• To generate more economic activity.
• To increase the number of goods and services exported.
• To create work opportunities.
• To increase both domestic and international investment.
• To develop infrastructure facilities.

Incentives and Facilities Available to SEZ

• Goods for the creation, operation, and maintenance of SEZ units can be imported duty-free or purchased domestically.
• Exemption from taxes such as income tax, minimum alternate tax, and others.
• External commercial borrowing by SEZ units up to USD $ 500 million per year through recognized banking channels, with no maturity restrictions.
• For approvals at the central and state levels, there is a single-window clearance.

SEZs in India

• In 1965, Kandla, Gujarat, became Asia's first EPZ (Export Processing Zone).
• While these EPZs had a framework similar to SEZs, the government started establishing SEZs in 2000 under the Foreign Trade Policy to address the infrastructural and bureaucratic obstacles that were perceived as limiting EPZ performance.
• In 2005, the Special Economic Zones Act was passed. In 2006, the Act and the SEZ Rules went into effect.
• SEZs, on the other hand, were operational in India from 2000 to 2006.
• India’s SEZs were structured closely with China's successful model.
• Presently, 379 SEZs are notified, out of which 265 are operational.
• About 64 percent of the SEZs are located in five states – Tamil Nadu, Telangana, Karnataka, Andhra Pradesh and Maharashtra.
• The apex body is the Board of Approval, which is led by the Secretary of Commerce (Ministry of Commerce and Industry).
• The Ministry of Commerce and Industry formed a committee led by Baba Kalyani to evaluate India's present SEZ policy, and it published its suggestions in November 2018.
• It was established with the general goal of evaluating SEZ policies in order to make them WTO (World Trade Organization) compatible, as well as bringing in global best practices to maximise capacity utilisation and potential output of SEZs.

SEZ Approval Mechanism

• A 19-member inter-ministerial SEZ Board of Approval (BoA) provides a single-window approval process for SEZs.
• The developer must present his plan to the state government.
• Within 45 days, the state government submits this plan to the BoA, along with its recommendation.
• The developer or applicant can also submit the plan to the Board of Advisors directly.
• The Board, which has 19 members and was established by the Central Government, makes the judgment based on the merits of the proposal.
• The Board makes all of its decisions by consensus.
• The Secretary of the Department of Commerce, Ministry of Commerce and Industry, chairs the Board.
• The other members come from the Central Board of Excise and Customs (CBEC), the Central Board of Direct Taxes (CBDT), the Department of Economic Affairs, the Department of Commerce, the Ministry of Science and Technology, the Ministry of Home Affairs, the Ministry of Law and Justice, and the Ministry of Urban Development, among others.
• Units are authorised to be established inside the SEZ once the BoA gets its approval and the central government notifies the area of the SEZ.

Performance So Far

• Exports: From Rs. 22,840 crores in 2005-06 to Rs. 7,59,524 crore in 2006-07. (2020-21).
• Investment: From Rs. 4,035.51 crore in 2005-06 to Rs. 6,17,499 crore in 2007-08. (2020-21).
• Employment: From 1,34,704 people in 2005-06, there are now 23,58,136 people employed (2020-21).

Challenges

Unutilized Land

Due to a lack of demand for SEZ space and disruptions caused by the pandemic, unutilized land in SEZs exists.

Multiple Models

Multiple economic zone models exist, including SEZs, coastal economic zones, the Delhi-Mumbai Industrial Corridor, the National Investment and Manufacturing Zone, food parks, and textile parks, all of which face issues in integrating the various models.

Competition from ASEAN Countries

Many ASEAN countries have modified their policies in recent years to encourage global players to participate in their SEZs, as well as working on a developing set of skilling projects.

As a result, Indian SEZs have lost some of their worldwide competitive advantages, necessitating new rules.

Benefits of Special Economic Zones

• They increase Foreign Direct Investment (FDI).
• Special Economic Zones increase foreign exchange earnings.
• They aid in employment generation.
• They help in experimenting with new policies.
• Special Economic Zones increase exports.
• They boost the economy.

