ASSIGNMENT ON SPECIAL ECONOMIC ZONES (SEZ)

Submitted to
DR.G.Muruganantham
MBA, M.Phil, UGC-NET, Ph.D
ASSISTANT PROFESSOR - DOMS - NITT

NATIONAL INSTITUTE OF TECHNOLOGY

DEPARTMENT OF MANAGEMENT STUDIES
TRICHY-15

INDEX

1. INTRODUCTION…………………………………………………………….3

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 2.

INTRODUCTION

After independence, Indian economic policy was a result of the nostalgia for socialism from
the pre-independence era which had driven and inspired our leader. The days of license Raj,

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orthodox business practices, non-involvement of foreign business and barriers on imports and
exports ensured that for decades our economic growth was pathetically slow. The slow
economic growth cost India its social development also. The scenario of health, education
and social reforms remained dismal in most parts of the country, a direct implication and
indicator of the fact that social growth is not sustainable without economic development.

By the early 1980s, deregulations and economic reforms were being slowly introduced to
liberalize trade, industrial and financial policies. The turning point came in the form of the
grim economic and financial situation of the 1990‘s when the foreign reserves had almost
depleted and our economy was on the verge of bankruptcy. In July 1991, India launched a
major economic reforms program, opening up the economy to trade, foreign investment and
more private sector participation. Since then, in spite of the regime changes, liberalization has
been going on in a phased manner. India has emerged as one of the major player in World
Economic arena and is attracting sizeable amounts of foreign capital in the country. Finding
more economic space, many private sector, companies and MNCs have taken up/set up their
Projects at places having locational advantage. Many capital intensive projects in heavy
engineering, steel, power generation, fertilizer, infrastructure development, etc. have also
been taken up. These Projects certainly have enhanced the capital resource of the nation and
accrued economic gain to certain section of population. Besides these infrastructural
developments, the recent emergence of India in the service sector, particularly in the software
and IT industry has lead to a spur in the economic growth in the last few years. Driven by the
domestic market and the new found spending power of the Indian consumer the
economy is on the fast track. But growing only in the service sector cannot help in
realizing the goal of a developed nation. Strong growth in industry, infrastructure and
manufacturing sector is the next main requirement along with a growth in exports to
bring in the much needed foreign currency. This is where the idea of SEZ comes in.

SPECIAL ECONOMIC ZONE (SEZ) – OVERVIEW

A Special Economic Zone (SEZ) is a geographical region with minimum possible

regulations and control mechanisms, more liberal support policies with quality infrastructure

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as well as attractive fiscal packages from both the Centre and the respective States where they
are situated.

A SEZ is also defined as

“A specifically delineated duty free enclave and deemed to be a foreign territory for the
purpose of trade operations and duties and tariffs”.

SEZs IN THE WORLD

While the first SEZ is said to have been set up in the year 1940 or so in Ireland, more than
130 countries now have SEZs / Free Trade Zones or similar Bodies. The largest and biggest
in total land area and volume of production, business and employment are in China. These
numbers are in fact sky-high compared to SEZs elsewhere. It is China which in 1980 created
the present concept of SEZ and the subsequent large number of SEZs coming up in other
countries is the result of lessons learnt from the Chinese great economic success through
SEZs. The gigantic economic growth of China is said to be through these SEZs and thus they
are the best models.
U.A.E. has more than 8 SEZs - some of them big in size and highly successful.

