Special Economic Zones and India’s

Industrialisation: Opportunities,
Challenges, and the Way Forward
The policy brief summarises the perspectives on the challenges that Indian special economic zones (SEZs)
have faced and the key policy recommendations of the various stakeholders (including policymakers, business
associations, and academia) based on the session organised by ISID in the India Land Development Conference,
2021 on November 24, 2021. The session was moderated by Prof Nagesh Kumar, Director, ISID, who set the narrative
of the session by stating the importance of SEZs to Indian economy and the challenges that await realisation of its
full potential. A detailed and insightful presentation on this issue was given by Prof Aradhna Aggarwal, Copenhagen
Business School. Distinguished panellists included Mr Srikanth Badiga, Vice President, Export Promotion Council
of EOUs and SEZs; Mr Bipin Menon, Development Commissioner, NOIDA SEZ; Dr Malini Tantri, Assistant Professor,
Institute for Social and Economic Change, Bengaluru; and, Dr Ramaa Arun Kumar, Assistant Professor, ISID, who
also coordinated the session. The YouTube link of the https://youtu.be/lduKMRF8YII

Introduction the zones may fail to move up the value chain.

Factors like global competition for attracting FDI,
The importance of special economic zones
economic risks arising from business cycles, and
(SEZs) as a tool of industrial policy has been
financial risks may undermine the advantages
realised across economies, given their growing
that the SEZs possess. External shocks and recent
presence on the global stage. For example, in
global developments such as increasing tariff
2019, there were 5,383 SEZs spread across 147
barriers, and the global slowdown post-2008
countries. Alongside this evolution, there has
have especially affected the global value chains
been a proliferation of a variety of SEZs across
that have either been reshoring or back-shoring,
economies. A number of structural changes
thereby affecting the SEZs.
have taken place in the evolution of SEZs at a
conceptual level. Initially, these zones were
located near ports as they were mainly of the Indian SEZs: A Mixed Bag of
nature of export processing zones. However, Successes and Failures
they have now evolved to take the form of
Unlike the successes of SEZs in countries like
various kinds of zones such as those engaged
South Korea, Taipei China, and People’s Republic
in transhipment activities, commercial or
of China, the experience of India in gaining
manufacturing hubs, hybrid zones (inter-mix of
from the SEZ model was limited to a few zones.
SEZs), and general economic zones.
The unparalleled success of the SEZ model of
Special economic zones help developing China has been looked up to by many economies
countries to overcome production bottlenecks that have emulated the SEZ model, successfully
or failures by offering an attractive business attracting FDI and generating employment with
and investment environment. By augmenting economic restructuring at varying degrees.
resource allocation and productivity – both being For example, countries in South East Asia
the drivers of economic growth – SEZs offer a like Malaysia, Vietnam, and the Philippines;
tremendous opportunity for economies to extract Bangladesh in South Asia; Dominican Republic
maximum benefit in terms of rise in employment and Costa Rica in North America; Ethiopia and
opportunities and export growth, among others. Mauritius in Africa; and, Poland in Europe.
These benefits, however, may be limited if Till 2000 India did not have any SEZ as it followed
appropriate policies are not in order. The SEZs are the approach of facilitating export processing
delineated zones within an economy; however, through various export processing zones (EPZs).
if they remain delinked from the economy, The SEZ policy in India gained momentum in 2005

