Special Economic Zones (SEZs) stand as potent catalysts for industrial expansion, manufacturing advancement, and export augmentation. Their pivotal role in fostering economic growth is widely acknowledged. However, despite their potential, SEZs grapple with multifaceted challenges hindering their success. Foremost among these hurdles are issues about taxation, governing laws, and administrative mechanisms. Taxation complexities within SEZs often undermine their attractiveness to investors, hampering their ability to thrive. Furthermore, the legal framework governing SEZs sometimes lacks clarity and coherence, creating ambiguity and inhibiting effective operation. Additionally, administrative inefficiencies and bureaucratic red tape can impede the smooth functioning of SEZs, stifling their growth potential. Addressing these challenges is imperative for maximizing the utility of SEZs as drivers of economic development and prosperity.
Tag: Indian economy and issues related to planning, mobilization of resources, growth development and employment.
Decoding the Question:
- In the introduction, try to define SEZ.
- In Body,
- Discuss SEZ’s role in industrial development, manufacturing, and export.
- Discuss gaps which need to be filled in areas of taxation, governing laws, and administration.
- Try to conclude with a wayforward.
Answer:
SEZ is a geographical region that has economic laws different from a country’s typical economic laws (i.e. reduced taxes, tariffs and bureaucratic burdens). Usually the goal is to increase foreign investments and to boost exports. The SEZ economic regulations tend to be conducive to—and attract—foreign direct investment (FDI). FDI refers to any investment made by a firm or individual in one country into business interests located in another country.
SEZs are a tool for Industrial Development, Manufacturing, and Export:
- Industrial Development: SEZs act as growth engines for industrial development by providing a conducive environment for businesses to set up manufacturing units. They offer various infrastructure facilities such as reliable power supply, transportation, and communication networks, which attract investments from both domestic and foreign companies.
Example: The Kandla Special Economic Zone, established in 1965, was the first SEZ in India. It played a pivotal role in transforming the barren land of Kandla into a bustling industrial hub, generating employment opportunities and driving economic development.
- Manufacturing Hub: SEZs focus on promoting manufacturing activities and export-oriented production. They provide a range of incentives, including tax benefits, duty-free import of raw materials and capital goods, and simplified regulatory procedures, which encourage manufacturing units to operate in these zones.
Example: The Nokia SEZ in Sriperumbudur, Tamil Nadu, became a major manufacturing hub for mobile phones, attracting significant investments and contributing to the growth of India’s mobile manufacturing industry.
- Export Promotion: SEZs are primarily designed to boost exports and enhance India’s global competitiveness. Companies operating in SEZs enjoy various export-related benefits, such as exemption from import and export duties, simplified customs procedures, and access to global markets.
Example: In the financial year 2021-22, SEZs accounted for exports worth USD 65.28 billion, contributing to about 16% of India’s total exports. (Source: Ministry of Commerce and Industry, India)
- Employment Generation: SEZs create significant employment opportunities, both direct and indirect, as they attract a large number of industries and businesses. This, in turn, leads to the development of ancillary industries and supporting services, generating employment for the local population.
Example: As of March 2022, SEZs provided direct employment to approximately 24 lakh (2.4 million) people in India. (Source: Ministry of Commerce and Industry, India)
- Attracting Foreign Direct Investment (FDI): SEZs serve as magnets for foreign direct investment (FDI) due to the attractive incentives and a favorable business environment they offer to foreign companies. FDI inflows into SEZs contribute to technology transfer, infrastructure development, and increased economic activity.
Example: During the financial year 2021-22, FDI inflows into SEZs stood at USD 6.58 billion, showcasing the significant role SEZs play in attracting foreign investments. (Source: Department for Promotion of Industry and Internal Trade, India)
Challenges faced by SEZs:
- Land Acquisition and Infrastructure Development: As of March 2021, a total of 379 SEZs have been approved in India, covering an area of over 55,000 hectares. However, land acquisition for SEZs has faced delays and legal challenges due to issues related to compensation and land use. (Source: Ministry of Commerce and Industry, India)
- Regulatory and Policy Changes: According to a report by the World Bank, India has made significant efforts to improve the ease of doing business, but regulatory changes continue to pose challenges for businesses, including those operating in SEZs.
- Lack of Skilled Workforce: A study by the National Sample Survey Office (NSSO) found that the availability of skilled labor remains a challenge for SEZs, especially in remote or less-developed areas where some SEZs are located.
- Export Dependence: In the financial year 2021-22, SEZs accounted for about 16% of India’s total exports, which highlights their significant reliance on export-oriented industries. (Source: Ministry of Commerce and Industry, India)
- Competition from Non-SEZ Areas: According to a report by the Reserve Bank of India (RBI), the presence of SEZs has led to concerns about potential spatial diversion, where businesses may prefer to set up operations in non-SEZ areas to take advantage of similar incentives. (Source: RBI, Handbook of Statistics on Indian Economy)
- Compliance and Approval Processes: A study by the World Bank found that India’s businesses spend an average of 71 days per year to comply with labor-related regulations, which includes SEZs. This compliance burden can create delays and challenges for businesses.
- Infrastructure Bottlenecks: Despite ongoing efforts to improve infrastructure in SEZs, a report by the Comptroller and Auditor General (CAG) of India noted that several SEZs continue to face challenges related to inadequate transportation and power supply.
- Sustainability and Environmental Concerns: The development of SEZs can lead to environmental concerns. A study by the Centre for Science and Environment (CSE) highlighted instances of environmental degradation and violations of environmental norms in some SEZs.
- Operational Costs: A report by the Associated Chambers of Commerce and Industry of India (ASSOCHAM) highlighted that operational costs, including compliance and infrastructure maintenance, can offset the incentives offered by SEZs for businesses.
The Confederation of Indian Industry (CII) also raised four SEZ issues that fall in the domain of the finance ministry or the Reserve Bank of India — grant infrastructure status to buildings of SEZs and industrial parks, permit external commercial borrowing (ECB) for entire SEZ infrastructure, allow a refinancing option through ECB; relax the “risk weightage norms” for the real estate sector. The significance of SEZ can be understood in context of Chinese progress due to successful utilisation of SEZ. India’s success of SEZ depends on active policy interventions, removing all the roadblock, and implementing expert suggestions.
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