SEZ IN INDIA

SEZs in India came only recently i.e. in November 2000. The category 'SEZ' covers a
broad range of more specific zone types, including Free Trade Zones (FTZ), Export
Processing Zones (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Ports, Urban
Enterprise Zones and others. The Special Economic Zones Act, 2005, was passed by
Parliament in May, 2005 which received Presidential assent on the 23rd of June, 2005 .
Initially the Foreign Trade Policy Guidelines regulated the SEZs in India which was
abandoned in February 2006. Though the Government of India announced the SEZ scheme in
April 2000, the Special Economic Zones Act, 2005 was brought into effect along with the
Special Economic Zones Rules, 2006 from February 10th, 2006. The Act and the Rules
together replaced the previous applicable legislations and rules governing the operations of
SEZ and provided for a single legislation. The structure of a SEZ is also defined in the EXIM
Policy. Special Economic Zones (SEZs) have been now in India for over four years. SEZs

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came into being from 1st November 2000 when four operating Export Processing Zones
(EPZs) were converted into SEZs vide Notification by the Govt. of India. At present, while 9
SEZs are operating, the total number of SEZs granted approval is 35.

KEY PLAYERS IN A SEZ

A SEZ is governed by four key parties:

a) The Central and State Govts. with respect to policy formation, rules and regulations,
issuance of approvals, permissions, etc.
b) Development Commissioner (DC) from the Govt. of India for implementation of the
policy, rules and regulations and monitoring of the performance in the Zone.
c) Developer for providing infrastructure, facilities, logistics and all other supports for the
unit holders to enable them to set up and run their units successfully and comfortably.
d) Unit-owners / Unit-holders: The parties who set up their factories / units and operate them
in the Zone.
While all the four have roles in an S EZ, the most critical and important role is of the
Developer. The success of a SEZ is his success and vice-versa. Therefore, his vision and
perspective are the most valuable for the country. Surat Special Economic Zone (SURSEZ),
the first and so far only operating SEZ in private sector in India, is rated highly successful as
some 235 parties have obtained Letter of Permission (LoP) and 115 are already operating
therein. Exports this year may cross Rs.1, 500 crores. Therefore, the experience of the
Developer of this sole private Zone is the real and highly revealing one and the vision and
perspective given by this Developer should be considered and taken as highly valuable for the
country as a whole.

OBJECTIVES OF SEZ

The main objectives of the SEZ Act are:

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(a) Generation of additional economic activity
(b) Promotion of exports of goods and services
(c) Promotion of investment from domestic and foreign sources
(d) Creation of employment opportunities
(e) Development of infrastructure facilities

(f) Boosting exports and attracting investments in various export-oriented manufacturing and
service sectors.

SEZ SET UP AND REQUIREMENTS

An SEZ can be set up jointly or individually the Central Government, a state government or
any other body, including a foreign company, for the purpose of (1) manufacturing goods, (2)
rendering services, (3) for both of these reasons or (4) as a Free Trade and Warehousing Zone
(FTWZ). The SEZ Rules specify the minimum land area that is required for setting up an
SEZ in general. This requirement depends on the type of SEZ to be established

Table 1: Minimum contiguous area requirements for certain types of SEZs

The requirements concerning the minimum size of an SEZ are relaxed with regard to certain
small states. Thus, in the states of Assam, Meghalaya, Nagaland, Arunachal Pradesh,
Mizoram, Manipur, Tripura, Himachal Pradesh, Uttaranchal, Sikkim, Jammu and Kashmir,
Goa or in a Union Territory, the minimum area requirement for multi-product SEZs or a
sector-specific SEZ has been reduced to 200 and 50 hectares or more respectively. In the case
of a multi-product or a sector-specific SEZ, at least 50 per cent of the area must be earmarked
for developing the processing area. If the developer proposing to set up an SEZ is not in
possession of the minimum contiguous area, the Central Government may approve more than
one developer. In such cases, each developer shall be considered as a developer in respect of

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the land under its possession. Whereas, at first, there was no ceiling regarding the maximum
size of an SEZ, a meeting of the so called Empowered Group of Ministers (EGoM) held on
5th April 2007 brought about a capping at 5,000 hectares, which can still be undercut by
states as land matters are state matters according to Indian constitutional law.