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when the SEZ Act, 2005 was implemented “for the However, in terms of employment intensity
establishment, development and management measured as employment per hectare, the figure
of the Special Economic Zones for the promotion stood at 61 persons per hectare of land under
of exports and for matters connected” (SEZ Act, SEZs. One explanation is the underutilisation of
2005). Following the announcement of the SEZ infrastructure set up for SEZs in the allotted lands,
policy in 2000, the previous seven EPZs set up which has failed to boost employment growth.
by the central government were converted into Another explanation for low employment intensity
SEZs; these were Kandla (Gujarat), Santa Cruz is the sectoral distribution of SEZ units, which
(Maharashtra), Cochin (Kerala), Noida (Uttar is oriented towards less employment intensive
Pradesh), Chennai (Tamil Nadu), Falta (West sectors such as the services sector which hosts
Bengal), and Visakhapatnam (Andhra Pradesh). around 61 percent of the total operational SEZs.
In addition, an EPZ in the private sector in Surat, Within the services sector, it is the Information
Gujarat was also converted into an SEZ. In the technology and information technology enabled
interim period between 2000 and 2005 (when services that account for 94 percent of the total
the SEZ Act was formulated), several state level SEZs. The share of manufacturing sector, which
SEZs were formed either by the government or holds the potential for generating employment,
private players. remains subdued.
However, in terms of implementation, the Absence of Single Window Clearances: Although
potential of SEZs could not be leveraged as it fast-track approvals have been put in place,
unfolded over the years. The round table brought in terms of implementation many exporters
forward the following challenges sharply: across SEZs have reported that documentation
and procedural issues are still prevalent. For
Lack of Institutional Preparedness: A mix of wrong example, the certificate of origin and goods
policies pertaining to archaic land acquisition and services tax issued by the development
laws and lack of institutional preparedness led commissioners are not recognised by the
to widespread resistance among the people, exporters to Dubai and Japan. Additionally,
especially rural land owners, in the very the approved MSME exporters also encounter
beginning. These gave the state and the private transaction delays within SEZs due to lack of
players authority to acquire massive land masses one-stop shop services wherein environmental
with a very narrow window for response from approvals and labour department approvals
land owners. As a result, as much as 50 percent have to be taken separately.
of the land marked for the development of SEZs
remained underutilised in respect of 369 notified In the midst of these challenges, there have
SEZs in 2017. been a few success stories in the SEZ ecosystem,
one of which is that of Sri City, Andhra Pradesh
Policy Reversals: The initial rise in the number which is discussed below.
of SEZs after 2005 was also neutralised due to
the lack of sustained incentives to the units.
The removal of key incentives in terms of Success Story of Sri City SEZ
exemptions from minimum alternate tax and There are a few SEZs which have succeeded in
dividend distribution tax in 2011–12 was a portraying the potential that can be achieved
turning point for the growing popularity of through the right mix of policies and institutional
SEZs in India. Moreover, the introduction of approach such as Sri City in Chittoor district,
the sunset clause for developers and SEZ units Andhra Pradesh. Spread over 3,800 acres of
that phased out the direct tax holidays also land, it is a hybrid zone comprising a domestic
exacerbated the weakening of the SEZ concept tariff zone (DTZ) and an export area that are
in India. Consequently, the overall area under adjacent to each other. The export capabilities of
SEZs fell to 419.7 sq kms in 2020–21 from 496.21 most companies operating even in the domestic
sq kms in 2012–13. processing zone was high, with some of them
exporting up to 70 percent of their total output.
Underutilisation of Land under SEZs: In terms of
performance of existing SEZs, the operating SEZs The zone has displayed a transformation from
have contributed positively to the current account a backward region dependent on subsistence
balance and sectoral growth for sectors such as farming with majority of the landholdings
electronics, modern jewellery, and information remaining less than one acre to a successful SEZ
technology. Employment in SEZs has risen to comprising about 100 companies and providing
2.5 million in 2021 from 0.13 million in 2006–07. employment to 50,000 people in the first phase.

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The region’s backwardness was characterised track clearances are in place whereby procedural
not only by limited and, predominantly, barren delays have reduced, for example, in Noida SEZ.
landholdings leading to economic restraint, but
However, there is a lot to be done to ensure
also by social issues like early marriage of girls, that the SEZ development is integrated into the
low literacy rates, and lack of basic amenities development strategy of the policymakers. The
like toilets within dwellings. key policy takeaways from the above discussion
What made Sri City a success was the are as follows:
humanitarian approach to land acquisition, ƒƒ Policies to exploit the underutilised existing
assuring that no dislocation of habitats took infrastructure should be the starting point for
place and ensuring employment opportunities overcoming the constraints that have lurked
to the inhabitants through training programmes. around for many years in restricting the SEZ
Proper evaluation of land and other assets like growth in India. For these, incentives such
mango trees, wells, and tube wells were made as removal of export obligation for units to
to ensure a fair compensation. The resulting operate in SEZs, allowing sales to domestic
compensation, therefore, was as much as ten tariff areas (DTAs), and enabling transactions
times of the actual value of land acquired, between SEZs and DTAs to be undertaken in
depending upon the type of land. domestic currency are some measures that
In addition, the policies that were the key enabling can be taken by the government to evolve
from the existing policies.
factors for the Zone’s success were high-class
infrastructure facilities by huge investments ƒƒ The manufacturing sector should be given
in design and development and one-stop shop a boost through SEZs. For this, apart from
policy of developers ensuring smoothness in the land, other important inputs such as skilled
implementation of development plans. manpower which needs to be sourced locally,
and availability of raw materials, ports,
roads, etc., are essential for units to locate
Key Policy Takeaways themselves in SEZs.
The Indian economy promises a strong and ƒƒ
Integration of production-linked incentive
resilient economic structure that not only schemes with the SEZ policy in sectors such as
overcame the adverse effects of global economic apparel, pharmaceuticals, automobiles, and
crisis of 2008, but also displayed its strength avionics can accelerate the industrialisation
during the most challenging pandemic crisis in process of the Indian economy.
the present times. In terms of SEZs, the exports
from these zones rose by 53 percent in the In the end, it can be said that the Indian SEZ
manufacturing sector while services exports policy holds immense potential to boost
grew by 10 percent during the period January to economic growth by enabling better allocation
June 2021. and utilisation of inputs and raising productivity
of the firms located therein. The case study of Sri
Presently, SEZs provide state-of-the-art City shows that a well-implemented SEZ can be
infrastructure with greater connectivity in the an important driver of inclusive and sustainable
form of roads, railways, and ports. Some of the industrialisation and development. The lessons
SEZs offer around 22–25 percent reduction in the learnt from such successes need to be scaled
costs due to duty free imports of raw materials up and replicated to exploit the full potential of
and construction material for developers. Fast SEZs for India’s development!

Acknowledgment: This Policy Brief has been prepared by Dr Ramaa Arun Kumar, Assistant Professor, ISID, based on the
discussions at the session organised by ISID in the India Land Development Conference 2021 on “Special Economic Zones
and India’s Industrialisation: Opportunities, Challenges, and the Way Forward,” held on November 24, 2021.