Baba Kalyani Committee Recommendations

• Shift in the framework from export growth to broad-based Economic Growth and Employment (Employment and Economic Enclaves-3Es).
• Separate norms and procedures for manufacturing and service SEZs are being developed.
• To increase investment efficiency, shift from a supply-driven to a demand-driven approach for 3Es development, based on certain industries and the present amount of existing inventory in the region.
• Enabling framework for Ease of Doing Business (EoDB) in the 3Es, aligned with state objectives. For new investments, operating requirements, and exits, there is a single integrated online platform.
• Enhance competitiveness through funding high-speed multi-modal connectivity, business services, and utility infrastructure to support ecosystem development. It is critical to offer support for the development of high-quality infrastructure within or connected to the zones, such as high-speed rail, express highways, passenger/cargo airports, shipping ports, and warehouses, among other things.
• Encourage integrated industrial and urban development by encouraging people to walk to work zones. States and the federal government should work together to build a framework that connects all of the efforts.
• Relaxation of procedures for developers and tenants in order to improve operational and exit issues.
• Extension of the Sunset Clause and the preservation of tax or duty advantages
• Allow numerous services to join together through broadening the definition of services.
• Additional enablers and procedural easings are included.
• The IFSC has a unified regulator.
• Using the Multi Services SEZ IFSC for all of the country's incoming and outbound investments.
• Domestic institutions are offered incentives to use the services of the IFSC SEZ.
• Extension of service-related benefits Scheme for export incentives.
• Allowing non-traditional industries to invest in sector-specific SEZs and 3Es.
• Long-term lease flexibility for both developers and tenants.
• Customers outside of the 3Es/SEZs can subcontract without restriction or cap at any level.
• Domestic suppliers supporting 'Make in India' will be taken into account in the NFE calculation.
• Goods supplied to developers and utilized in the manufacture of goods exported should not be subject to export duties.
• Developers have more flexibility in how they use NPA and how they sell space to investors/units.
• To improve access to credit and facilitate long-term borrowing, infrastructure must be in good shape.
• Encourage MSME engagement in the 3Es and allow manufacturers and service providers to locate in the 3Es.
• Arbitration and commercial courts are used to resolve disputes.

Conclusion

Each government determines its own definition of a special economic zone. Above all, companies may also be offered tax vacations, in which they are allowed a period of cheaper taxation after establishing themselves in a zone. Companies are also bestowed tax vacations, in which they are allowed a period of cheaper taxation after establishing themselves in a zone. It is critical for the government. However, the advantages of an SEZ considerably outweigh the drawbacks, which are almost insignificant.

FAQs

Q1: What is a Special Economic Zone (SEZ)?

Q2: What are the benefits of SEZs for businesses?

Q3: How do SEZs contribute to economic development?

Q4: What challenges do SEZs face in India?

Q5: What is the current status of SEZs in India?

MCQs

1. Which is the main objective of establishing SEZs?

(a) Increase agricultural production

(b) Promote industrial and trade activities

(c) Strengthen defense infrastructure

(d) Ensure rural development

2. Which of the following is NOT an incentive for SEZs in India?

(a) Income tax exemptions

(b) Simplified labor laws

(c) Complete export duties on goods

(d) Duty-free imports

3. Which year saw the introduction of the SEZ policy in India?

(a) 1991

(b) 2000

(c) 2005

(d) 2010

4. What is one of the criticisms of SEZs?

(a) High economic benefits

(b) Unequal regional development

(c) Strict environmental norms

(d) Over-dependence on rural labor

5. Which Indian state has the highest number of SEZs?

(a) Karnataka

(b) Maharashtra

(c) Tamil Nadu

(d) Andhra Pradesh

GS Mains Questions and Model Answers

Q1: Discuss the role of SEZs in boosting economic growth and exports in India.

Answer: Special Economic Zones (SEZs) play a pivotal role in promoting economic growth by attracting foreign and domestic investments through favorable policies. They offer tax exemptions, duty-free imports, and relaxed labor laws, fostering an environment conducive to industrial production and trade. SEZs have significantly contributed to India’s export-oriented growth by increasing the share of manufactured and service exports. Additionally, they generate employment opportunities and encourage infrastructure development. However, challenges such as land acquisition disputes, regional disparities, and underutilization of certain zones have impeded their full potential. Reforms aimed at converting SEZs into comprehensive economic hubs are essential for sustained economic growth.

Q2: Evaluate the impact of SEZs on employment generation in India.

Answer: SEZs have played an essential role in generating employment by attracting industries, especially in manufacturing, IT, and services. The availability of skilled and unskilled labor within SEZs fosters job creation across multiple sectors. However, employment in SEZs is often criticized for being concentrated in certain states, leading to regional imbalances. Furthermore, contractual employment and lack of permanent job security within SEZs raise concerns about workers' welfare. Despite these challenges, SEZs remain an important driver of job creation in India, and policy reforms are needed to ensure inclusive growth across regions.

Q3: Analyze the challenges faced by SEZs in India and suggest measures to improve their effectiveness.

Answer: SEZs in India face several challenges, including land acquisition issues, environmental concerns, lack of infrastructure, and competition from other countries offering better incentives. Additionally, delays in regulatory approvals have discouraged investors. The uneven regional distribution of SEZs has also resulted in economic imbalances. To improve their effectiveness, the government must streamline approval processes, develop robust infrastructure, and implement policies promoting balanced regional growth. Converting underperforming SEZs into service hubs or logistics centers can further enhance their utility and attract investments.

Previous Year Questions on Special economic zones

1. UPSC CSE Prelims 2016

Question: Which of the following incentives is available to units established in SEZs?

(a) Complete exemption from income tax

(b) Subsidy on labor costs

(c) Duty-free imports of inputs

(d) Guaranteed government contracts

Answer: (c) Duty-free imports of inputs

Explanation: SEZs offer various incentives, including duty-free imports of raw materials and components required for production. This policy aims to reduce production costs and encourage export-oriented growth.