SEZ APPROVAL

To consider proposals pertaining to the Special Economic Zones (SEZs), the Board of
Approval (BOA) of the Special Economic Zones (SEZs) met recently. The Board also
approved other miscellaneous requests pertaining to SEZs. In this meeting, 53 applications
for setting up SEZs were considered and 36 Formal approvals and 9 In principle approvals
were granted.
Prominent among the Formal approvals are: Electronic Hardware SEZ by Foxconn India
Developers Private Limited in Tamil Nadu; Aviation Sector SEZ by GMR Hyderabad
International Airport Limited in Andhra Pradesh; One IT/ITES SEZ and one Gem and
Jewellery SEZ by Omnibus Industrial Development Corporation of Daman & Diu and Dadra
& Nagar Haveli; Three SEZs for Biotechnology, Light Engineering and Pharmaceuticals by
Navi Mumbai SEZ Private Limited in Maharashtra; IT/ITES SEZ by Reliance Infocom
Infrastructure Private Limited in Maharashtra and six IT/ITES SEZs by Electronic
Corporation of Tamil Nadu in various Districts of Tamil Nadu and MAS Fabrics Textile SEZ
in Andhra Pradesh which is being developed with 100% FDI. Prominent In principle
approvals granted are: Electronics and Electrical SEZ, Engineering Equipment &
Components SEZ and a Multi Product SEZ by TIDCO in Tamil Nadu; Multi product SEZ by
DLF Limited in Rajasthan; Aerospace related industries SEZ by KIADB in Karnataka.

LIST OF DEVELOPERS WHO HAVE SET UP SEZs

 Nokia SEZ in Tamil Nadu

 Quark City SEZ in Chandigarh
 Flextronics SEZ in Tamil Nadu
 Mahindra World City in Tamil Nadu
 Motorola, DELL and Foxconn
 Apache SEZ (Adidas Group) in Andhra Pradesh

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  Divvy's Laboratories, Andhra Pradesh
 Rajiv Gandhi Technology Park, Chandigarh
 ETL Infrastructure IT SEZ, Chennai
 Hyderabad Gems Limited, Hyderabad

SEZ – BENEFITS

(SEZs/EPZs) is seen as an important strategic tool for expediting the process of

industrialization in these countries. Special Economic Zones offer many advantages to investors
otherwise wary of dealing with an unfamiliar foreign regime and foreign business environment.
The promotion of SEZs is an attempt to deal with infrastructural efficiencies, procedural
complexities, bureaucratic hassles and barriers raised by monetary, trade, fiscal, taxation, tariff
and labour policies. These structural bottlenecks affect the investment climate adversely by
increasing production and transaction costs. Since country-wide development of infrastructure is
expensive and implementation of structural reforms would require time, due to given socio-
economic and political institutions, the establishment of industrial enclaves (SEZs/EPZs) is seen
as an important strategic tool for expediting the process of industrialization in these countries.
The zones offer numerous benefits such as:

1. Tax incentives:

 Income tax exemption for a block of 10 years in 15 years.

 100% income tax exemption for a block of five years and an additional 50% tax
exemption for two years thereafter
 100% FDI in the manufacturing sector permitted through automatic route, barring a
few sectors.
 100% FDI permitted to SEZ franchisee in providing basic telephone services in SEZs.
 Exemption from Central Sales Tax and Service Tax.
 Exemption from customs duties on import of capital goods, raw materials,
consumables, spares etc.
 Exemption from Central Excise duties on procurement of capital goods, raw
materials, consumable spares etc., from the domestic market.

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2. Infrastructure and Utilities:

 Roads with Street lighting, Signals and Signage

 Water treatment plant, water supply lines (dedicated lines up to source), sewage lines,
storm water drains and water channels of appropriate capacity
 Sewage and garbage disposal plant, pipelines and other necessary infrastructure for
sewage and garbage disposal, Sewage treatment plants
 Electrical, Gas and Petroleum Natural Gas Distribution Network including necessary
sub- stations of appropriate capacity, pipeline network etc
 Security offices, police posts, etc, at entry, exit and other points within and along the
periphery of the site.
 Effluent treatment plant and pipelines and other infrastructure for Effluent treatment
 Telecom and other communication facilities including internet connectivity
 Recreational facilities including club house, Indoor or Outdoor games, gymnasium,
employee welfare facilities like Automated Teller Machines, Crèche, Medical center
shopping arcade and/or retail space and other such facilities.

