study on special economic zones in india

8/12/2019 Study on special economic zones in India

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A Project On

Impact of SEZs in India

Guided By:

Prof. P. A. Johnson

Presented By:

Jatin Arora PG12013

Brij Mohan PG12017

Samiksha Kothari PG12019

Mihir Ambedkar PG12011

Rutika Kasat PG12015

MET INSTITUTE OF MANAGEMENT


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Acknowledgement

We would like to take this opportunity to express our sincere and heartfelt gratitude to Prof.P. A Johnson for his timely guidance and inspiration without which this project would not have been

possible.


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Contents

Acknowledgement .................................................................................................................................. 2

Introduction ............................................................................................................................................ 4

Transition of EPZs to SEZs in India .......................................................................................................... 5

Rationale behind SEZs ............................................................................................................................. 6

SEZ Act 2005 ............................................................................................................................................ 7

SEZs Facilities and Incentives (SEZ Act 2005) ......................................................................................... 8

SEZs in India ......................................................................................................................................... 10

Impact of SEZs ...................................................................................................................................... 15

A. Export Performance of SEZs ...................................................................................................... 15

B. Human Development and Poverty Reduction Effects .............................................................. 18

Direct and Indirect Employment ............................................................................................... 18

Female Employment ................................................................................................................. 19

C. Regional disparity ......................................................................... Error! Bookmark not defined.

D. Land Acquisition & Displacement Effects ................................................................................. 23

E. Labour Relations ....................................................................................................................... 28

F. Agriculture ................................................................................................................................ 28

G. Fiscal Losses .............................................................................................................................. 29

H. Real Estate................................................................................................................................. 29

I. Water Scarcity ........................................................................................................................... 30

Financial Viability of SEZs ..................................................................................................................... 31

Lessons from China ............................................................................................................................... 35

Conclusion ............................................................................................................................................. 37

Bibliography .......................................................................................................................................... 38


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Introduction

India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ)model in promoting exports, with Asia's first EPZ set up in Kandla in 1965.

With a view to overcome the shortcomings experienced on account of the multiplicity of controls andclearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view toattract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announcedin April 2000.

A Special Economic Zone (SEZ) is a geographical region that has economic and other laws that aremore free-market-oriented than a country's typical or national laws. "Nationwide" laws may be

suspended inside a special economic zone.

The category SEZ covers, including free trade zones (FTZ), export processing Zones (EPZ), freeZones (FZ), industrial parks or industrial estates (IE), free ports, free economic zones, urbanenterprise zones and others.

Usually the goal of a structure is to increase foreign direct investment by foreign investors, typicallyan international business or a multinational corporation (MNC), development of infrastructure and toincrease the employment.

Special Economic Zone (SEZ) is mainly introduced to attract the foreign investment and technology.

SEZ has its own laws for trade and other business apart from the country's law. SEZ covers thefollowing zones:

Free Trade Zone (FTZ) Export Processing Zones (EPZ) Free Zones (FZ) Industrial parks Free Ports Urban Enterprise Zones

This policy intended to make SEZs an engine for economic growth supported by quality infrastructurecomplemented by an attractive fiscal package, both at the Centre and the State level, with theminimum possible regulations


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Transition of EPZs to SEZs in India

India was one of the earliest to have EPZs. Following Shannon in Ireland in 1956 and Mayaguez atPuerto Rico in 1962, the first Asian EPZ came up at Kandla in India in 1965. This was followed by

the Santa Cruz Electronics Export Processing Zone (SEEPZ) at Mumbai in 1974. These weresucceeded by zones at Noida, Madras, Cochin, Falta and Vishakhapatnam. All these EPZs weredeveloped by the Central Government. The limited success of EPZs gave rise to the concept of SEZ.SEZ has much more flexibility and is much larger in size than EPZ and has proved successful inalmost all countries.

Differences between SEZ and EPZ

SEZ is much larger in geographical size than EPZ.

SEZ has much larger scope of business than EPZ.

Infrastructure of SEZ consist of manufacturing units, townships, roads, hospitals, schools andother services but EPZ are confined to manufacturing establishments.

The benefits of SEZ are more towards the growth of domestic business where as EPZ has themain objective of developing exports business.

SEZ is open to all fields of business like manufacturing, trading and services but EPZ has morefocus on manufacturing.

Tax benefits in SEZ are much more than in EPZ.

There is very limited accountability of export per formance in SEZ but it has great influenceover the business carried out in EPZ as the penalties and duty recovery is imposed in case ofshortfall.

The consumption of raw material that is imported duty free has to be consumed over a period of5 years in SEZ but the time period in EPZ is only 1 year.

Laws concerning the certification of the import goods are much more relaxed in SEZ than inEPZ.

Custom department has less interference in the inspection of the premises in SEZ but EPZrequires routine customs inspection of cargo.

FDI investment in manufacturing unite does not require sanctions from the board as it is in EPZ.


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Rationale behind SEZs

The SEZ is a subset within the geographical boundaries of the state. The rest of the host state islegally referred to as the Domestic Tariff Area or the DTA . Effectively, the SEZ is outside the

territory of the host state with respect to trade and investment.

Figure 1 below explains this relationship.

The host states can expect inter alia to earn increased export earnings, benefit from increasedemployment opportunities, improved training and skills, and transfer of modern technology

In return, foreign investors are offered incentives such as tax exemptions, duty free imports,exemptions from import quotas, capital mobility to remit profits, export allowances and subsidisedinterest rates within the SEZ.

A significant incentive offered by the host state involves the legal control of labour relations.Specifically, the right to establish trade unions or take industrial action may be limited within the SEZ

Political and economic stability, reliable infrastructure, inexpensive labour, market access, andefficient bureaucracy are factors that determine not only how attractive investors will find the SEZ,

but are factors that eventually determine the success of the SEZ.


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SEZ Act 2005

SEZs in India functioned from 1.11.2000 to 09.02.2006 under the provisions of the Foreign TradePolicy and fiscal incentives were made effective through the provisions of relevant statutes.

To instil confidence in investors and signal the Government's commitment to a stable SEZ policyregime and with a view to impart stability to the SEZ regime thereby generating greater economicactivity and employment through the establishment of SEZs, a comprehensive draft SEZ Bill preparedafter extensive discussions with the stakeholders.

