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Evolution of Special Economic Zone Milan DhanukaBackground The concept of special economic zone had evolved from Export processing zones. The ASEAN countries were some of the first to utilize EPZs to increase exports, relax foreign exchange constraints and thereon it was internationally accepted which is evident, as seen in Spain, Ireland and Malaysia. EPZs helped to boost the economy by using liberal trade policies, moderate tax rate and other policies which were favorable to new entrepreneur for setting up units. The rate of increase in the numbers of export processing zones had been remarkable. There were 176 zones across 47 countries in 1986, but that number stood in excess of 3,000 across 116 countries by 2003, it had been seen that large number of these were located in developing countries. It provided them a suitable platform to earn foreign exchange and to increase the exports. Export Processing Zones in India: Analysis of the Export Performance, “ICRIER Working Paper 148, November 2004;
On the other hand, India, the first Asian economy who had set up an EPZ– at Kandla in 1965, followed by the Santacruz Electronics Export Processing Zone (SEEPZ) in the year 1973 which actually took off in 1989, following a report by the Comptroller and Auditor General of India (CAG). Comptroller and Auditor General of India in its report had defined EPZ as foreign exchange earner, developing export-oriented industries, stimulating investment and generating employment. It also had been said in the report that it had been set up to create an internationally competitive environment for export production at low cost. Subsequent policy documents have reiterated the low-cost export production motive. The Centre had Drafted SEZ Bill (2004) in which also “promotion of foreign trade in goods and services” was the most important of all SEZ objectives and defended the Bill after it took the step of replacing the old EPZ scheme by SEZs. Centre provided a concrete substance when it passed the SEZ Act (2005). The Ministry of Commerce had even gone on record, saying that – apart from exports – SEZs will attract investments to the tune of Rs 1, 00,000 crore (with Rs 25,000 crore more in FDI), plus create 5 lakh new jobs by December 2007. The centre had learned from the past experience it share from the functioning of Export processing zones that they need to avoid items depending on ‘scale economies’ and the collapse of engineering exports in EPZs in the mid-90s. Ground Realities The pre-1991 period was a tough period for entrepreneurs for investment purpose as countless approvals were needed in order to set up an industrial enterprise. An entrepreneur who were interested in setting up business units had to first get ‘in principle’ approval from the Ministry of Industry. If granted, the businessman would be able to approve Letter of Intent from the appropriate authorities and then take the next necessary steps to finalize project requirements on other fronts. Secondly the businessman had to take ‘essentiality’ and indigenous ‘non- availability’ clearances from the Directorate General of Technical Development (DGTD) and after issue of the same, he will be approaching Chief Controller of Imports and Exports (CCI&E) in the Ministry of Commerce, who were the authorized person to issue license which in turn help the businessman in imports of capital goods but the final approval would have to be obtained elsewhere – from a committee in the Ministry of Industry. The CCI&E was the prominent figure related to imports of raw materials and components and separate license had to be acquired annually making it a tedious job to comply with. They had to further clear foreign technology collaborations via specific approvals from a committee chaired by the Finance Secretary and serviced by the Ministry of Industry. This was not enough to set up a unit. If an industrialist wanted to source funds for its project, they would have to take permission from Ministry of Finance. In that case the entrepreneur had to apply to the 15 Controller of Capital Issues (Ministry of Finance) for approval to approach the capital market. Only after everything had been tied up, and the unit was about to go into production, he could approach the Ministry of Industry again – this time for an ‘Industrial License’. If above mentioned procedures was an easy procedure to set up a new unit, matters were even more complex in 1969 with the enactment of the MRTP Act (1969). Firms covered by the act had to obtain separate MRTP clearances from the Department of Company Affairs. The Government wanted to promote small-scale industries (SSIs) so it had reserved 836 items for the small-scale sector. This was in addition to the list of industries that stood reserved (since 1956) solely for the public sector. In year 1977, India largest 30 cities witnessed a ban on locating industries .That ban was extended in 1988 to include the municipal areas of all towns, cities and to specified areas of influence around the largest twenty-one cities. Only after such incidence had taken place a serious reconsideration was look into earlier economic models that had been so firmly entrenched right since Independence. Early Lackluster Performance As of now we already know that EPZs was established to increase foreign exchange earning and to boost the economy but it hasn’t been able to make any serious dent in India’s economic aggregates which can be observed from the data of year 2004-05. Export Processing Zones accounted for just:
Although the intention was not wrong in setting up EPZ but it was the collapse of the major Eastern Bloc markets that used to absorb 87 per cent of their exports, an investigation made in the year 1990 for EPZs strongly suggested the above note. This slowdown persisted until the mid-90s, and only since then has there been an upturn. All said and done but China is the one, who has emerged as the best practitioner of the SEZ policy and justifying the hypothesis that, those which are well defined geographically, and restricted, are the ones which are best suited for export processing though electronics and gems & jeweler should turn out to be the most successful Indian EPZ exports seems to bear out this conclusion. However, there are many other aspects about Chinese SEZs: they are (i) Far (16 bigger than Indian EPZs or SEZs), (ii) far fewer in number, with units therein (iii) operating in line with the liberalization that is fast taking place in China’s DTA. EXPORT PROCESSING ZONES – BEGINNINGS AND EXPANSION Phase I: 1965—1985 The first change occurred at the end of the 1970s, when India suddenly found itself