Special Economic Zones In Indias Economic Growth Economics Essay

The rapid expansion of SEZs in India has initiated a wide-spread debate on the impact of such zones on the economic growth and development of the concerned nations. The most common expostulation in favour of SEZs is that it fosters quick economic growth. The key indicators which are used to determine this growth include increasing flow of FDI, growth in export-oriented production, and growth in GDP. Moreover, foreign investments in SEZs depend largely on global market demands and the world economy which is quite volatile; and increasing global competition combined with volatile markets makes SEZs unsustainable. This paper aims to highlight the impact of SEZs and their impact on economic growth of India. The main argument of this paper is that economic growth, as demonstrated in rising Gross Domestic Product, is not necessarily the same as economic development nor does it always mean an improvement in the well-being of the majority of the people in a country.

SEZ is a double edged weapon which has been gifted by WTO arrangements. It has been envisaged to play a very positive role in boosting manufacture of goods and rendering of services. It is allowed to impart/procure from the Domestic Tariff Area (DTA) without payment of duty all types of goods (except prohibited items, whether new or second hand. Goods shall include raw materials for making capital goods for use within the unit. The units are allowed to import goods required for the approved activity, free of cost on loan from clients. Software Gem and Jewellery Units may also avail this concessional opportunity through nominated agencies. Thus SEZ shall be a good foreign exchange earner.

Net Foreign Exchange Earning (NFE) shall be calculated cumulatively for a period of five years from the period of commercial production. In a country like India destined to have successive coalition governments utmost care is required in selection of land. Permission of setting up SEZ should be given on barren land. Other logistic support can be developed there like water, road, electricity, communication etc. In no case fertile land providing livelihood to inhabitants engaged in agricultural production should be given to launch industrial production.

Uprooted people deprived of their earnings from cultivation will be compelled to agitate. Political parties make it a slogan and instigate mass upsurge. We have seen how very recently TATA’s had to say good bye from Singur one pretext or other. Similar voices of protects have emerged from U.P. and Haryana. Hence it is suggested that utmost care is required while choosing a site for SEZ. Arbitrary selection of land is bound to boomerang in the form of retaliatory measures like picketing, Dharna, Satyagraha, Roadjam even violence.

Special Economic Zones – Indian perspective

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. There are 13 functional SEZs and about 61 SEZs, which have been approved and are under the process of establishment in India. Most of the developing countries such as India have recognized the importance of facilitating international trade for the sustained growth of the economy and increased contribution to the GDP of the nation.

Under this policy, one of the main features is that the designated duty free enclave to be treated as foreign territory only for trade operations and duties and tariffs. No license required for import. The manufacturing, trading or service activities are allowed. 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 policy was first introduced in India in April 2000, as a part of the Export-Import (“EXIM”) policy of India. Considering the need to enhance foreign investment and promote exports from the country and realizing the need that level playing field must be made available to the domestic enterprises and manufacturers to be competitive globally, the Government of India in April 2000 announced the introduction of Special Economic Zones policy in the country deemed to be foreign territory for the purposes of trade operations, duties and tariffs.

Figure.1: State Wise investment in SEZs under notified area of SEZ Act, 2005

Source: Export Promotion Council for EOUs & SEZ Units

A SEZ is an especially demarcated area of land, owned and operated by a private company, which is deemed to be foreign territory for the purpose of trade, duties and tariffs. SEZs enjoy exemptions from customs duties, income tax, sales tax, service tax. The fascination with export driven economy is visible in the fervor with which the United Progressive Alliance (UPA) government is pursuing the creation of SEZs, owned by private corporations. Prior to the Special Economic Zone Act of 2005 there were only 19 such zones in the country. This number has drastically increased in the last few years. Though the scope of external sector is very wide, the impact of SEZs is limited to only two areas viz, foreign direct investment and exports.