The Special Economic Zones Act, 2005, was passed by Parliament in May, 2005 which receivedPresidential assent on the 23rd of June, 2005. After extensive consultations, the SEZ Act, 2005,supported by SEZ Rules, came into effect on 10th February, 2006, providing for drastic simplificationof procedures and for single window clearance on matters relating to central as well as stategovernments.

The main objectives of the SEZ Act are:

(a) Promotion of exports of goods and services

(b) Promotion of investment from domestic and foreign sources

(c) Creation of employment opportunities

(d) Development of infrastructure facilities

It is expected that this will trigger a large flow of foreign and domestic investment in SEZs, ininfrastructure and productive capacity, leading to generation of additional economic activity andcreation of employment opportunities.

The SEZ Act 2005 envisages key role for the State Governments in Export Promotion and creation ofrelated infrastructure. A Single Window SEZ approval mechanism has been provided through a 19member inter-ministerial SEZ Board of Approval (BoA). The applications duly recommended by therespective State Governments/UT Administration are considered by this BoA periodically. Alldecisions of the Board of approvals are with consensus.

The SEZ Rules provide for different minimum land requirement for different class of SEZs. EverySEZ is divided into a processing area where alone the SEZ units would come up and the non-

processing area where the supporting infrastructure is to be created.

The SEZ Rules provide for:

" Simplified procedures for development, operation, and maintenance of the Special Economic Zonesand for setting up units and conducting business in SEZs;

Single window clearance for setting up of an SEZ; Single window clearance for setting up a unit in a Special Economic Zone; Single Window clearance on matters relating to Central as well as State Governments;

Simplified compliance procedures and documentation with an emphasis on self certification.


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SEZs Facilities and Incentives (SEZ Act 2005)

CUSTOMS AND EXCISE :

SEZ units may import or procure from the domestic sources, duty free, all theirrequirements of capital goods, raw materials, consumables, spares, packingmaterials, office equipment, DG sets etc. for implementation of their project in theZone without any licence or specific approval.

Duty free import/domestic procurement of goods for setting up of SEZ units. Goods imported/procured locally duty free could be utilised over the approval

period of 5 years. Domestic sales by SEZ units will now be exempt from SAD. Domestic sale of finished products, by-products on payment of applicable Custom

duty. Domestic sale rejects and waste and scrap on payment of applicable Custom dutyon the transaction value.

I NCOME TAX

Physical export benefit 100% IT exemption (10A) for first 5 years and 50% for 2 years thereafter. Reinvestment allowance to the extend of 50% of ploughed back profits Carry forward of losses

FOREIGN DIRECT I NVESTMENT

100% foreign direct investment is under the automatic route is allowed inmanufacturing sector in SEZ units except arms and ammunition, explosive, atomicsubstance, narcotics and hazardous chemicals, distillation and brewing of alcoholicdrinks and cigarettes , cigars and manufactured tobacco substitutes.

No cap on foreign investments for SSI reserved items.

BANKING / I NSURANCE /EXTERNAL COMMERCIAL BORROWINGS

Setting up Off-shore Banking Units allowed in SEZs.OBU's allowed 100% Income Tax exemption on profit for 3 years and 50 % for nexttwo years.

External commercial borrowings by units up to $ 500 million a year allowedwithout any maturity restrictions.

Freedom to bring in export proceeds without any time limit. Flexibility to keep 100% of export proceeds in EEFC account. Freedom to make

overseas investment from it.


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Commodity hedging permitted. Exemption from interest rate surcharge on import finance. SEZ units allowed to 'write-off' unrealized export bills.

CENTRAL SALES TAX ACT

Exemption to sales made from Domestic Tariff Area to SEZ units.

SERVICE TAX

Exemption from Service Tax to SEZ units

E NVIRONMENT

SEZs permitted to have non-polluting industries in IT and facilities like golfcourses, desalination plants, hotels and non-polluting service industries in theCoastal Regulation Zone area

Exemption from public hearing under Environment Impact Assessment Notification

COMPANIES ACT

Enhanced limit of Rs. 2.4 crores per annum allowed for managerial remuneration Agreement to opening of Regional office of Registrar of Companies in SEZs.

Exemption from requirement of domicile in India for 12 months prior toappointment as Director.

DRUGS AND COSMETICS

Exemption from port restriction under Drugs & Cosmetics Rules.

SUB-CONTRACTING /CONTRACT FARMING

SEZ units may sub-contract part of production or production process through unitsin the Domestic Tariff Area or through other EOU/SEZ units

SEZ units may also sub-contract part of their production process abroad. Agriculture/Horticulture processing SEZ units allowed to provide inputs and

equipments to contract farmers in DTA to promote production of goods as per therequirement of importing countries.


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SEZs in India

At present there are 158 SEZs (as of February 2012) operating throughout India. The government ofIndia formally approved additionally more than 500 SEZs (as on October 2010)

Tamil Nadu and Karnataka are the first two states with highest number of SEZs are working i.e. 20and 18 respectively. In Chandigarh, Rajasthan and Orissa each one SEZs are functioning.

The government of India has also approved 109 SEZs, for Andhra Pradesh, 105 Maharashtra and 70Tamil Nadu.

Names of the few SEZs set up by the Government / Private sector are :

Kandla Special Economic Zone, Kandla (Gujarat)

SEEPZ Special Economic Zone, Mumbai

Noida Special Economic Zone, Noida (UP)

MEPZ Special Economic Zone, Chennai (TN)

Cochin Special Economic Zone, Cochin (Kerala)

Falta Special Economic Zone, Falta (West Bengal)

Visakhapatnam SEZ, Vishakhapatnam (AP)

Salt Lake Electronic City - WIPRO, West Bengal

Mahindra City SEZ (IT), Tamil Nadu

DLF Cyber City, Gurgaon

Hiranandani Business Park, Mumbai, Maharashtra

Tata Consultancy Services Limited, Tamil Nadu


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STATE WISE DISTRIBUTION OF SEZ S

1) I.T SEZs in Maharashtra, AP, Karnataka, Tamil Nadu

From the map we can immediately see that the highest number of SEZs is in the states ofMaharashtra, Andhra Pradesh, Karnataka and Tamil Nadu. A majority of these, around 66%, are inthe information technology (IT) and information technology-enabled services (ITES) sectors.