3. Simplified procedures:

 Exemption from industrial licensing requirements for items reserved for the SSI
sector.
 No import license requirements.
 No routine examinations by Customs for export and import cargo.
 Exemption from duties on import /procurement of goods for the development,
operation and maintenance of SEZ.

4. Provisions better suited for foreign investors than domestic economy:

 External commercial borrowings by SEZ units up to US$500 million in a year without

any maturity restrictions through recognized banking channels.
 No cap on foreign investment for small scale sector reserved items.
 Facilities to set up off-shore banking units in SEZs.

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These benefits foster a conducive business environment to attract local and foreign
investment, which would not otherwise have been forthcoming. The competitive advantages
of zones may also be explained within the framework of the cluster approach. Zones are
industrial clusters where external economies of scale and other advantages help the operating
firms in reducing costs, developing competitive production systems and attracting investment,
in particular, FDI. As a result of these benefits, many developing countries have been
promoting zones with the expectation that they will provide the engine of growth to propel
industrialization.

SOCIO-ECONOMIC IMPACTS OF SEZs

POSITIVE IMPACT OF SEZs

Setting up SEZs in such areas can have many positive effects on these situations as listed below:

1. CHANGING THE CURRENT OCCUPATION PATTERN: Most of the people in villages

live in poverty not only due to lack of employment but also poor size of land per capita/per
household. Due to shortage of fodder, livestock or animal rearing can not be practiced on a large
scale in these regions. More intensive and profitable activities like secondary and tertiary
activities can be developed for sustained economic development of the area.

2. NEW EMPLOYMENT OPPORTUNITIES (LOCAL RECRUITMENT. With the setting

of industries within these regions there will be an urgent need of skilled and semi-skilled
workforce. Giving regular employment in the project to the persons of affected households would
provide them regular source of income. This will be beneficial for the recruiters as well as the
recruits.

3. SELF-EMPLOYMENT WITH THE COMPENSATION MONEY: Most of the

villager families will receive compensation money for the loss of their lands. This will
provide families with some capital that they can invest. Besides providing easy term loans to
Project Affected People (PAPs) and training them, the project agency may utilize various
rural and urban development programmes for the purpose.

4. BETTER INFRASTRUCTURE AND LIVING CONDITIONS: The setting of these

new projects would ensure that new transportation facilities, water supply facilities, medical

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facilities will be setup in these regions. Need to bring in the raw construction material will
ensure better roads right from the beginning.
5. CONTRACT OPPORTUNITIES FOR LOCAL POPULATION: Though it is obvious
that most of the construction work would be carried out by big real-estate contractors but the
local population may be provided with an opportunity for the supply of lower level materials
such as sand, stone etc.
6. FURTHER SELF EMPLOYMENT OPPORTUINITIES THROUGH TRAINING: If
the developmental authorities ensure that they work with the local population for mutual
benefits then they can be given training for self employment. The scope for training people
for various kinds of jobs depends on the kinds of job which are going to emerge from the
Project.

NEGATIVE IMPACT OF SEZs

Implementation of such a large scale venture will most definitely have negative effects as
well. These negative impacts are of economic as well as social nature. We now list the
possible negative effects that they can have:

1. FINANCIAL LOSSES TO GOVERNMENT: Up to now government has approved

around 339 Special Economic Zones, each of which will have more than one industrial firms
working with the heavily reduced taxes, tariffs and custom duties. The huge tax exemptions
that they will be enjoying will cost the finance ministry an estimated 1, 50,000 crores by the
year 2010. These are huge losses by any standards and the SEZs need to validate their
importance to justify this.

