Special Economic Zones in India: Status, Issues and Potential (India Studies in Business and Economics)

This book examines India’s ten years of experience developing Special Economic Zones (SEZs) and the performance of SEZs in the context of India’s growing international engagement, its endeavours to attract domestic and foreign investment in manufacturing and services and its aim to increase and diversify exports of goods and services. SEZs are industrial enclaves/clusters within a country that receive certain incentives and business facilitation benefits that are not generally available to the rest of the country. To facilitate private and foreign investment in SEZs, India introduced the SEZ policy in 2000, which was followed by the SEZ Act in 2005. After ten years under the Act, India now has one of the largest number of approved SEZs in the world and its SEZ policy remains heatedly debated, with a number of studies arguing both for and against it. Given this background, the book also identifies the challenges faced by SEZs in India and offers policy recommendations on how to make the SEZs an engine for India’s economic growth and development that can more effectively link the country’s manufacturing and services sectors to global value chains. Foreword 7 Acknowledgement 10 Contents 12 About the Authors 16 Abbreviations 16 List of Figures 22 List of Tables 24 List of Boxes 28 1 Introduction 29 Abstract 29 1.1 Background 29 1.2 India and the Importance of Special Economic Zones 31 1.3 SEZs and Their Role in Economic Development 32 1.4 Recent Issues 37 1.5 Layout of the Book 39 1.6 Research Methodology 40 2 SEZs in Select Countries: A Comparison with India 42 Abstract 42 2.1 Introduction 42 2.2 Country Experiences that can be Compared with India 43 2.3 Snapshot of Zones in the Selected Countries 46 2.4 Administrative Framework and Regulation of Zones 51 2.5 Land Acquisition and Choice of Location of SEZs 55 2.6 Ownership and Development of Zones 56 2.7 Incentives Offered to SEZs 57 2.7.1 Fiscal Incentives Offered to SEZs 57 2.7.2 Non-fiscal Incentives and Other Support Offered to SEZs 59 2.8 Contribution of SEZs 61 2.9 SEZs, Autonomous Liberalisation and Trade Agreements 67 2.10 Conclusion and the Way Forward 70 Appendix 1 71 3 SEZs in India: Evolution, Policy Framework and Current Status 78 Abstract 78 3.1 The EPZ Regime 78 3.1.1 Establishment of EPZs by the Central Government 80 3.2 The SEZ Regime 81 3.2.1 The Regulatory Framework for SEZs 82 3.2.1.1 Zone Administration/Management 84 3.2.1.2 Setting up an SEZ 85 3.2.1.3 Land Criteria for SEZs 86 3.2.1.4 Setting up a Unit in an SEZ 89 3.2.1.5 Incentives for SEZ Developers/Units and Amendments 89 3.3 Spread of SEZ: State-Wise Distribution and Sector Coverage of SEZs 94 3.3.1 Distribution of SEZs Across States 95 3.3.2 Sectoral Coverage of SEZs 97 3.4 Conclusion and the Way Forward 98 4 Performance of SEZs 100 Abstract 100 4.1 Introduction 100 4.2 Analysis of Secondary Data 101 4.2.1 Export Performance of SEZs 101 4.2.2 Investment in SEZs 109 4.2.3 Employment in SEZs 110 4.2.4 NFE Earnings from SEZs 113 4.2.5 Revenue Forgone from SEZs 114 4.3 Performance of Developers: Evidence from the Primary Survey 116 4.4 Performance of Units: Evidence from the Primary Survey 118 4.4.1 Export Orientation of Production 118 4.4.2 Import Intensity and Net Foreign Exchange Earnings from SEZs 119 4.4.3 Employment Intensity of Production 120 4.4.4 Overall Performance Assessment for SEZ Units 121 4.5 Conclusion and the Way Forward 122 5 Quality of the Business Environment: SEZs Versus DTA 124 Abstract 124 5.1 Introduction 124 5.2 Sampling Framework 127 5.3 Motivations for Locating in SEZs 129 5.4 Quality of Business Environment 131 5.4.1 Quality of Business Infrastructure 131 5.4.2 Ease of Access to Social Infrastructure 136 5.4.3 Ease of Doing Business 138 5.5 Conclusion and the Way Forward 140 6 Special SEZs for Services: India’s Experiences and the Way Forward 144 Abstract 144 6.1 Introduction 144 6.2 Free Trade Warehousing Zones 146 6.3 Finance SEZs 155 6.4 Power SEZs 161 6.5 SEZs for Aviation Maintenance, Repair and Overhaul (MRO) Services 166 6.6 Potential Services SEZs 173 6.6.1 Audio-Visual Services SEZs 173 6.6.2 Professional Services 176 6.7 Conclusion and the Way Forward 178 7 SEZs and Other Industrial Clusters: Why Incentives Have Not Been Successful in Developing Manufacturing in India? 