Even before the enactment of the SEZ Act, these states were major centres of the IT industry, mainly because the IT sector was given tax holiday till 2010 and other benefits such as land and electricity atsubsidized rates in these states. After the enactment of the SEZ Act, these same IT companies viedwith each other to get into SEZs so that they could continue enjoying tax breaks for a further fifteen totwenty years. Which means that after earning super profits for the past two decades riding on the IT

boom, in a large part facilitated by generous subsidies and benefits from the public exchequer, thesecorporations are now ensuring that they can continue to enjoy these benefits for the foreseeable future.


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As a result, on one hand as unfettered profiteering by capital has been facilitated, on the other handinvestment and expenditure in agriculture and social sectors have been curtailed. In this context itwould be useful to remember that the most number of suicides by debt-ridden farmers have also taken

place in these states.

2) SEZ clustering near big cities: Connection to real estate

After this we see that most of the SEZs are clustered around the big cities, specifically the metros. Amajority of the SEZs are situated in and around Delhi, Mumbai, Kolkata, Bengaluru, Hyderabad andChennai. From this it is clear that one of the original declared motivations behind the development ofSEZs, that SEZs would help in infrastructure development in the underdeveloped regions of thecountry as SEZ developers would build roads, communication and power supply networks in areassurrounding the SEZs, have completely failed. SEZ developers have invested nothing for thedevelopment of infrastructure in interior areas, rather they have tried to locate the SEZs mostly nearcities where there is existent infrastructure thereby increasing the pressure on this infrastructure.

3) SEZ clustering on agricultural areas

The third thing that becomes clear to us from this map is that many of the SEZs are coming up infertile, agricultural areas. These include the Gangetic plains of West Bengal, Vidarbha and coastalareas of Maharashtra, south Karnataka, coastal areas of Kerala, Tamil Nadu and Orissa and theagricultural areas of Punjab and Haryana. Although the central government had initially claimed that

not more than 0.5% of the arable land in the country would be acquired for SEZs, this amount hasnow increased by fivefold to around 2.7%.

4) SEZ clustering along coastlines

The next thing that this map brings to our attention is that the entire coastline of India is being handedover to national and multinational corporations for setting up of SEZs. Starting from Gujarat in thewest to West Bengal in the east, nearly the entire coastal regions of all the coastal states are dotted

with large and small SEZs. Many of these SEZs are being specially established for commodities like petrochemicals and steel, which have large international markets. This means that raw materials willenter these SEZs from either within the country or would be imported, to be processed into variousexportable commodities which will go out of the country. For this purpose, huge tracts of coastal landin the states of Gujarat, Andhra Pradesh, Orissa and West Bengal is proposed to be handed over to

private operators for setting up what has been christened as Petroleum, Petrochemical and ChemicalInvestment Regions (PCPIR).


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5) SEZ clustering in river valleys

Finally, this map also shows us that the SEZs have turned out to be a great way for the looting of thewater resources of the country. This is because we see that a large number of SEZs are coming up inthe major river valley regions of various states. This includes the Narmada-Tapti valley inMaharashtra, the Godavari valley in Andhra Pradesh, the Kaveri valley in Karnataka-Tamil Nadu, thevalley of the Mahanadi and its distributaries in Orissa and in the lower Gangetic valley in WestBengal.

6) Where are there no SEZs

It is quite obvious from the map that there are nearly no SEZs in north-east India and Kashmir.Because of the geo-political sensitivity of these border regions, the government apparently does notgive approvals for setting up SEZs in these states. Also, the higher costs of setting up SEZs in theseremote and less accessible areas, and also the higher costs of transport and communication, does notmake it a lucrative option for SEZ developers to set up SEZs in these states. Basically, all the reasonsfor setting up SEZs in a particular region enumerated above are generally absent from these regions.Moreover, the long standing movements for self-determination in these regions would have alsodissuaded corporations from setting up SEZs there. We also see that there are no SEZs in the desertareas of Rajasthan or the arid regions of north Karnataka because of lack of water and otherinfrastructure.

7) Probing the absence of SEZs in Bihar and UP

Two major states where there are few or no SEZs are Uttar Pradesh and Bihar. The Nitish Kumargovernment of Bihar has taken a policy decision not to set up SEZs in Bihar. According to politicalactivists and analysts from Bihar, the reason is not that Nitish Kumar is anti-capital or hostile to thecorporates. The reason is the socioeconomic conditions specific to Bihar and the caste support base of

Nitish Kumars government. Same hold true for Uttar Pradesh.

A look at the geographical distribution of SEZs on the map of India today clearly shows the scale ofthe aggression of big capital over the resources of India, resources that include our agricultural land,waters, sea coasts and infrastructure. However, we also see how a spe ctrum of peoples strugglesagainst this, ranging from the legal methods used in Goa, to the peaceful protests by the villagers ofJagatsinhpur in Orissa against the POSCO SEZ, to the armed struggle being waged in large parts ofeast-central India, has been able to stop the establishment of SEZs and successfully resist thiscorporate onslaught.


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SECTOR WISE D ISTRIBUTION OF SEZ S

Of the sectors, the Information Technology and IT enabled services sector has a 61% share of SEZs,

while the biotech, pharmacy, textile sector and multi-product SEZs have less than 10% share each.

Apart from these, there are three airport based multi-product, and eight port-based multi-productSEZs.

Source: SEZ India, 2011e


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Impact of SEZs - Positives

A. Export Performance of SEZs

Special Economic Zones Primarily aim at developing export potentials of the country through exportoriented individual complexes or industrial agglomerates.

The special economic zones in India were established with a view to bring expertise for the country'sexports sector. For this a policy was introduced on 01.04.2006. As to these policies, the Governmenthas set up SEZ's in the public, private, joint sector or by State Governments. In this regard some of theexisting Export processing zones were converted in to Special economic zones.

Fiscal incentives, financial assistance, infrastructural support and environment free of bureaucraticinterference, underlies the economic policy parameters promoting these zones. These incentives andassistance schemes increase indirect competitive strength in the units in these zones to face adequatelythe international competition in the world market. The valuable foreign exchange earned by the unitsin the SEZs provides the needed investment resources and thus help the economic development of thecountry.

