An economy can be strengthened in many ways. Still, the most efficient way is to provide incentives on taxes to the primary industries, thus increasing the gross production of the nation and elevating the economy. Following the same concept, the GOI also launched many initiatives to improve the gross output of the country and attract more FDI (Foreign Direct Investment). One such initiative is the launch of Special Economic Zones (SEZs).
Between 2005-2021 the total SEZ exports of India increased by more than 30 times, i.e. from USD 3.07 Billion in 2005 to USD 102.24 Billion in 2021.
What does a Special Economic Zone (SEZ) mean?
A Special Economic Zone (SEZ) is a specially dedicated zone built by a nation for businesses. An SEZ is developed by a nation to promote the economic growth of the country. As the companies set up in the SEZ get relaxation on the taxes by the government and other benefits such as the incentives on export duties and ease in transportation. At present in India, there are 378 SEZs out of which 265 are currently functional. The Kandla SEZ was the first Special Economic Zone that was set up in India in 1965 near Kandla port, Gujarat.
More than 25 Lakh people are employed by the companies set up in different SEZ across India.
What are the different types of SEZs in India?
- Free Trade Zone (FTZ): The Free Trade Zone or the FTZ usually refers to a location or a zone where goods are being manufactured, stored, or handled and are not subject to customs duty.
- Free Economic Zone (FEZ): A Free Economic Zone is referred to an area where companies are charged very less taxes by the government.
- Export Processing Zones (EPZ): An Export Processing Zones (EPZ) is a designated processing zone developed by a nation to manufacture specific goods with high export demand. These zones are usually located near the international sea and airports to provide convenience for export.
- Industrial Parks/ Industrial Estates (IE): An industrial park is a specifically dedicated area for light and heavy industries. This area is usually located far from the residential areas to manage the pollution.
- Urban Enterprise zone (UEZ): An Urban Enterprise zone is an area located in the suburban or urban regions of the state, where companies can enjoy incentives on local state taxes, with a primary motive to boost economic growth.
- Bonded Logistic Parks (BLP): A Bonded Logistic Parks (BLP) is an especially dedicated area for the storage and supply of export goods. These parks are built in a specific geographical location from where the seaports and airports are the nearest.
How SEZs are developed in India?
A Special Economic Zone (SEZ) can be developed by a state/central government, any private or government organization/group, or by an individual. Before setting up the SEZ the respective person/corporation needs to seek permission from the state and central government of India. Also, any foreign institution/organization can set up an SEZ in India complying with the rules and regulations of the nation.
Certain factors play a major role in setting up an SEZ in India.
- Geographical Location: While setting up an SEZ it’s quite important to mark a perfect geographical location. An SEZ is usually built near seaports and with the outskirts of the cities so that the transportation via sea becomes easy and also it becomes easy to manage the pollution.
- Investment: Setting up an SEZ requires a huge investment and thus the central government supports the private investors via subsidies to develop the SEZ.
- Resources: An SEZ is usually located in the remote areas far away from the cities thus, getting access to the resources like electricity, water, and manpower becomes difficult. However, the state and the central government help the companies in SEZ get access to these resources.
How does an SEZ promote economic growth?
The main motive behind setting up the SEZ was to promote economic growth. An SEZ elevates the economic growth nation, as the industries and companies set up in SEZ get an incentive on taxes by the government, also they enjoy relaxation on the import and export duties. With ease in the transportation through the nearby ports, the companies easily save a lot of profit. As the state and the central government of India mutually get a share of the profit from the industries in SEZ, the national treasury gets prosperous and increases the value of the currency. Also as more and more industries are setups in the SEZ the domestic production of the country increases and thus increases the GDP of the nation.
Impact of SEZ on Foreign Direct Investment (FDI):
Foreign direct investment is the main key for any nation to leverage its economic growth. A special economic zone can play a crucial role in increasing the FDI of any nation. It has been observed in the past time times that foreign investors usually invest in countries where the taxes are less and transportation is economical. The SEZ is a perfect match for the foreign investors as here they get huge incentives on taxes and also with outstanding connectivity via seaports the transportation becomes quite economical.
The foreign investors usually set up a second unit of their main firm in SEZ to manufacture the same product and transport it to the nearby nations. For example, a US smartphone manufacturer opens its second unit at any SEZ in India and manufactures the same phones there and supplies it to nearby nations in the middle-east.
Along with the FDI, the GOI also focused on increasing export via SEZ, and exporting the goods became easy like never before with the SEZ as the companies get immense relaxation on export duties and as well as the transportation costs just cut in half with connectivity to the major seaports of the nation.
For the financial year 2019-2020, the total export value via Special Economic Zone was more than INR 5219 crores.
Pros and Cons of Special Economic Zone:
Pros:
- Economic Growth: The SEZs play an important role in attracting more FDI for a nation and thus increasing its economy at a rapid pace. Also, duty-free imports and exports allow companies to do an easy foreign trade and give a boost to economic growth.
- Employment Generation: The development of new SEZs generates more employment opportunities. As many local and international companies setups in the SEZ and thus they require manpower. Thus the development of new SEZs brings in employment opportunities.
- Relaxation on Taxes: An SEZ unit offers relaxation of taxes on all kinds of purchases, also the companies in SEZ do not need to pay the service tax. Also, the government of India waives all the customs charges and import/export duty on any foreign trade conducted by the companies in the SEZ.
Cons:
- Loss in Central Revenue: Removing all kinds of taxes for the SEZs, creates a huge loss in the central revenue collection of a nation.
- Loss in Export Trade: The government’s primary motive behind the development of SEZ was to increase exports. But it has been observed that most of the companies in SEZ are not involved in foreign trade.
- Loss of Farmland: Any SEZ is usually set up in a remote area and to set up an SEZ farmland or a forest is been cut down. Thus resulting in reducing the soil fertility and reducing the total agricultural production of the nation.