Special Economic Zone: The History & The Future

Article for Blog Post Writing Competition 2011 | by Abhijeet Singh

April 13th, 20118:50 pm

A Special Economic Zone (SEZ) is a geographical region that has economic laws more liberal than a country’s typical economic laws. It is a trade capacity development tool, with a goal to promote rapid economic growth by using tax and business incentives to attract foreign investment and technology. By offering privileged terms, Special Economic Zones attract investment and foreign exchange, spur employment and boost the development of improved technologies and infrastructure. Today, there are approximately 3,000 SEZs operating in 120 countries, which account for over US$ 600 billion in exports and about 50 million jobs. By offering privileged terms, SEZs attract investment and foreign exchange, spur employment and boost the development of improved technologies and infrastructure.

History of SEZ:

The History of SEZs in India suggests that the seeds of the basic concept of Special Economic Zone (SEZ) were sown in the mid sixties. Further, the History of SEZs in India suggests that the basic model of the present day Indian Special Economic Zone was structured with the establishment of the first Export Processing Zone (EPZ) at Kandla in the year 1965. Several other Export Processing Zones were set up at various parts of India in the subsequent years. The lack of good Government of India economic policy and inefficient management soon became the detrimental factors for the success of these Export Processing Zones. Thus, the performance of these Export Processing Zones of India fell short of expectations.

The modern day Special Economic Zone came in to existence because the economic reforms incorporated in the early 1990s did not resulted in the overall growth of the Indian economy. The SEZ policy of India was devised to act as a catalyst to promote the economic growth attained in the early 1990. The economic reforms incorporated during the 1990s did not produce the desired results. The Indian manufacturing sector witnessed a sudden dip in the overall growth of the industry, during the second-half of 1990s. The History of SEZs in India suggests that red tape, lengthy administrative procedures, rigid labor laws and poor physical infrastructural facilities were the main cause of deterioration of Foreign Direct Investments (FDI) inflow in to India. Further, the Indian markets were not mature enough to facilitate easy entry of Foreign Institutional Investors (FIIs) in to the Indian economic system. Furthermore, the legal framework of Indian economy was not strong enough to prevent misuse of Indian markets by the foreign investors. Thus, the lack of investor friendly environment in India prevented growth of Indian industry, in spite of implementation of liberal economic policy by the central government. This resulted in the formation of a much larger and more efficient form of their predecessors with world-class infrastructural facility.

A number of meetings were held across India for the formulation of – ‘The Special Economic Zones Act, 2005’, which was subsequently passed by Parliament in May 2005. The SEZ Act, 2005 and SEZ Rules became effective on and from 10th February 2006. The SEZ Act 2005 defines the key role for the State Governments in Export Promotion and creation of infrastructural facilities. A Single Window SEZ approval mechanism has been facilitated through a 19 member inter-ministerial SEZ Board of Approval or BOA. And the decision of the SEZ Board of Approval is binding and final.

In India, Special Economic Zones are being established in an attempt to deal with infrastructural deficiencies, procedural complexities, bureaucratic hassles and barriers raised by monetary, trade, fiscal, taxation, tariff and labour policies. Since country-wide development of the infrastructure is expensive and implementation of structural reforms would require time, Special Economic Zones/Export Processing Zones are being established as industrial enclaves for expediting the process of industrialization.

The Special Economic Zone Act 2005 came into force with effect from 10th February 2006, with SEZs Rules legally vetted and approved for notification. The SEZs Rules, inter-alia, provide for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments. Investment of the order of Rs.100, 000 crores over the next 3 years with an employment potential of over 5 lakh is expected from the new SEZs apart from indirect employment during the construction period of the SEZs. Heavy investments are expected in sectors like IT, Pharma, Bio-technology, Textiles, Petro-chemicals, Auto-components, etc. The SEZ Rules provides the simplification of procedures for development, operation, and maintenance of the Special Economic Zones and for setting up and conducting business in SEZs. This includes simplified compliance procedures and documentation with an emphasis on self-certification; single window clearance for setting up of an SEZ, setting up a unit in SEZs and clearance on matters relating to Central as well as State Governments; no requirement for providing bank guarantees; contract manufacturing for foreign principals with option to obtain sub-contracting permission at the initial approval stage; and Import-Export of all items through personal baggage.