Source: SEZ India, 2011e

Year Value (Rs. Crore) Growth Rate ( over previous year )

2003-2004 13,854 39%

2004-2005 18,314 32%

2005-2006 22 840 25%

2006-20007 34,615 52%

2007-2008 66,638 93%

2008-2009 99,689 50%

2009-2010 2,20,711.39 121.40%


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Exports from the functioning SEZs have increased to Rs. 2.2 trillion in 2009-10 from Rs. 13,854 crorein 2003-04. The value of exports was Rs. 18,314crore in 2004-05, Rs. 22,840 crore in 2005-06 andRs. 34,615 crore in 2006-07. It grew by a 43 percent and reached Rs. 3.16 Trillion in 2010-11 fiscal.As per the Ministry of Commerce and Industry, Gujarat has registered the highest exports of US$ 32.6

billion.

An example of a successful SEZ in this regard would be the Mundra SEZ. This SEZ houses Indiaslargest private port and has been most successful in seeing an increase in exports. It is expected tohandle 100m tonnes of exports by 2013, with a growth rate of 40% in these years.

While the astounding figure of Rs 2 lakh crore exports from SEZs till March 2010 is used to highlightthe performance of SEZs in general, it is important to examine this figure. Nearly 50% of theseexports came from the same handful of functional zones in the state of Gujarat. Also, it may be notedthat Gujarats functional SEZs, including Kandla, Mundra, Jamnagar, Surat and Dahej, whichcontribute to the exports, existed or were projects that were planned and under construction before

the central and state SEZ Acts were put in place; hence their success can hardly be attributed to theSEZ policy of 2005. Further, a single SEZ (Reliance Jamnagar) contributed Rs 75,000 crore to theall-India figure, and this level of performance cannot be expected of all SEZs.

SEZs are a specifically delineated duty free enclave and are deemed foreign territory for the purposeof trade operations, duties and tariffs. Accordingly, goods and services from domestic tariff area(DTA) to SEZ are to be treated as exports and goods coming from SEZ into DTA are to be treated asimports.

The incentives and facilities offered to the SEZs include duty free import/domestic procurement ofgoods for development, operation and maintenance. At the same time, the SEZ law allowsimport/export operations on self-certification basis.

Additionally, as per the EXIM Policy (2002-'07) and the Foreign Trade Policy (2004-'09) an SEZ unitwas required to achieve a positive NFE.

The issue of positive NFE (Net Foreign Exchange) and physical exports is also controversial, as Rule53 of the SEZ Act, which considers sale to DTAs from SEZs, is deemed exports. In fact, it was theCAG report of 2 008 that observed that 22 SEZ units had been achieving the prescribed positive

NFE mainly though domestic sales and this defeats one of the sub-objectives of the scheme whichwas to augment real exports.

Policy had not prescribed the extent of foreign exchange that should be earned by an SEZ unit throughactual physical export and that which could be earned through deemed export in DTA, to comply with

positive NFE provision .

However, the Comptroller and Auditor General of India has pointed out that most of the SEZs sellgoods within the country as deemed exports rather than actually exporting them overseas. Thisseems plausible as the exponential rise of exports from SEZs corresponds with stagnant nationalexports. The Finance Ministry speculates that some units have merely shifted to these zones from theDTA to avail tax benefits

The CAG found that duty was waived twice - first on the inputs used in manufacturing products in theSEZs, and again when the finished products from the SEZs were allowed into DTA at nil rate of duty.


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The duty foregone on the inputs utilized for manufacture of the finished products could not berecovered, in the absence of the provisions of paying back.

CAG's audit scrutiny explains how this system turned out to be a huge favour for Nokia the wellknown mobile manufacturer, while putting similar units in the DTA or even in other EOUs at

distinctly disadvantageous position. The audit report states without mincing words, "Audit scrutiny ofrecords of Nokia India Pvt. Ltd., a unit in Madras SEZ, revealed that the unit cleared mobile phoneswith a value of Rs.4,855.69 crores in 2005-06 and 2006-07 in DTA at 'nil' rate of duty. Duty ofRs.681.38 crores (Rs.86.76 crores in 2005-06 and Rs.594.62 crores in 2006-07) foregone on theinputs used in the manufacture of these mobile phones could not be recovered in the absence ofenabling provisions."

Exports Tr end Analysis (Value in crores)


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B. Human Development and Poverty Reduction Effects

Three channels through which SEZs may affect human capabilities

Employment effects Human capital formation effects Technology upgrading effects Income effects

E MPLOYMENT E FFECTS

Direct and Indirect Employment

The employment effect of SEZs operates through three channels: one, SEZ generates directemployment for skilled and unskilled labour; two, they also generate indirect employment; and three,they generate employment for women workers.

It is believed that employment creation generates incomes, creates non pecuniary benefits, improvesthe quality of life of labour and enhances their productivity. These, in turn, have poverty reductioneffect. SEZs have lead to employment generation.

The total employment by all types of SEZs across India as of 2011 was about 7, 00,000.

The indirect effect is manifested as ancillary employment opportunities generated in sectors of theeconomy affected by the operations of the SEZ. These include, transport, communication, automobile,civil aviation, shipping, tourism, hospitality, packaging, banking, and insurance. Employmentopportunities are, thus generated for both unskilled and skilled labour.

Critics however argue that employment opportunities created within SEZs will not be a net addition toemployment; they will replace old jobs outside the zones due to relocation/diversion of investmentactivities from the domestic mainland to SEZs.


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involves upgrading of the education system to cater to the needs of the zone units. Zone units mayalso be setting up training institutes to impart training to the labour to create the relevant pool ofskilled labour. Skill formation for the poor unskilled workers also occurs through assimilation ofindustrial discipline. This might increase the welfare of poor unskilled workers by increasing therange of job opportunities available to them . Improved skills and productivity increase workersincome earning capacity. Given the high labour turnover rate in the SEZs, domestic firms can benefitfrom this training by hiring workers previously employed in the zone firms.

In the long-term, the creation of a macro environment in which returns to education and skilldevelopment are high, is an important component of the skill formation effect of SEZs. Zone unitsraise the demand for and wages of skilled workers through technology transfer and capital investment,which in turn provides positive incentives for educational attainment and skill formation.

