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SEZ IN INDIA - The Ground Realities Amitava Basu

Background
Recognizing that exports contribute significantly to economic growth and considering the potential of raw material resources and skilled labour at competitive cost, Government of India promulgated Special Economic Zone policy in 2000. The policy intended to correct the shortcomings of the Export Processing Zones.

After lapse of considerable time, Special Economic Zones Act, 2005 was enacted in June 2005 and notified on 10th February 2006. This led to a tremendous surge in interest for launch of SEZs. Establishment of SEZs helped to increase volume of international trade, inflow of foreign investment and foreign technology into export trade, infrastructure construction and commerce. Yet, the progress of SEZs and benefits expected from them has been relatively limited in India as compared to China and other countries.

Challenges
The biggest challenge presently faced by SEZs in India is in acquisition of land. There is a large outcry against poor compensation paid to farmers, diversion of arable land to industrial use that carries the risk of lowering agricultural production and leading to food insecurity.

Though the policy aims at creating world class infrastructure within SEZs, the need for connecting these islands of excellence with other ports, airports and other social infrastructure is not fully addressed. Planning location of SEZ is a critical element to facilitate supply chain management and balanced regional development.

Proper balance is needed between relaxation of applicability of labour laws to SEZs and hedging the workers from hostile company policies. SEZs in China were initially exempted from national labour laws despite being a communist country. This model sustained initially because the foreign investors were given the leverage to train the workers and developing confidence in Chinese domestic labour competence.

In sum, the challenge is whether India through SEZs can leverage its cost advantage and huge knowledge base and break the hold of China in manufacturing by making India the preferred destination for doing business.

The Way Forward
India needs to create the enabling environment for SEZs with high quality infrastructure, a liberal and supportive business policy environment, providing necessary push which the manufacturing sector urgently requires. This would help small and mid-sized entities which cannot afford to set up captive infrastructure facilities like large Indian companies to house their units in SEZs with state of the art infrastructure facilities and at the same time share the costs in a large group. And, importantly, coordination among multiple agencies with the common goal for facilitating SEZ is urgent to prevent hijacking the legislative framework by will of regulatory bodies.

Lessons from China in regard to location of SEZs close to ports, determination of size of SEZ area, flexible labour laws, and provision for world class infrastructure can provide the required directions.