Special Economic Zone (SEZ)

I did a presentation in my college on the Special economic zone also know as FTA (Free trade zones) in US.

What is SEZ?

A special Economic zone is a geographical region that economic laws which are more liberal than the usual economic laws in the country. . The basic motto behind this is to increase foreign investment. The sez was first established by the PRC (Peoples republic of China) for a variety of reasons like, increase in investment and increase job opportunities and technical knowledge and bring about certain tax reforms.

Need for Sez and who can set up:

The policy of sez was introduced on 1/4/2000 (In India) with a view to provide an internationally competitive and hassle free environment for exports and make the domestic enterprises and manufacturers globally competitive. The units set up under sez can be for manufacturing or rendering service. The policy provides setting up the sez in the public sector or private sector or by joint sector or even by the state government. It was also decided that the current EPZ (Export processing zone) would be converted into the special economic zone. EPZ like SEZ also have less bureaucratic requirements and quotas are eliminated but there are certain barriers like tariff for import and export.

As I mentioned earlier sez are set up mainly to attract foreign investments and increase the exports, there are certain features that I would like to highlight from the SEZ act 2005 which will show what makes a unit under a special economic different from any other unit anywhere in the country

1) 100% FDI for the manufacturing sector, and no cap on foreign investments for Small scale industries (SSI) items. Foreign direct investment (FDI) is defined as a long term investment by a foreign investor in some other country’s economy. The FDI relationship consists of a parent enterprise and a foreign affiliate, the foreign affiliate will invest money in the parent company and together they will form the Trans national corporation (TNC)

2) Income Tax benefit under section 80 of the Income Tax Act, this implies that the profits earned by the unit is exempt from it for 3 years and 50% exemption for the next 2 years.

3) Duty free import of domestic goods required for the development and maintenance of the sez.

4) Exemption from Service tax and CST

5) Whatever investments that are made by individuals whether in mutual funds or properties or anywhere the interest that is earned is subject to income tax, but under sec88 of IT act investments made by the individual in the special economic zone is exempted from income tax.

6) There is an enhanced limit of 2.4 crore per annum allowed for managerial remuneration. This implies that units under sez’s can attract the best students from top business management schools, and a professional and well paid team will take charge of the management.

7) Normal labor laws are applicable which are enforced by the state, however state governments have been requested to simplify the procedures and for introduction of single window clearance mechanism by delegating appropriate powers to the development commissioner of SEZs.

Evaluation of Sez’s:

When evaluating the success of sez it is important to determine how the resources would have been utilized in the absence of the zones, would capital have remained in the country and would employment be created in more productive areas. When the regulatory framework legal framework and the administration of the sez fail then the cost of the sez’s outweighs the benefit.

Advantages of Sez:

Sez’s are good from the point of view of growth and development. It increases income level of citizens, encourages competition and lowers labor costs.

Attracts FDI and exchange earnings: FDI spells long term capital that can help sustain solvency. Also FDI will ensure meaningful ownership, in times of adverse claims pay put, it is only through the FDI route that foreign stake holders will infuse capital to come over the adverse situation

The state id well informed about the latest technology and also relevant information regarding the trade that goes on all over the world and how the domestic producers can penetrate into several markets. And private business’s can position themselves in the world market and boost the standard of living of citizen’s.

Sez’s also create a lot of job opportunities

Also when sez’s become a success it increases the GDP, and acts as a good economic model for the policy makers to mimic.

Disadvantages of Sez:

Employment: In the area of employment the disadvantage of SEZ is quite similar to the disadvantages of WalMart entering retail business. New jobs are created and working conditions improve, but for whom?? It is for the educated masses and the literate people and not for the laborers. Laborers suffer in the form of; forced overtime, exhausting work schedules; poverty pay, and unhealthy working conditions. The majority of workers in the Sez units are women who are exposed to the most humiliating sexual harassments. Free trade creates a “race to the bottom”, whereby developing countries lower their labor charges and environmental standards in an effort to attract foreign investment.

Secondly Companies would like to simply relocate to SEZ to take advantage of the tax concession’s being offered. This will bring about a significant revenue loss to the government. This will result in a kind of ‘disguised industry’ just as ‘disguised unemployment’.

And thirdly to set up an SEZ, large scale acquisition of land takes place which results in displacement of farmers and alternate means of livelihood are not available for them. But this issue has been taken up by the govt, and they will work out an appropriate compensation package before taking away land.

There is a possibility that Sez’s will be set up is states where there is already a strong tradition of manufacturing and exports. This in turn can aggravate regional disparities.

Conclusion:

Finally i would like to point out that SEZ can become a dangerous tool in the hands of power hungry politicians who want to show how much investment the country has attracted in their term, and so many jobs have been created. Sez’s appeal to almost all developing countries but they will not work if the country has no clear vision or strategy to move forward. They can perform even better than now if the public sector private sector and the government administration and the people, all work in coordination with each other and all work in harmony.