SEZs offer a highly conducive investment climate to attract FDI by making up for infrastructuraldeficiencies and procedural complexities that characterize developing countries. Typically, FDI bringswith it technology transfer, managerial, and other skills (such as marketing and distribution), access tomarkets and training for staff. Foreign entrepreneurs may set an important example for potentialdomestic entrepreneurs by demonstrating that the right combination managerial, technical andmarketing know-how can allow organizations to profitably enter world markets The exportknowledge of foreign firms operating in SEZs is expected to spill-over to domestic firms in SEZs andthen to those in the domestic economy. Through such linkages SEZs may enable firms in the rest ofthe economy to master production, distribution and marketing skills important for enhancinginternational competitiveness. SEZs can thus play a crucial role in upgrading domestic entrepreneurialskills.

T ECHNOLOGY U PGRADING E FFECTS

SEZs attract export-oriented FDI and promote other forms of collaboration between local firms andMNCs. For instance, SEZs facilitate the insertion of domestic SMEs (small and medium enterprises)into global value chains by offering them an enabling investment climate. Global standards, low-costcompetition, and advances in technology raise challenges for the SEZ units competing in global valuechains. This stimulates learning and innovation which are crucial aspects of human development.

Learning and knowledge created in SEZs is eventually transmitted to domestic firms supplying to theSEZ firms through backward linkages when the companies within the SEZ buy inputs from the hostcountry. Direct transaction of technology and indirect spill-overs through various channels such as

copying, reverse engineering, and movement of workers and managers between foreign and domesticcompanies also facilitate transmission of knowledge to the rest of the economy. Further, the trade bodies, manufacturers associations and export marketing bodies which provide a useful platform tointeract and to foster closer rapport among members act as valuable forums for information sharingand spillovers.


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I NCOME E FFECTS

The all-India per capital Net National Product (NNP), which in simpler terms is the country s per

capita income, stood at 53331 in 2010-11.

Five out of the seven top states that account for 76 per cent of total approved zones namely,

Maharashtra - 83471 ,

Haryana - 94680 ,

Karnataka - 60946 ,

Gujarat - 75115,

Tamil Nadu - 72993 , have per capita incomes higher than the national level.

The other two (Andhra Pradesh and West Bengal) have per capita marginally lower than the nationalaverage.

The per capita income is one of the most common yardsticks for clubbing states into rich and poorcategories. States with per capita incomes higher than the national level can be called richer than theothers.

Thus out of seven states that individually account for 5 per cent of the total SEZs approved, five aremore well-off, higher-income states. These five Maharashtra, Haryana, Karnataka, Gujarat and

Tamil Nadu have 268 of the 500 + approved SEZs. Overall they account for 57.7 per cent of the SEZscoming up in the country.

The two other states Andhra Pradesh and West Bengal are middle income states with 85 zonesor 18.3 per cent of total SEZs.

Bihar has the lowest per capita income of 20708 . No SEZ has come up in Bihar till now.

Among the top ten poorest states of the country apart from Bihar, Assam, Arunachal Pradesh andManipur also do not have any SEZs. Jharkhand and Chhattisgarh have one and two each


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Linkages between SEZs and human development

The above analysis suggests that SEZs impact on human development through three broad channels:employment generation, skill (human capital) formation and technology upgradation. Each of them

exerts two types of effects: direct and indirect. For instance, employment is generated directly whenzone units and administration hire labour. The demand for complementary goods and servicesgenerates indirect employment. Similarly, the skill formation effect operates directly when workersare given specific training by the firms or when they acquire skills by working in the zone units. Theindirect channel becomes operative when the spillovers take place through movement of workers todomestic areas.

Finally, foreign collaborations are a direct source of new technology, managerial, and marketingnetworks in the zones. But they also narrow the technology gap between the foreign and domesticfirms indirectly by promoting spill-overs within the zone and then outside the zone. Direct impact in

each case may be empirically analysed but indirect effects, which operate through backward andforward linkages are difficult to measure. They can only be assessed by analysing the extent of suchlinkages.

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Impact of SEZs - Negatives

A) Land Acquisition & Displacement Effects

Land acquisition is the hot topic of Indias SEZ policy. The SEZ Act, 2005 makes no mention of it.

Land acquisition is especially contentious and problematic when the land being acquired is populatedwith people living off the land, which is often the case with agricultural land, as was the case in

Nandigram, West Bengal.

In addition to this that real-estate developers can engage in major land grab in the guise of setting upSEZs as the SEZ rules require only 25 per cent of the land to be used for industrial processing

purposes.

While approved SEZs are to consume 95,000 hectares of land, the land allocated to SEZs is about0.070% of the total land area and 0.128% of the total agricultural area of the country. While this mayseem low, it is proven to be problematic because of the high population density in some of theseareas.

An illustration of the flawed acquisition mechanism by the government would be the case of the stateof Andhra Pradesh, where land is being acquired from the poorest people who had been earlier

allocated land by the government in land-for-the-poor schemes . Legally, this land belongs to thegovernment, so the government takes it back often without compensation on the behalf of SEZdevelopers.

On the other hand, the Commerce Ministry has cited examples of how rise in land rates in barren,unproductive land has brought wealth to the poor and SEZs have brought infrastructure to thehinterland, as is the case with Mundra in the state of Gujarat. The wastelands in the coastal regions ofGujarat are mostly owned by the government, hence leaving out land acquisition out of the picture.Moreover, states like Tamil Nadu have seen the rural population welcome SEZs, because severalyears of social upliftment by the government has made the populace less dependent on agriculture fortheir livelihood.


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C ASE STUDY NANDIGRAM V IOLENCE

The Nandigram SEZ controversy, which caused the Nandigram massacre, started when the WestBengal government decided that the Salim Group of Indonesia would set up a chemical hub under theSEZ policy at Nandigram, a rural area in the district of Purba Medinipur.