unable to match either the value, or volume, of its exports with the much higher value of imports that was resulted by the second oil price shock. Due to happenings of such events the government therefore decided to boost exports and set up four more EPZs in 1984 – in Noida (UP), Falta (W Bengal), Cochin (Kerala) and Chennai (Tamil Nadu). The Visakhapatnam EPZ (Andhra Pradesh) was also established in 1989, but became operational only in 1994, excluding Chennai, the EPZs in all other locations were situated in industrially backward regions. But what is remarkable is that the government never really specified the main aims for the creation of such EPZs. Nor were there any significant changes in the laws and procedures pertaining to them making entire gamut of policies and controls that applied to the rest of the economy at the mercy of the government. Such policies were inflexible, and were circumscribed by unattractive incentives and facilities. There was no single window facility within such zones, and entrepreneurs had to acquire individual clearances from various State government and Central departments. Day-to-day operations were subject to rigorous controls, examples being customs procedures for bonding, bank guarantees, and the movement of goods. FDI policy was very restrictive, even the Zone Authorities enjoyed very limited powers. That put India at the bottom of the international ranking on business environment indices, making government-appointing the committees to review the working of EPZs. The EPZ growth was being hampered by numerous handicaps, such as
Yet, none of the committees’ suggestions got adopted. The only change that (belatedly) occurred was the government’s 1980 introduction of the Export Oriented Units scheme (EOU). That facilitated the creation of EOUs outside the EPZs’ boundaries. The first change occurred at the end of the 1970s, when India suddenly found itself unable to match either the value, or volume, of its exports with the much higher value of imports that was resulted by the second oil price shock. Due to happenings of such events the government therefore decided to boost exports and set up four more EPZs in 1984 – in Noida (UP), Falta (W Bengal), Cochin (Kerala) and Chennai (Tamil Nadu). The Visakhapatnam EPZ (Andhra Pradesh) was also established in 1989, but became operational only in 1994, excluding Chennai, the EPZs in all other locations were situated in industrially backward regions. But what is remarkable is that the government never really specified the main aims for the creation of such EPZs. Nor were there any significant changes in the laws and procedures pertaining to them making entire gamut of policies and controls that applied to the rest of the economy at the mercy of the government. Such policies were inflexible, and were circumscribed by unattractive incentives and facilities. There was no single window facility within such zones, and entrepreneurs had to acquire individual clearances from various State government and Central departments. Day-to-day operations were subject to rigorous controls, examples being customs procedures for bonding, bank guarantees, and the movement of goods. FDI policy was very restrictive, even the Zone Authorities enjoyed very limited powers. That put India at the bottom of the international ranking on business environment indices, making government-appointing the committees to review the working of EPZs. The EPZ growth was being hampered by numerous handicaps, such as
Yet, none of the committees’ suggestions got adopted. The only change that (belatedly) occurred was the government’s 1980 introduction of the Export Oriented Units scheme (EOU). That facilitated the creation of EOUs outside the EPZs’ boundaries. Phase II: Consolidation 1991-2000 In 1991, a spell of liberalization was administered to the Indian economy. On the above backdrop, wide-range of measures was initiated by the government for revamping and restructuring EPZs. This phase was thus marked by progressive liberalization of policy provisions and relaxation in the severity of controls and simplification of procedures. The focus had been on
The scope and coverage of the EPZ/EOU scheme was enlarged in 1992 by permitting units in the agriculture, horticulture and aqua culture sectors. In 1994, trading, re-engineering and re-conditioning units were also permitted to be set up. Phase III: Re-Emergence 2000-Onwards This period has witnessed a major shift in direction, thrust and approach. The EXIM Policy (1997-2002) has introduced a new scheme from 1 April, 2000 for the establishment of Special Economic Zones (SEZs) in different parts of the country. The SEZ is an almost self-contained area with high-class infrastructure for commercial as well as residential inhabitation. SEZs are permitted to be set up in the public, private, joint sectors or by the State governments with a minimum size of not less than 1000 hectares. The number of incentives both fiscal and non-fiscal has also been extended to the units operating in SEZs. Several measures have been adopted to improve the quality of governance of the zones. These include relaxation in the conditions for the approval process and simplifying customs rules. Development Commissioners were given the labour commissioner’s powers. SEZ policy is thus the most significant thrust towards ensuring the success of export processing zones. From 1 November, 2000 the Export Processing Zones at Kandla, Santa Cruz (Mumbai), Cochin and Surat were converted into SEZs. In 2003, other existing EPZs namely, Noida, Falta, Chennai, Vizag were also converted into SEZs. Approvals were also given for the setting up of 26 SEZs in various parts of the country in the private/JT sectors or by the State. These are,
Devolution of Powers Since 2005 The SEZ Act (2005) limited the responsibility of the Central government to just the appointing of a Development Commissioner (DC) – along with 23 a small complement of staff to supervise the functioning of SEZs. The latter must conform to the guidelines contained in the Act and Rules. The DC oversees the Approvals Committee at the level of the SEZs and reports to the Secretary in the Department of Commerce who is the Chairman of the Board of Approvals with the Government of India. As mentioned earlier an EGOM was constituted to discuss and decide contentious issues .At the same time, it became the responsibility of the private developer to install infrastructure – social or otherwise – attract new units to the processing area, and manage the zone. It is also the developers’ responsibility to fund and manage the project on a commercial basis and work closely with the State government concerned. |