Special Economic Zones in India

Some of the established important Special Economic Zones in India are given as below

Falta food processing unit, West Bengal

Salt Lake Electronic City, West Bengal

Manikanchan – Gems and jewelry, West Bengal

Calcutta Leather Complex, West Bengal

Karnataka Biotechnology and Information Technology Services – SEZ on biotechnology sector in Bangalore’s Electronics City, over an area of 43 acres

Shree Renuka Sugars Limited – SEZ on sugarcane processing complex covering 100 hectares, comprising a sugar plant, power station and distillery, at Burlatti in Belgaum district

Ittina Properties Private Limited and three other – SEZs in IT sector, covering electronics, hardware and software sectors in Bangalore, over an area of 15.732 hectares

Divyasree Infrastructure – SEZ in the IT/ITES sector over an area of 20.234 hectares in Bellandur Amani Kane near Bangalore

Chaitanaya Infrastructure Private Limited – SEZ in the IT/ITES sector in Bangalore over an area of 20.24 hectares

Bagmane Developers Private Limited – SEZ in the IT/ITES sector in Raman Nagar in Bangalore North over an area of 15.5 hectares

Shipco Infrastructure Private Limited – Free Trade Ware Housing Zone in Karnataka over an area of 120 hectares

Hinduja Investments Private Limited – SEZ in the textile and apparel sector at Doddamannugudde in Bangalore Rural district, over an area of 100 hectares

Wipro Infotech – SEZ on IT / ITES at Electronics City, Sarajpur Bangalore

Hewlett Packard India Software Operation Pvt. Ltd. – SEZ on IT

Food processing and related SEZ services in Hassan, over an area of 157.91 hectares.

SEZs on pharmaceuticals, biotechnology and chemical sectors in Hassan, covering of 281.21 hectares.

SEEPZ – Andheri (East), Mumbai

Khopata – Multi-product, Mumbai

Navi Mumbai – Multi-product, Mumbai

The key projections for the financial year 2009 – 2010 are as follows –

Projected exports from all SEZs for 2009-10 is Rs.67300 crore

Presently, 1016 units are in operation and providing direct employment to over 1.79 lakh people of which around 40% are women

Private investment by entrepreneurs before the SEZ Act was around Rs.4400 crore. In the 63 notified SEZs which have come up after 10th February 06, investment of Rs.13, 435 crore has already been made in less than a year

Have created direct employment for around 18, 457 people

Exports through SEZs:

Exports from Indian SEZs were to the extent of Rs. 18,655 Crores (US$ 4.14 bn) in the year 2006-07. However, with the establishment of new SEZs, exports, employment, FDI and value addition in the country in the expected to increase phenomenally in the coming years. SEZ is certainly going to become a main instrument in export promotion and employment generation.

Table – 1: ZONE-WISE EXPORTS OF MAJOR ITEMS

Zone

Items Exported

SEEPZ SEZ

Gem & Jewellery (57.3%), electronics hardware (16.7%), electronics software (15.4%) and trading (10.6%)

NOIDA SEZ

Gem & Jewellery (51.3%), electronics software (11.7%), engineering goods (10.9%), electronic hardware (6.3%), textiles and garments (3.9%) and plastics & rubber goods (2.1%)

MEPZ SEZ

Textile and garments (29.8%), electronic software (23.1%), engineering goods (21.7%), pharmaceuticals & chemicals (8.7%), leather / sports goods (7.4%) and electronics hardware (5%)

KANDLA SEZ

Pharmaceuticals & Chemicals (53.9%), plastics and rubber goods (14.6%), textiles & garments (11.1%), engineering goods (4.6%) and food & agro products (1.4%)

SURAT SEZ

Gem & Jewellery (92.7%), textiles and garments (2.8%) and engineering goods (1.1%)

FALTA SEZ

Textile and garments (66.9%), Leather / sports goods (17.6%), Food and agro products (3.3%), Plastics & Rubber goods (2.2%) and Pharmaceuticals & chemicals (1.2%)

VISAKHAPATNAM SEZ

Gem & Jewellery (94.9%), Textiles & Garments (2.6%) and electronics software (2.3%)

KOCHI SEZ

Electronics hardware (28.3%), Food & agro products (22.3%), Plastic and rubber goods (10.3%), engineering goods (8.3%), gem & jewellery (6.2%), textile & garments (5.9%) and electronics software (3.4%)

Source: Government of India, Ministry of Commerce & Industry, Department of Industrial Policy and Promotion, FDI Statistics 2009.

The zone wise composition of exports of major items has been presented in table-1. The item of Gem & Jewellery has been the single largest item of export from SEEPZ (57.3%), Noida (51.3%), Surat (92.7%) and Visakhapatnam SEZ (94.9%). Textile and garments is the major item of exports from MEPZ (29.8%) and Falta SEZ (66.9%). Pharmaceutical and chemical products constitutes 53.9 per cent of the total exports from Kandla SEZs, where as electronics and hardware is the single largest item of export from Kochi SEZs. It is observed from the above analysis that the composition of items of exports from the selected SEZs are of non conventional, non traditional and modern products.