The chemical hub required the acquisition of over 14,000 acres (57 km) of land. The specialeconomic zone spread over 29 mouzas (villages) of which 27 were in Nandigram. Most of the land to

be acquired was multi crop and would have affected over 40,000 people. Expectedly, the prospect oflosing land and thereby livelihood rose the heckles of the predominantly agricultural populace. Thevillagers, who had been predominantly supporters of the party in power, CPI (M), turned against itand organized a resistance movement under the banner of the newly formed Bhumi Uchhed PratirodhCommittee or BUPC

The villagers took over the administration of the area and all the roads to the villages were cut off.The administration was directed to break the Bhumi Ucched Protirodh Commitees (BUPC) resistanceat Nandigram and a massive operation with at least 3,000 policemen was launched on March 14,2007.

However, prior information of the impending action had leaked out to the BUPC who amassed acrowd of roughly 2,000 villagers at the entry points into Nandigram with women and childrenforming the front ranks. In the resulting mayhem, at least 14 people were killed .

After the bloodshed at Nandigram, and the stiff resistance from opposition parties and Left Front partners over land acquisition, chief minister Buddhadeb Bhattacharjee on 3 September expressed thegove rnments preference for the sparsely populated island of Nayachar, 30 kilometres from Haldia, toset up the much talked-about chemical hub.


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C ASE STUDY POSCO SEZ

On June 22nd 2005, the state government of Orissa signed a Memorandum of Understanding(MoU) with the Korean steel giant, the Pohang Steel Company (POSCO). Since then the company hassigned more than 40 MoUs with the government.

Valued at Rs. 52,000 Crores ($13 Billion), this is India's largest Foreign Direct Investment (FDI) yet,and involves a 12-million ton integrated steel plant, and the construction of a new port for which over4,500 acres of land has been designated. The proposed steel plant is expected to affect seven villagesin three gram panchayats, namely Dhinkia, Nuagaon & Gadakujang, and will allow POSCO to extract600 million tons of iron ore over the next 30 years.

The terms of the MoUs require the government to recommend, free of encumbrances to POSCO,mining and prospecting licenses, clearances related to matters of forest and environment, and permitsfor drawing water from the Mahanadi River. In addition, the government has agreed to defend various

recommendations made in favor of POSCO in the eventuality of litigation in the appropriate judicial,quasi judicial areas. Similar facilitation of clearances by the state government for all aspects of the

project - the steel plant, mines, roads, railways and port - has been agreed upon.

In 2006, the project was granted "Special Economic Zone" (SEZ) status, and the Prime Ministerissued a statement saying that land acquisition by POSCO must be expedited.

While reports issued by the Government and by POSCO claim that about 400 families will bedisplaced by the project, according to figures from the 2001 census, the three panchayats (villages)have3,350 households, which adds up to 22,000 people who will be displaced.

This is fertile land, and an average family involved in cashew farming earns about Rs. 20,000 ($500) per season. About 50% of the families are also involved in pisciculture (mostly prawns), for which thedaily earnings per family can range between Rs. 100-5000 ($2.50-$125). In addition, there are manylandless families that depend on ancillary employment like making baskets for packaging Paan leavesgrown in the area.

POSCO has applied for environmental clearance for different parts of the project separately ratherthan as a whole in the hope of expediting clearance.

Implications of SEZ status

POSCO gets a 10-year tax-break as a result of its being granted SEZ (Special Economic Zone) status by the central Government. Land will also be sold to POSCO at a lower than market price. Theseimpose significant costs to the exchequer. The SEZ status of this project also removes it from the

purview of the local panchayat governments, thus further decreasing the control of the villagers overtheir local environment. Further, the SEZ status also grants immunity to POSCO from adherence tohard-won labor and environmental laws designed to protect employees.

Since government records recognize only a small fraction of the total number of affected people,

most of them will not receive the compensation or rehabilitation they are entitled to. The residents ofthe area have been growing betel nuts, cashew nuts and paddy, and also engage in pisciculture. No
http://www.indiatogether.org/2007/oct/eco-posco.htmhttp://www.indiatogether.org/2007/oct/eco-posco.htmhttp://propertybytes.com/?p=524http://propertybytes.com/?p=524http://www.indiatogether.org/2007/oct/eco-posco.htmhttp://www.indiatogether.org/2007/oct/eco-posco.htm


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other land in the immediate neighborhood is viable to grow these crops. The POSCO plant willuproot the farmers from a livelihood that they are skilled at and trained for, and convert them tounskilled labor, and transfer them to non-guaranteed jobs in the construction of the plant, port andother facilities.

The situation in Orissa and the tactics being used by the government are similar to those employedin Kashipur, Kalinganagar, and more recently in Nandigram, West Bengal, where villagers resistingthe takeover of their farmland for the construction of an automobile plant were shot and killed by the

police. Villagers opposed to the POSCO steel plant are being intimidated by the use of force,including the use of paramilitary troops. During the statutory public hearings in April 2007, the Statestationed 15 platoons of armed paramilitary forces in the area thus silencing the expression of localopposition to the project. Amnesty International, the human rights organization, issued a reporturging the Government of Orissa against the use of force, and to follow the democratic process.
http://sanhati.com/news/193/http://sanhati.com/news/193/


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B) Labour Relations

While the SEZ Act, 2005 makes no mention of changes in labour law, all units operating in SEZs arecategorised as Public Utility Service , meaning that many labour laws become irrelevant. A PublicUtility Service is defined to be a service that is of great value to the society, and the lack of provisionof which can affect the life of everyone.

In this case, employees have to give a 14 day notice before going on strike. Additionally, employeesin SEZs dont have protection in the form of a notice period or compensation against retrenchment. Itfollows that employees will be reluctant to raise a voice against their employers when the need arises.

Moreover, employers in SEZs have the right to change the terms and conditions of service at any point of time. Critics raise concern regarding the lack of labour unions, stating that the possibility offall in real wages is high.

C. Agriculture

Agricultural land, and the non-agricultural common land in villages that is used by marginal sectionsof the agricultural population for grazing livestock and other means of subsistence, is being grabbedfor SEZs, thereby putting the lives and livelihoods of a large section of the rural population in

jeopardy.

Rising food prices on one hand, and ever-decreasing government investment in agriculture, is pushingthe country toward a food crisis in the near future. Under these circumstances, diverting this hugeamount of agricultural land for non-agricultural purposes will worsen the situation.

