Insights into Editorial: Revamping SEZs to boost exports

Context:

At a time when India is poised to breach the annual $400-billion target for exports, the move to change laws governing the Special Economic Zones Act comes as a big boost for the sector.

This transformative announcement will enable states to become partners in the Development of Enterprise and Service Hubs.

As the finance minister observed, the move would enable all large industrial enclaves to optimally utilise the available infrastructure, thereby pushing up competitiveness of exports.

About Special Economic Zones (SEZ):

1. An SEZ is a territory within a country that is typically duty-free (Fiscal Concession) and has different business and commercial laws chiefly to encourage investment and create employment.
2. SEZs are created also to better administer these areas, thereby increasing the ease of doing business.
3. Asia’s first EPZ (Export Processing Zones) was established in 1965 at Kandla, Gujarat.
4. While these EPZs had a similar structure to SEZs, the government began to establish SEZs in 2000 under the Foreign Trade Policy to redress the infrastructural and bureaucratic challenges that were seen to have limited the success of EPZs.
5. The Special Economic Zones Act was passed in 2005. The Act came into force along with the SEZ Rules in 2006. India’s SEZs were structured closely with China’s successful model.

Facilities Available to SEZ:

1. Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units.
2. Exemption from various taxes like Income Tax, minimum alternate tax, etc.
3. External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restriction through recognized banking channels.
4. Single window clearance for Central and State level approvals.

Concerns with present SEZ:

1. SEZs in India have not been as successful as their counterparts in many other countries. Several Asian economies, particularly China, Korea, Malaysia, and Singapore, have greatly benefited from these zones.
2. Most of India’s new generation SEZs came up not for exporting, but for avoiding taxes. Large fiscal sops, in the form of a bunch of reliefs from central and state taxes, lured developers into building SEZs.
3. Most manufacturing SEZs in India have performed below par due to their poor linkages with the rest of the economy.
4. Weak connections of coastal SEZs with their hinterlands inhibited these zones from utilising their full potential.
5. Many states did not match the central SEZ Act with State-level legislation, which rendered the single window system ineffective.
6. Lack of a robust policy design, efficient implementation and effective monitoring have seriously jeopardize India’s effort to industrialise through SEZs.

Scope of development of SEZs in India:

India’s coastline of 7,517 km, abutting nine states, can be leveraged to develop large hubs or industrial clusters near deep draft ports to enable goods to be sent out.

At the same time, firms may choose to be located in tier-2 and tier-3 cities in the hinterland, to be able to cash in on labour costs and the relatively lower cost of living. If the new legislation is framed with these considerations in mind, labour-intensive exports in apparel, footwear, furniture can be encouraged in a big way.

SEZs to be transformed in to Employment and Economic Enclaves (3 Es):

In the April-December 2021 period, exports from SEZs increased by 25% to $93 billion; these were $102.3 billion in 2020-21. About 270 SEZs are currently operational, though many more have been notified.

In rewriting the SEZ legislation, the commerce ministry will be guided by the recommendations of the Baba Kalyani report, submitted in November 2018.

It had suggested a focus on promoting employment, recommended that SEZs be transformed into Employment and Economic Enclaves (3 Es) and operational guidelines and other rules be modified accordingly.

There have been calls for separate procedures for manufacturing and services SEZs.

New Law that promotes infrastructure in SEZs:

1. The thinking behind the new law is also to enable optimum utilisation of all the vacant land and buildings in SEZs and industrial parks.
2. As commerce minister has been quoted, the infrastructure needs to be used to the maximum and, therefore, the government is looking to convert SEZs into a plug-and-play industrial park ecosystem.
3. Services companies appear to have been able to use SEZs more effectively than manufacturing companies. Also, the pandemic has hit the performance of several businesses.
4. According to some reports, the commerce ministry is understood to be working to see whether SEZ firms can be allowed to sell goods in the domestic market by paying just an ‘equalisation levy’.
5. This levy would be smaller than the regular customs duty that SEZ units are currently mandated to pay while supplying to the domestic tariff area. A lower duty would, no doubt, help boost sales.
6. But it will neutralize the advantages that SEZs enjoy, being specifically delineated duty-free enclaves, vis-à-vis domestic manufacturers to ensure a level-playing field.
7. To be sure, the changes to SEZs need to be accompanied by better labour laws and lower levels of protectionism.
8. Ahead of the Budget, Experts had cautioned industry telling it to brace for increased competition and think global since India was going to sign a host of ‘very deep’ FTAs with advanced economies like Australia, the UK and the EU.
9. Indeed, while the government needs to make it easier to do business, exporters too must shape up.

Conclusion:

Promotion of MSME investments in SEZs by linking with MSME schemes and allowing alternate sectors to invest in sector-specific SEZs is among the recommendations by the Baba Kalyani Committee on SEZs.

The prospective SEZ legislation is expected to be more enterprise-friendly. As it “provides for significantly larger zones with more flexible labour laws and speedy customs clearance of inbound inputs and outbound finished goods, we may witness in India the emergence of China-style large, globally competitive processing firms.”

NITI Aayog has always been in favour of India taking a leaf out of the China book for the development of coastal economic zones on the lines of a Shenzhen.