Essay and Answer Writing → UPSC Essays

Special Economic Zones [2008]

One most commonly associates Special Economic Zones or SEZs with exclusivity and access. These are spaces specifically delineated as ‘duty-free’ enclaves and are deemed to be foreign territories for the purpose of trade operations, duties, and tariffs. While the main objective of SEZs is to develop an integrated world-class infrastructure for exports, including carrying out of manufacture of goods, and rendering of services in connection therewith, it has been both applauded and criticised. The essay evaluates the two sides of the coin. 
 
What are SEZs?
A special economic zone (SEZ) is an area in a country that is subject to different economic regulations than other regions within the same country. The SEZ economic regulations tend to be conducive to and attract foreign direct investment (FDI). FDI refers to any investment made by a firm or individual in one country into business interests located in another country. When a country or individual conducts business in an SEZ, there are additional economic advantages for them, including tax incentives and the opportunity to pay lower tariffs.
 
SEZs are usually created in order to facilitate rapid economic growth in certain geographic regions:
 
·This economic growth is accomplished by leveraging tax incentives as a way of attracting foreign dollars and technological advancement.
·SEZs may also increase export levels for the implementing country and other countries that supply it with intermediate products. 
·However, there is a risk that countries may abuse the system and use it to retain protectionist barriers (in the form of taxes and fees). SEZs can also create a high level of bureaucracy due to their regulatory requirements. 
 
The first SEZs appeared in the late 1950s in industrialized countries. They were designed to attract foreign investment from multinational corporations. However, China has been the most successful in using SEZs to attract foreign capital:
 
·The first four SEZs in China were created in 1979 in the south-eastern coastal region: Shenzhen, Zhuhai and Shantou in Guangdong province, and Xiamen in Fujian province. 
·These cities enjoy similar benefits as SEZs such as the power to approve investment projects, offer incentives to foreign investors and import equipment and technology tax free. 
·Within China, the SEZs essentially act as liberal economic environments that promote innovation and advancement. The Chinese government continues to allow these areas to offer tax incentives to foreign investors as a way of further developing the infrastructure of these regions.
·In the case of China, economists agree that the country’s SEZs helped to liberalise the formerly traditional state. Without the SEZs, China may not have been able to successfully implement the same level of national reform.
 
India and SEZs
A scheme of setting up the SEZs in India was announced in the Export and Import (EXIM) Policy in March 2000. But the implementation of this policy and the task of setting up SEZs on a large scale gathered momentum later after the rules and regulations were clearly laid and amendments wherever required, duly made.
Encouraged by the success of China’s SEZs, the Indian Government had envisaged the SEZs for the country’s export-oriented economic activity. Thus, the Special Economic Zones Act, 2005 had a view to providing an internationally competitive and hassle-free environment for exports.
 
The objectives of the Special Economic Zones Act, 2005: 
·generation of additional economic activity
·promotion of exports of goods and services
·promotion of investment from domestic and foreign sources
·creation of employment opportunities
·development of infrastructure facilities
·maintenance of sovereignty and integrity of India, the security of the state and friendly relations with foreign states. 
The government considers SEZ as engines of growth and employment generation. An emphasis is laid on infrastructure.
 
The Advantages
Any policy or schemes that promotes technological investment and employment generation in a country, is a welcome step. In that SEZ policy is a strategy for economic development. SEZs lead to improvements in related sectors like: roads, airports, ports, power, hotels, education, entertainment etc. They are the means through which a country gets a state-of-the-art infrastructure and the availability of the most skilled and trained workforce. Enterprises and developers are more motivated to get associated with it as it provides 100% income tax exemption, which is valid for five years. The main benefit comes to the manufacturing sector as they are open for a 100% FDI investment.
 
The SEZ Policy also gives an impetus to private sector to overcome the country’s infrastructure problems which are considered to be a roadblock to attracting Foreign Direct Investment (FDI). India is a vast country with a large population. Despite rapid economic development during the last five years or so, there is persistent poverty and rampant unemployment. The setting up of SEZs would result in the creation of lakhs of new jobs for skilled and unskilled workers. The number of managerial jobs would increase tremendously. The Information Technology Parks and Computer Software as well as Hardware Parks being created through SEZs shall firmly establish India as an IT and ITES giant.
 
The Disadvantages
It is true that these SEZs have helped boost economic activity in India in the last decade but that has come at a great expense.  Some downsides of Special Economic Zones in order to form a holistic opinion about the issue:
 
·When states compete for these industries in terms of cheaper land and greater tax cuts, the costs shoot up, depleting the government’s revenue further.  SEZs have helped India in exporting certain new products but were unable to induce technology-based dynamism, reducing the overall impact to being just moderate.
·Another area of concern is that the capital-intensive activities in SEZs have low employment intensities. This, coupled with the reduction in small scale industries due to competitive pressures of the low cost industries in the SEZs has led to a fall in employment opportunities even though outputs and profits show an upward trend.
·Environmentalists argue is that the large industries release chemicals in the water thereby polluting it. The sound of huge machinery used in the SEZs causes sound pollution and an environmental imbalance. Moreover, with no rules about constructions of roads, open spaces etc, it leads to pollution and severe health consequences for the population residing in and around these special areas.
·Another major drawback is loss to the community that includes confiscation of land, displacement of people and shifting of productive land away from agriculture.
·Seizing the opportunity offered by the SEZ Policy, an active land mafia has appeared. These land-brokers are already making a huge amount of money by buying land from poor landowners at cheap rates and selling the same to SEZ developers at much higher rates.
 
Conclusion
Special Economic zones a novel attempt to overcome the infrastructural bottlenecks procedural delays, bureaucratic hassles and barriers created by monetary, trade, fiscal, taxation, tariff and labour policies. Since country wide infrastructure is expensive, the establishment of economic zones is an important strategic tool for speeding up the process of industrialisation. The economic zones offer positive signals for a both domestic and foreign investors. These measures are likely to create a conducive business environment to attract the investors globally for sizable amount of investment. While Special Economic Zones definitely help in increasing output and exports, they must be built with caution. For example the problem of reduced agricultural land and rehabilitation of farmers can be solved by acquiring non- agricultural land. Moreover, compensation for land acquired must not be less than the subjective valuation of the land by the landholder. The environmental factors are also important. It is required that SEZs be created only after taking all downsides into consideration. 
 
(Sources: researchgate.in / indianexpress.com) 

 




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