2. LAND GRABBING: These movements include displaced, political and economic

refugees, migrants, and exiles that move across and within national boundaries, as well as
those forced to relocate in response to infrastructural development such as economic zones,
power projects, dam construction or conservation projects. Such movements mean that
thousands are rendered landless, jobless, homeless, income less, rootless, displaced making
way for gargantuan projects christened as epitomes of economic development. Land mafia
will rule the prices and force the farmers to sell land to big companies at throw- away prices.
SEZ policy is described by some as the ―biggest land grab movement in the history of
modern India.

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3. ENVIRONMENTAL IMPACT: huge tracts of agricultural as well as forested land will
be converted for industrial purposes for the setting up of SEZs. This can have grave effect on
the ecosystem. Besides, this it is unfortunate that the minimum environmental guidelines set
by the United Nations for Special Economic Zones the world over, are not necessarily
followed in our country. The blatant replacement of such forested or agricultural land can
lead to severe environmental problems

4. CLUSTERS OF DEVELOPMENT: Rather than promoting overall economic

development, SEZs will result into clusters of heightened economic activity widening the
already existing chasm between selective areas witnessing rapid development vis-à-vis the
impoverished surroundings.

5. EMPLOYEE WORKING CONDITIONS: No labor laws will apply to SEZs. Workers

will enjoy no rights, including he fundamental rights of association and protest. They serve to
exempt capitalists from existing labor laws and regulations,– including limits on the length of
the working day, right not to be dismissed without adequate cause, right to form unions and
go on strike, to retirement benefits, maternity leave, etc.

6. LOSS TO FARMERS DUE TO LACK OF AWARENESS: The people that

developmental authorities are dealing with for land acquisitions are generally poor farmers
who are not literate enough to have the awareness about the proper prices of their lands and
the compensation that they deserve.

SEZ CONTROVERSY
Land, especially agricultural land is a very sensitive issue in India. There are millions of
people whose livelihood depends on agricultural land. But the introduction of SEZ in India
has resulted in the dispossession of agricultural land and has affected the livelihood of farmer
at large. In against of this, farmers first protested to safeguard their interests through litigation
and court cases challenging the establishment of SEZs. But later on, the resistance against
SEZ in India became massive when political parties also joined the farmers.
Jamnagar Incident
In November 2006, farmers from the Jamnagar District in Gujarat moved the High Court of
Gujarat and later to the Supreme Court in order to challenge the setting-up of a 10,000-acre
(approx. 4,000-ha) SEZ by Reliance Infrastructure. They claimed that the acquisition of large

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tracts of agricultural land in the villages of the district not only violated the Land Acquisition
Act of 1894, but was also in breach of the public interest. This led the Government to
“consider” putting a ceiling on the maximum land area that can be acquired for multi-product
zones and decide to “go slow” in approving SEZs.
Nandigram Violence
The Nandigram violence is another famous incidence related to SEZ controversy. Nandigram
is a rural area in Purba Medinipur district of the Indian state of West Bengal. It is located
about 70 km southwest of Kolkata, on the south bank of the Haldi River, opposite the
industrial city of Haldia. In 2007 the West Bengal government decided to allow Salim Group
to set up a chemical hub at Nandigram under the SEZ policy. Farmers of that village were
against it. So, on the order of the Left Front government on 14 March 2007, more than 3,000
heavily armed police stormed the Nandigram area. During this incidence, police shot dead at
least 14 villagers and wounded 70 more including children and women.

The above given examples show the controversies associated with SEZs. No doubts that these
commercial hubs started with a lot of premature praise and have now became a bone of
contention which is readily exploited by the political forces to the detriment of the peasants,
who fear losing their means of livelihood.