Together with this, states like Uttar Pradesh, where agriculture is the mainstay, and which have beenleft behind in the race for setting up SEZs, are now trying to hand over huge tracts of agricultural landto corporations, although not for setting up SEZs.

The case in point is the attempt by the UP government to transfer around 1 lakh acres of land to the JP Group for building the Yamuna Expressway in Western UP and the three times larger GangaExpressway in Eastern UP, and associated high -tech cities. The recent police firing on farmers inAligarh, protesting against land acquisition for the Yamuna Expressway, should be mentioned in thiscontextThe SEZs policy will cause the following effects on Indian Agriculture:

i. The acquisition of huge tracts of prime and fertile agricultural land has caused reduction infood grain production and ground water levels.

ii. Giving the land acquired at concessional rate, to rich corporate houses and other concessionsgiven to SEZs units and developers has added to fiscal deficit and agricultural process.

iii. The acquisition of huge land more than requirement diverts prime agricultural land to non-agricultural uses.


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iv. In practice, SEZ units do not provide sufficient employment, because modern units need

highly skilled workers in a limited strength only.

v. The SEZs policy creates dual economy, SEZs area/zones that will be developed, but non-SEZarea will be backward comparatively.

vi. Acquiring fertile land producing two or three crops a year at concessional rate (low thanmarket rates) has caused clashes between the government and the farmers.

D. Fiscal Losses

i.

Greatest problem with the SEZ Act in its current form is the huge fiscal losses that will occur because of the tax incentives and hidden subsidies being provided to SEZ developers and producers within the zone.

ii. The offer of tax holidays in the SEZs goes beyond generous providing 100 per centexemption from income-tax on profits for the first five years of production and 50 per cent forthe next five years. Even land developers are to be given tax breaks.

iii. These amount to appalling losses in terms of foregone revenue the Finance Ministry hasestimated that if total investment in SEZs is around Rs 3,60,000 crore, the revenue loss to thestate exchequer would be more than Rs 1,74,000 crore.

iv. To give up such a huge amount of government resources is, of course, a major crime given theneeds of Indian society today and in future. But once again, what is at stake is more than therevenue losses, enormous as they are. Providing such massive tax giveaways encouragesinvestors to shift their production from other locations to SEZs, in order to benefit from thetax holiday. This means NO net benefit to the economy from additional investment, since it issimply moving from other areas.

E. Real Estate

It is for this reason that all the big real estate companies such as DLF, Emaar, Parsvanath, Raheja etc.are in the business of developing SEZs today.

In most of the ITES SEZs, a couple of IT companies provide the faade behind which goes on alucrative business of running shopping malls, multiplexes, hotels and luxury housing. This has beenfurther facilitated by the government regulation that only 35-50% of the land in a SEZ need to be used

for industrial purposes, the rest can be used for purposes such as real estate development.


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Over the last two years as land prices had depreciated in the big cities due to the economic recession,the government amended the SEZ rules to bring down the minimum land required for the building ofmulti-product SEZs in fifteen medium-sized cities to 250 hectares from the erstwhile 500 hectares.These include cities such as Raipur, Varanasi, Dhanbad and Amritsar.

It has been further reduced to 125 hectares in the smaller cities. This means that the land around thesecities has also been opened up for real estate speculation via SEZs and in the next few years we mightexpect a few hundred more SEZs in this map around the medium and smaller-sized cities.

F. Water Scarcity

SEZs have turned out to be a great way for the looting of the water resources of the country. This is because we see that a large number of SEZs are coming up in the major river valley regions of variousstates.

This includes the Narmada-Tapti valley in Maharashtra, the Godavari valley in Andhra Pradesh, theKaveri valley in Karnataka-Tamil Nadu, the valley of the Mahanadi and its distributaries in Orissaand in the lower Gangetic valley in West Bengal.

This means that the water of the major rivers of the land is going under the control of these SEZs at acheap rate. And this is happening in various places where there is great scarcity of water for drinkingand irrigation or there are intra-state conflicts on water usage such as the conflict between Karnatakaand Tamil Nadu on Kaveri water.

In many places water from dams are being preferentially supplied to SEZs rather than to farmers, as ishappening for the Bharat Forge SEZ near Pune in Maharashtra, or has been proposed for the JindalSEZ in Salboni in West Bengal.

Today, while we see that because of scarcity of water for irrigation, crops are failing in different partsof the country, the central and state governments are handing over the control of water resources tothe private owners of these SEZs.


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Financial Viability of SEZs

Today SEZs have become some sort of a Business Model. There are three aspects to understand theBusiness of SEZs. Main concern is the Economic Viability of the zone.

Any Economic Zone such as an SEZ should be a constellation of projects; which should be spun offfrom a common economic activity. To make integrated use of the three factors of production, capitaland labour possible, countries provide a contiguous parcel of land to entrepreneurs, the fourth factorof production.

The SEZs, therefore, attempt to maximize the use of each factor to produce the best possible qualityof goods and services. Only when these connections are established can the infrastructure provided beoptimally utilized. The connectivity can be then leveraged upon to keep costs low and the marginsstretched to maximize the revenue.

An SEZ plan has to be, therefore, substantially different from real estate projects. These zones are nottownships per se. Instead of being clustered around a hosing zone, an SEZ has to be clustered aroundunits.

The foregoing analysis shows up, therefore, two keys to evaluate the possible success of the proposedSEZs. The keys are the location or the proximity to an economic hub, and the physical connectivity it

plans to generate, like transport links. In the case of the product specific SEZs, the cluster of activitywould create an economic hub that, in turn, would generate the momentum for the SEZs to becomeviable.

Financing an SEZ

Assessment of scale of investment demand Control over size of the project Factoring in relative lack of debt windows in domestic market Possible upfront recoveries by government of some costs Match between external development and private development within the zones

SEZs are mega investment vehicles. The larger Indian developers have followed international practices to develop the SEZ properties as special purpose vehicles, such as Reliance industries,which has set up the Navi Mumbai SEZ.

Larger SEZs are all expected to adopt this route to firewall the parent company from the losses whichare certain in the initial years. If one draws a comparison of the SEZs projects with the ongoinginfrastructure projects in the other sectors, it can be seen that across the board Indian companies preferto work on such ventures through the special purpose vehicle route.