The Controversy Surrounding SEZ’s:

A major controversy surrounding the implementation of the Special Economic Zone scheme has been the ruthless manner adopted for acquiring land. News reports highlighted protests across the country against acquisition of lands for the purpose of establishing Special Economic Zones. The “SEZ No More” campaign gained momentum after the bloody chapter in Nandigram.

Since, developing Special Economic Zones involves massive displacement of farmers, it is essential that a systematic approach should be followed for ensuring balance of interests. Consequently, state governments have been advised that in land acquisition for Special Economic Zones, first priority should be for acquisition of waste and barren land and if necessary single crop agricultural land.

The government has also announced the new National Policy on Rehabilitation and Resettlement 2007. This policy would provide land-for-land compensation for acquisition of land for development purposes, including Special Economic Zones, and employment to at least one person from each affected family. A National Rehabilitation Commission would be set up by the Central Government, which would be duly empowered to exercise independent oversight over the rehabilitation and resettlement of the affected families. Further, wage employment would be provided to the willing affected persons in the construction work in the project. The policy also ensures housing benefits including houses to the landless affected families in both rural and urban areas.

Adequate provisions have been made for financial support to the affected families for construction of cattle sheds, shops, working sheds; transportation costs, temporary and transitional accommodation, comprehensive infrastructural facilities and amenities in the resettlement area including education, health care, drinking water, roads, electricity, sanitation, religious activities, cattle grazing, and other community resources.

A strong grievance redressal mechanism has been prescribed, which includes standing R&R Committees at the district level, R&R Committees at the project level, and an Ombudsman duly empowered in this regard. The R&R Committees shall have representatives from the affected families including women, voluntary organizations, Panchayats, local elected representatives, etc.

For effective monitoring of the progress of implementation of plans, provisions have been made for a National Monitoring Committee, a National Monitoring Cell, mandatory information sharing by the States and Union Territories with the National Monitoring Cell, and Oversight Committees in the Ministries/Departments concerned for each major project.

For ensuring transparency, provision has been made for mandatory dissemination of information on displacement, rehabilitation and resettlement, with names of the affected persons and details of the rehabilitation packages. Such information shall be placed in the public domain on the Internet as well as shared with the concerned Gram Sabhas and Panchayats by the project authorities. This policy aims at striking a balance between the need for land for development purposes and protecting the interests of land owners and other displaced people.

With new generation Special Economic Zones emerging, the scope of human capital formation and technology upgrading effects will widen. It is therefore important for the government to play a pro active role in strengthening these effects. For the contribution of Special Economic Zones to various aspects of human development to be realized, it is important to forge linkages between the domestic economy and Special Economic Zones. Systematic efforts need to be made to help zone units forge links with the outside units. Also, the effects of Special Economic Zones are contingent upon the success of these zones in attracting investment, in particular, Foreign Direct Investment. A comprehensive policy framework is required to attain this. The government has to ensure that strategies are developed in a timely manner to strengthen the opportunities that are likely to emerge, protect interests of the Special Economic Zones workers, and forge linkages between Special Economic Zones and the domestic economy.

Article by-

Abhijeet Singh

IVth year BBA.LLB

Symbiosis Law School

[Submitted as an entry for the MightyLaws.in Blog Post Writing Competition, 2011]

Enter your Email Address to Get Similar Articles in your Inbox Free!


MightyLaws is not responsible or liable for the views expressed by the authors. The articles are general information and should not be treated as legal advice. Please read the Disclaimer for further clarifications.