INDIA AND CHINA: POLICY COMPARISON

India has more or less adopted the same China model of SEZ development and expecting the
similar results. However, the government is missing out on few vital differences:
(i) Free zones in countries like China, UAE were mostly public funded in which economic
gains prospects assumed far more significance than financial viability considerations. Thus
the responsibility of market to promote zones & to attract tenant industries was primarily
shouldered by governments. The Indian model, on the contrary, envisages ‗private sector
led‘development of such zones. Thus, the responsibility or risk of financing, marketing &
promotion has been vested with private players, who have very little or no experience in these
areas.
(ii) India is not a command economy i.e. foreign investors are not confined to SEZs only,
which make these zones little special than were China‘s where SEZs used to be the only route
through which foreign investors could enter the country. Besides, Indian has no equivalent to
Hong Kong or Taiwan where industries had a pressing need to relocate and China served as a
ready relocation base.

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(iii) China continues to score because it has bundled an attractive tax environment with
world-class infrastructure and a liberal labour environment. In India, on the other hand,
buckling under the pressure from Left parties, the government has axed the Section 50(b)
from the central SEZ bill, which would have empowered states to ease labour laws in SEZs.
Democratic India has strong labour unions organically linked to political parties.
Authoritarian China, conversely, has very pliant unions. Here India has lost a crucial edge in
the global environment marketplace.
(iv) India has also some advantages over countries like China. It has significantly larger
English-speaking workforce than does China. India also has an edge in a number of key
knowledge based industries like software, IT-enabled services, medical services, drugs &
pharmaceuticals & agro-based industries. Hence India‘s SEZs are therefore likely to develop
along quite different lines from China‘s. Indian zones will more likely attract investments in
high-end human skill based industries & services sector.
(v) Also in the light of the increasing economic engagement of India with the ASEAN &
China, it is more likely that a greater proportion of investment into Indian zones could come
from these countries than from US or Europe.

CONCLUSION
On the basis of economic theory and history we can conclude that absorption of agricultural
labour is necessary for sustained economic development of a developing country. “Special
Economic Zones” constitute a medium for such sustenance. However, the SEZ policy in India
has suffered from permission being granted for far too many subs optimally sized SEZs or for
others to serve as appendages to mega cities already suffering from overcrowding,
infrastructure and a size which far exceeds the optimum. There are other ways of minimizing
peasant unrest during the process of land acquisition for SEZ development. For example, the
state can assume the role of a passive provider of a legal framework, information and
incentive packages. Mutually beneficial transactions will automatically result if possibilities
for any exist. If implemented according to proper rules and regulations and most importantly,
with proper consideration for farmers and project affected people (PAPs), the SEZ s provides
a win-win situation for the company and the PAPs as well. In the ideal condition, the Project
Affected People benefit by getting better occupation, better living conditions and better
income while the involved developers and company get the benefits of tax-exempt production
centers along with a dedicated workforce derived from amongst the PAPs.

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REFERENCES

1. www.theindiastreet.com – “India grants more SEZ approval” by Dhruv Jyothi

Choudhary , Kolkatta ,India

2. www.scribd.com - 6910855-Special-Economic-Zones-Socio-Economic-Impact-

report has been prepared as a part of the practice component of course HS-6101 titled

―Human Resource Management

3. “Special Economic Zones in India” - Research and business analytics group ,India,

Cushman & Wakefield – November 2008, A C& W publication

4. 26944933-Demystifying-Indias-SEZs – Synopsis by JBIMS students.

www.esnips.com

5. No.D.12/30/2009-SEZ Government of India , Ministry of Commerce & Industry,

Department of Commerce - greensezguideline.pdf

6. http://en.wikipedia.org/wiki/Special_Economic_Zone

7. www.macroscan.com

8. Outlook, Nandigrammed, 19th February 2007, p. 20.

9. Taken from the introduction to Special Economic Zones in India:

http://www.sezindia.nic.in/HTMLS/about.htm (last viewed on 12th July 2007).

10. “Special Economic Zones in India – An Introduction” by Jona Aravind Dohrmann

ASIEN 106 (January 2008), S. 60-80.

11. “South India’s largest SEZ to attract 17.5 k cr funds” – The Financial Express,

Chennai, July 31st, 2008.

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