180 Abstract 180 7.1 Introduction 180 7.2 Cluster Development Policies and Schemes of the Central Government vis-à-vis the SEZ Policy 183 7.3 State Government Policies and Schemes vis-à-vis SEZs 190 7.4 Why Have Cluster-Based Development Polices and Schemes Failed to Attract Manufacturing? 192 7.5 The Way Forward 195 8 SEZs in the Multilateral Trading System 198 Abstract 198 8.1 Introduction 198 8.2 Overview of the SCM Agreement 200 8.2.1 Developing Countries and Special and Differential (S&D) Treatment in the SCM Agreement: Provisions for India 203 8.2.2 Analysis of Countervailing Initiations and Measures Faced by India 208 8.2.3 Special Economic Zones and the WTO Agreement on Subsidies and Countervailing Measures 210 8.2.4 Special Economic Zones and Specific Subsidies 212 8.3 Making the Special Economic Zones WTO-Compliant 215 8.3.1 Use of Non-specific Subsidies 217 8.3.2 Handling the WTO Inconsistency on Capital Goods 217 8.3.3 Remission of Indirect Taxes on Inputs 218 8.3.4 Remove the NFE Criteria and Allow DTA Sales from SEZ 218 8.3.5 Government and Credit 219 8.3.6 More Favourable Business Atmosphere 219 8.3.7 Subsidies to SEZ Units and Corporate Social Responsibility (CSR) 220 8.3.8 Subsidies Through Services 220 8.3.9 Maintaining a Stable and Somewhat Undervalued Currency in the Face of a Currency Appreciation 221 8.4 Conclusion and the Way Forward 221 Appendix 1: From the Canada Border Services Agency Website 222 Description of Identified Programmes and Incentives 223 India 223 Appendix 2 225 9 Special Economic Zones and Regional Trade Agreements 226 Abstract 226 9.1 Introduction 226 9.2 RTAs and India 229 9.3 Fallouts Associated with Signing RTAs: Inverted Duty Structure 234 9.4 Unfavourable Treatment to SEZ Producers vis-à-vis FTA Partners 235 9.5 FTAs, Tariff Structure and Horizontal FDI 237 9.6 FTAs, Tariff Structures and Vertical FDI 238 9.7 The Complementary Role of SEZs and the RTAs 240 9.8 Conclusion and the Way Forward 243 10 Challenges Faced by SEZs in India and the Way Forward 245 Abstract 245 10.1 Introduction 245 10.2 Barriers Faced by the SEZs 246 10.2.1 Institutional Mechanism and Its Implications 246 10.2.2 Challenges Related to Land Acquisition 249 10.2.3 Location, Sharing of Infrastructure and the Business Model 252 10.2.4 Barriers Related to Fiscal Incentives 254 10.2.5 Challenges Related to Shifting of Existing Units from DTA to SEZ 257 10.2.6 Challenges Related to Backward and Forward Linkages 258 10.3 How to Make SEZs a Success Story? 258 10.3.1 Strengthening the Regulatory and Administrative Framework 261 10.3.2 Addressing Land-Related Issues 263 10.3.3 Providing the Right Incentives to SEZs 264 10.3.4 Encourage Backward and Forward Linkages 267 10.3.5 Need for More Proactive Marketing of SEZs 268 10.4 What Kind of SEZs Should India Develop and Which Units Should Locate in SEZs? 268 10.5 Conclusion and the Way Forward 271 Bibliography 273 Front Matter....Pages i-xxix Introduction....Pages 1-13 SEZs in Select Countries: A Comparison with India....Pages 15-50 SEZs in India: Evolution, Policy Framework and Current Status....Pages 51-72 Performance of SEZs....Pages 73-96 Quality of the Business Environment: SEZs Versus DTA....Pages 97-116 Special SEZs for Services: India’s Experiences and the Way Forward....Pages 117-152 SEZs and Other Industrial Clusters: Why Incentives Have Not Been Successful in Developing Manufacturing in India?....Pages 153-170 SEZs in the Multilateral Trading System....Pages 171-198 Special Economic Zones and Regional Trade Agreements....Pages 199-217 Challenges Faced by SEZs in India and the Way Forward....Pages 219-246 Back Matter....Pages 247-254