Special Economic Zones in India: Catalysts for Economic Growth and Global Competitiveness

Tempo de leitura: 6 minutos

Special economic zones (SEZ) are special areas within a country that offer incentives to business and trade regulations operating in those areas. The main objectives of the SEZ are generating additional economic activity, promoting exports of goods and services from the country, promoting foreign and domestic investment and creating more employment opportunities beside the development of infrastructure facilities. The category ‘SEZ’ covers a broad range of zone types, few of which are free zones (FZs), industrial estates (IEs), and free ports, free trade zones (FTZs), export processing zones (EPZs). In this blog, we discuss the impact of SEZs on the overall economic and industrialized growth picture in India.

SEZs in India

One of the first in Asia and India’s first EPZ was set up in Kandla, Gujarat in 1965, followed by seven more EPZs in the country. The SEZ policy was introduced in April 2000, and it is envisioned to make SEZs a driver for economic growth supported by quality infrastructure and accompanied by an attractive incentives package, at the centre and state levels in the country. The eight pre-existing EPZs located at Kandla and Surat (Gujarat), Mumbai (Maharashtra), Cochin (Kerala), Chennai (Tamil Nadu), Visakhapatnam (Andhra Pradesh), Falta (West Bengal) and Noida (Uttar Pradesh) were converted into SEZs under this scheme. Later, the SEZ Act, 2005 was passed by the Indian Parliament in May 2005, and the act, supported by SEZ Rules, came into effect on February 10, 2006. As of March 31, 2024, there are 280 operational SEZs in India.

Source: Department of commerce

Growth of SEZs in India

After the SEZ rules implemented in February 2006, the Department of Commerce allowed 424 formal approvals for establishing SEZs. As on April 30, 2024, 375 SEZs have been notified. Out of the total employment provided to 30,70,653 persons in SEZs, 29,35,949 jobs were incrementally generated after February 2006 till December 31, 2023. This number is excluding millions of man days of employment produced by the developers for infrastructure occupations. Physical exports from the SEZs increased from Rs. 9,90,747 crore (US$ 133 billion) in 2021-22 to Rs. 12,63,578 crore (US$ 157.24 billion) in 2022-23, registering a growth of 28% and Rs. 13,55,220 crore (US$ 163.67 billion) in 2023-24 marking a growth of 7%. Overall, exports grew at a CAGR of 23% over the past 18 years (2005-06 to 2023-24). Major export destinations include the UAE, the US, the UK, Australia and Singapore. The total investment in SEZs till December 31, 2023, is Rs. 6,92,914 crore (US$ 83.18 billion), including Rs. 6,26,514 crore (US$ 75.21 billion) in the newly notified SEZs set up after SEZ Act, 2005. As of March 31, 2024, there are 280 operational SEZs in India and 100% FDI is allowed in SEZs through automatic route.

Source: SEZ India

Role of SEZ in India

The SEZ scheme created a significant response among investors, in India and abroad. This is evident from the steady flow of investment and creation of additional employment opportunities across the country. Apart from earning foreign exchange and developing infrastructure, SEZs have played a valuable role in the development of local areas in which they operate. This impact can be seen in terms of direct and indirect employment generation, the emergence of new economic activities, and overall impact on social life. With 38% share in India’s total exports, SEZs’ exports profile largely aligns with India.

Since the enactment of the SEZ Act, SEZs facilitated growth of exports from the country. In FY24, exports from SEZs expanded at 10% CAGR from FY18 to FY24 to US$ 163.7 billion compared with India’s average of 6% during the same period. Moreover, the share of exports from SEZs in the overall exports from India posted a six-fold increase, from 6% in FY06 to 38% in FY24.

SEZs in India also played a major role in the past few years in enhancing the country’s global competitiveness. These designated economic areas advanced the exports from the country and attracted foreign direct investment. By offering tax benefits, modernised regulatory procedures, scheme also supported in improving the infrastructure and facilitated the growth of new industries and businesses in the designated zones in multiple sectors, making Indian products and services competitive in the global market. The expansion of SEZs in the country led to the development of specialized industrial clusters, encouraging innovation, technological upgrading and creation of skilled employment opportunities. As a result, its improved India’s position as an attractive investment destination, ultimately improving its global competitiveness.

Source: Department of commerce

Government initiatives

The incentives and advantages offered to the unit’s operating in SEZs for attracting investments into the SEZs, including foreign investment, include the following:

• Government offers Exemption of IGST and CGST for SEZ developers.
• 100% income tax exemption on export income offered to SEZ units under Section 10AA of the Income Tax Act for first five years, 50% for the next five years afterwards and 50% of the ploughed back export profit for the next five years.
• As per IGST Act, 2017, supply of goods or services or both to a SEZ developer is considered as ’zero rated supply’.
• Duty-free import and domestic procurement of goods for development, operation and maintenance of SEZ units operating in SEZ.
• Other levies as enacted by respective state governments.
• Single window clearance for central and state level approvals.

Challenges

The size and location of Indian SEZs needs to be more strategic, and the competitive advantage of Indian SEZs and linkages to the broader economy need to be enhanced. This presents an opportunity for India to improve its approach and establish successful SEZ models, like other developed countries. India can identify areas for improvement and leverage its existing infrastructure and resources to create a more competitive and attractive ecosystem for investment, export growth and job creation. This could involve a thorough evaluation of the SEZ policy, strengthening the single window system, and fostering better organization between central and state governments. Attending these challenges can unlock the true potential of India’s SEZ program.

Conclusion

The establishment of SEZs in India has been a policy applied by the government to increase the country’s global competitiveness. These zones played a key role in drawing foreign direct investment, boosting exports, developing strong infrastructure and creating employment opportunities. The dominance of the IT/ITeS sector and geographical concentration of SEZs in a few industrialized states highlight the success of this policy in leveraging India’s strengths and catering to the needs of specific industries. The exponential increase in physical exports from SEZs, which advanced over 23% CAGR in the past 18 years, is an indication of the efficiency of this policy. The significant job creation, with over 30.7 million incremental jobs generated since the notification of the SEZ Rules, further features the positive impact of SEZs on employment and economic development. As India aims to become the global economy, the sustained success of SEZs will be key in leveraging the country’s strengths.

Fonte/Foto: IBEF