Source - Investopedia
Recently, India released its Q-3 results, which posted a 7 quarter low growth rate of 5.4% and the GVA slowed down to 6.8% in this quarter. Multiple economists of the country, penned down these results to factors such as, reduction in exports, lack of rapid job creation etc. in the economy. In fact, the budget 2024’s main focus was on mass job creation in the economy. In India, SEZ is an innovation that created mass-scale jobs in the beginning of 21st century, maybe in budget 2025, its time for Smt. Nirmala Sitaraman to reintroduce SEZs again into the Indian economy, to give wings to India’s growth story.
The first documented history of SEZ, in India, was in the form of Export Processing Zones (EPZ) set up in Kandla in 1965. However, the EPZ policy was inconsistent and there was the license raj regime which kept the growth potential of these EPZs slow. This was replaced by special economic zones(SEZ) announced in 2000, by then India had EPZs in more than 5 locations.
The SEZ Act was passed in 2005 May by parliament. Some of the key objectives of these SEZs as per the act were – generation of additional economic activity, promotion of export goods and services and creation of employment opportunities, being the key objectives. Since then, the SEZ Act 2005 has not been amended or changed many times. As of 13th January 2023, 270 SEZs are operational and about 64% of the SEZs are located in 5 states of Tamil Nadu, Telangana, Andhra Pradesh, Maharashtra and Karnataka.
The SEZs and its relative activities have slowed down massively in last few years with barely any budget announcements, and since 2019, with the introduction of schemes like PLI, PM Mitra Parks, Atmanirbhar Bharat fiscal stimulus etc. the concept of SEZs is no more visible even in the news. With India facing export, rural infrastructure, and job creation challenges in the last 3 quarters, economists and think tanks must ponder whether it's time for the finance minister, Smt. Nirmala Sitaraman to revive SEZs.
The SEZs as pointed out before were created to deliver high rates of growth and the areas around SEZs are usually given the best of infrastructure to fulfill the economic designs of that particular state. The last update related to SEZs was issued by the research team of PIB way back in 2021.
As on 30 November 2021, 425 approvals for setting up SEZs have come up in the country and 8 agro food processing zones out of which 3 are functional. This was the last major news related to SEZs in the country, which was issued by the then, Union MoS for Commerce & Trade,Smt. Anupriya Patel, the Apna Dal(S) supremo, in a reply to a parliamentary query in 2021.
As per a research by GIPE, in 2017, 81 SEZs were denotified where major reasons cited were - imposition of Minimum Alternate Tax, Dividend Distribution Tax and viability of land that was given to the corporates. To credit to the government, SEZ Act, 2019 amended the 2005 law and in 2024 SEZ Amendment rules, gem and jewelry units were allowed to source gold, silver or platinum from foreign buyers. Looking at the last few articles or the approach of the government, it seems that the government of India, is more interested in creating the SEZs as an economic zone that caters to specific industries like agro food industry or pearls instead of being inclusive to all the industries.
This approach faces challenges, including difficulty in identifying centers within states and a lack of specialized labor, resulting in limited job creation. Additionally, sector-specific focus raises investor concerns about prioritizing high-value industries, hindering mass replication and competitiveness, as seen in sectors like civil aviation.
The third issue is that a lack of SEZs risks making India's growth story lopsided, with only states having a significant number of SEZs driving export progress, ultimately hurting the country's net trade. Currently, 64% of SEZs are in five states, and Maharashtra, Tamil Nadu, and Karnataka are in the top-3 of NITI Aayog's 2022 Export Preparedness Index.
India's investment history shows that states with SEZs, whether industry-specific or broad, attract more FDI in the long run. Not surprisingly, states with a strong SEZ history, like Uttar Pradesh (operational SEZs since 2000, aiming for a $1 trillion economy) and Maharashtra (MoUs worth ₹16 lakh crore signed at WEF Davos), are leading in economic targets for states.
Naysayers may argue that already developed states don't need more SEZs, but the focus should shift to states like Rajasthan, Odisha, Telangana, Madhya Pradesh, Chhattisgarh, and Assam, which require a significant boost in manufacturing and export competitiveness. SEZs can attract investments and unlock these states' untapped potential as export hubs.
While, the promotion of SEZs may not have a major impact for the already well to do states, the comeback of SEZs in the lesser developed states of India would help them, to win over investor’s confidence as SEZs are the areas blessed with the state of art infrastructure liberalized trade laws and simplified labor laws. To add on, even with its challenges like inefficiencies in land utilisation, SEZs still have a contribution to almost about 34.83% Indian exports even in 2022-23. This shows that SEZs are still relevant for India’s export ambitions, in key sectors like pharmaceuticals, automobiles etc.
To add on, given Indian ambitions of creating GIFT city for international financial institutions or the Bharat Vayuyan Vidheyak - 2024 of aircrafts manufacturing or developing the peripheries of big cities, all these require massive investments, which can pushed forward only via SEZs in an economical way. It makes absolute sense to reintroduce the special economic zones in the states, where the respective state governments are also enthusiastic of delivering high economic growth in a short time.
With the Modi government's industry-specific approach, sectors like financial institutions, civil aviation manufacturers, and PLI-linked industries can be integrated into multiple SEZs across states. This will boost exports, diversify the economy, and drive job creation. This could be the right time to reintroduce SEZs, as India now boasts massively improved road connectivity, doubled domestic airports, and expanding high-speed rail networks, enabling seamless integration of high job-creating industries. With the pre-existing single-window clearance system in SEZs, their revival would be smooth and come with minimal economic costs for the country.
To conclude, this is the correct time to reintroduce SEZs and perhaps bring more industries covered under the PLI in these SEZs in a new avatar which will help in rapid infrastructure development in the country and improve the economy’s productivity. All it needs is a reframed and a refocused version for SEZs, which can deliver high growth rate for the country, via the Ricardian way of increasing exports.