Table – 2: Exports of SEZs during the last five years

Year

Value (Rs. Crore)

Growth Rate

(over previous year)

2003-2004

13,854

39%

2004-2005

18,314

32%

2005-2006

22 840

25%

2006-2007

34,615

52%

2007-2008

66,638

92%

2008-2009

74,532

94%

2009-2010

86,622

95%

Source: http//SEZIndia.nic.in

SEZs for Economic Development of Nation

Special Economic Zones is the emerging concept, which is directly related with our socio-economic development of the nation. Earlier the concept has proved to be a success in China. In China over 20 per cent of foreign direct investment inflows into SEZs and generates 10 per cent of exports. India over the past decade has progressively opened up its economy to face effectively new challenges and opportunities of the 21st century. Considering SEZ as a dream project Government of India has passed ‘SEZ Act 2005’ for the promotion of SEZs and enterprises for boosting up the exports in the coming years. A new policy initiative (Exim Policy 1997-2002) was taken to introduce ‘Special Economic Zones’ in India to encourage all the State Government to start SEZs in their respective States. The present Government also contributed the same concept by passing the various SEZs in the country. There is a strong possibility that SEZs will be more popular in States where there is already a strong tradition of manufacturing and export. The main objectives of the SEZ Act are:

Generation of additional economic activity and increase in production of goods and services;

Promotion of exports of goods and services;

Promotion of investment from domestic and foreign sources;

Creation of employment opportunities;

Development of infrastructure facilities.

SEZs can be set up either by private developers or as joint projects with Government entities or by Government agencies themselves. The developer has to submit the proposal for developing the SEZ to the State Government. There are 21 notified SEZs in Maharashtra of which 10 are in Pune. A majority of these are in the knowledge services of IT-ITES-BT sector.

Economic Growth through SEZs

Benefit derived from SEZs is evident (Khan, 2008) from the investment, employment, exports and infrastructural developments additionally generated.  The benefits derived from multiplier effect of the investments and additional economic activity in the SEZs and the employment generated thus will far outweigh the tax exemptions and the losses on account of land acquisition.  Stability in fiscal concession is absolutely essential to ensure credibility of Government intensions.

Since majority of units in SEZs are of labour intensive manufacturing industry, it provides employment opportunity to a large number of unemployed youths. Employment generation and social protection of labour are two major goals of Indian Planning since 1950s. SEZs in this context serve as an instrument for enlargement of employment potential leading to full employment.

At present, 1943 units are in operation in the SEZs. In the SEZs established prior to the Act coming into force, there are 1143 units providing direct employment to over 1.97 lakh persons; about 37% of who are women. Private investment by entrepreneurs in these SEZs established prior to the SEZ Act is of the order of over Rs. 5626.24 crore. The Current Investment and Employment are as under:  

Investment:           Rs. 83450 crore

Employment:        1,13,426 persons

Economic growth derived from SEZs is evident from the investment, employment, exports and infrastructural developments additionally generated. The benefits derived from multiplier effect of the investments and additional economic activity in the SEZs and the employment generated thus will far outweigh the tax exemptions and the losses on account of land acquisition. Stability in fiscal concession is absolutely essential to ensure credibility of Government intensions.

Therefore special economic zones are capable of bringing multiple benefits to an economy in terms of creating jobs, augmenting exports, building infrastructure of international standard and inviting huge foreign direct investment. Besides these, some of the possible trickledown effect of SEZS on the host economy, including learning effects, human capital development effect, demonstration effect, technological and knowledge transfer and so on.

Conclusions

In this changing global business environment, the role of SEZs is very crucial; through the SEZ we are attracting larger foreign investment in India, and promoting the exports. With the help of SEZ projects, we are increasing employment opportunities, raising productivity, enhance exports, transfer skill and technology and for development of infrastructure facilities. Thus SEZ are very necessary for under developing countries like India.

SEZs in India have another object to creating 4 million new jobs. SEZs also generate employment by creating demand for physical infrastructure and utilities such as water, electricity, communication, and administration within the zone. Productive activities within SEZs create demand for various support services such as, hotels, restaurants, transport, communication, automobile, tourism, hospitality, packaging, banking and insurance which are expected to have a substantial impact on employment generation. Employment generated by SEZs is remunerative and working conditions in the zones in terms of social security benefits, transport, health, food facilities, working environment and working space, are also better than those in the same types of jobs in the rest of the economy.