A key government supported report on development of infrastructure for the economy has outlinedthe advantages of the special purpose vehicle route for the economy. These are as follows

Able to vary the capital with ease. Easy to wind up.

Tax transparency


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Government has limited its role under SEZ act to provide land to promoters only, if they were unableto procure it themselves. SPVs in India are created by Private sector instead of buying intogovernment floated entities.

In absence of Government intervention the private developers have to assume a deeper role. Lack of

Government funding has a led to a financial risk on top of lack of experience among developers inhandling projects of such scale.

Additional Risks included are

Uncertainty over location decisions as private investors do not control investment climate. Inability to develop corresponding infrastructure beyond the zone. Investment promotion and Marketing activities especially abroad. Since the investment risks are far more for the private parties in Indian SEZ models

Tax breaks may not seem too much of a giveaway. It could take more than a decade for the costincurred to break even.

Initially there was a model of financing an SEZ through Angel investor. Since its not possible for adeveloper to sell the land on which SEZ is situated (just a lease holder), the equity participation routeis preferred route but given the current scale of investment, it is very unlikely that any of the SEZ

promoters would be in the position to tap the capital markets for a listing soon. Valuations may not bevery attractive at this point.

Lending to SEZs by Banks

Banks have to be solving issues before they can lend to SEZs. This is because SEZs cost of moneywith a long gestation period and a possible moratorium on any recovery. As banks raise a large

percentage of funds in short term deposits we observe that there is asset liability mismatch in lendingPortfolios. Another issue is that there is a need to keep a check on non performing assets in BankingIndustry.

Result


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The pace of withdrawals is increasing, with 60 leaving in the past two years alone. These includecompanies that were looking to set up SEZs for captive purposes (Bata, Dr Reddy's and Essar) or tolease it out (DLF, Omaxe and Unitech). It's no different for tenants.

About one-third of India's exports come from SEZs. Impressive as that headline number is, it is boosted by some migrating exporters -- for example, IT companies moved from software technology parks to SEZs. Further, it hides the skew of just five states and five sectors account for 90% of exportsfrom SEZs.

Of the 583 SEZs the Indian government had approved till October 2011, only 143 were operational.The running SEZs are operating under capacity as well. The government recently changed landacquisition, incentives and taxation provisions.

In 2008, the Indian government transferred the responsibility of land acquisition from government todeveloper itself.


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In 2009, the government changed the basis of incentives from profits to investments in the draft of thedirect tax code (DTC).

In 2011, the budget removed income tax exemption for 15-year period and slapped 18.5% minimumalternate tax and 15% dividend distribution tax. Investors argue that once the DTC is enacted, SEZs

won't be an attractive option anymore.


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Lessons from China

One of the reasons why China is such a success story is its concentration and focus on world classinfrastructure within the specifics zones. Thus, with a cumulative FDI of around $70 billion, the five

SEZs namely Shenzen, Zhuhai, Shantou, Xiamen and Hainan together account for 20 per cent of theexports from China, providing direct employment to over 8 million persons.

China attracted investors by offering a slew of tax sops, flexible labour regime and quick clearances.PRC (SEZs are established by PRC in china) invests significant resources into developing andimproving the infrastructure located within the SEZ and other infrastructure facilities, which arerequired to support SEZs.

Although one should also remember that the development of SEZ will require some time. ChinasSEZ policy was essentially state-driven, having FDI and export markets as its main focus.

Unlike China, Indias focus is not so much on FDI as on generation of economic activity. The philosophy driving Indias policy is to boost manufacturing, generate jobs while attracting FDI.

Few points of comparison are:

Location

The most prudent strategy for developing a SEZ is to have an essential and quality zone infrastructure.This will help attract industries. The private sector has limited experience in development of theseworld class infrastructure zones. Therefore SEZ projects should evolve under the public private

partnership format.

An important factor that should be kept in mind while deciding the location of SEZ is it should provide a natural gateway that could serve as a source of capital and a conduit for the movement ofgoods in the manner that Hong Kong and Taiwan function for China. India is yet to focus on thisapproach but Singapore is taking a lead in providing a similar natural gateway. If a SEZ is locatednear the urban areas then the labour needs of the units can also be easily satisfied, it would also ensureaccessibility and uninterrupted supply of essential utilities, SEZs located near ports or airports orhaving proximity to a bigger city have shown more progress than the industrial sites.

Unlike India, where 200-odd SEZs are spread over the length and breadth of India, China's five SEZsare strategically located in the southeast, three of them in Guandong province and are close to portsand trade nations like Hong Kong, Macau and Taiwan.

Positra in Gujarat which claimed to be a pioneer SEZ, has neither got a rail link nor an airport in thevicinity till now.

All the major ports in India are located 500-1,000 km apart. Shenzhen SEZ has many major portswithin a radius of 50 km


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Conclusion

The SEZs have high investment and employment potentials. The country has been an importantinvestment destination for the foreign investors apart from the domestic private corporate bodies. Thesurge in the investment activities during last 60 years of planning has created lot of employmentopportunities particularly for the skilled manpower. India is in the forefront of supply of skilled man

power, particularly in the area of software engineering.

Due to the world trend of recession in the advanced countries of the west, Indian skilled manpowerhad more employment opportunities within the country. Hence the schemes like SEZs have greatemployment potentials for the software engineers and other skilled workers. Hence there is need forsocial and political awareness among the people to support such schemes for the all-round economic

development of the country

It is imperative that laws are amended in order to make trade and flourish without disempowering the people who are displaced or the workforce in SEZs. The Land Acquisition Act of 1894 need to belooked into and a transparent rehabilitation law needs to be put in place. In fact, the people need to bemade stakeholders in the progress of the nation. Failure to do so may further prove former IndianPrime Minister VP Singh correct in his assessment of the SEZ policy of India, when he said, thecurrent promotion of SEZs is unjust, and that it acts as a trigger for massive social unrest, whichmay even take the form of armed struggle


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Bibliography

1) Special Economic Zones in India Myths And Realities by Amitendu Palit and SubhomoyBhattacharjee

2) Special Economic Zones by K. R. Gupta

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4) http://www.sezindia.nic.in/about-ep.asp

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6) http://www.ndtv.com/topic/land-acquisition-bill

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