SPECIAL ECONOMIC ZONES (SEZs)

IN
CHINA & INDIA

Introduction

- Historical background
- From ancient times – Harappan, Roman to mediaeval times and later
- Small fenced-in areas specializing in manufacturing for exports
- Modern times – Free ports – Aden, Singapore, Hong Kong – Difference
- Modern version of export zones starting from Puerto Rico (USA), Shannon
International Airport in Ireland in 1959 – latter considered the first one
- India – Kandla in 1965. EPZs in Taiwan, S. Korea and other countries
- Since 1979, most extensive, large and successful SEZs in PRC (China)
- After early start, India slow in following up
- Recent interest in India
 SPECIAL ECONOMIC ZONES (SEZs)
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CHINA & INDIA

Common Features of SEZs

- Duty-free imports of capital goods and inputs for production for Export
- Liberal access to foreign exchange
- Encouragement to FDI
- Simplified, “one-stop” approvals
- Generous tax concessions esp. in early years
- Flexible Labour Laws
- Limitations on sales within the country
- Better Infrastructure (Power, Transport & Communications)

We will note the differences between China and India later.

 SPECIAL ECONOMIC ZONES (SEZs)
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CHINA & INDIA
Rationale for SEZs

- Main benefits sought from SEZs are:

* Faster economic growth
* Employment generation on a large scale
* Earning more foreign exchange
* Infusion of modern technologies & their demonstration and spread
effects
* Economies in production due to clustering
- Benefits can be there for the whole country if same policies are adopted
everywhere. Economic, political, social reasons for restricting to certain
places. SEZs as ‘second-best’ options to generalized liberalization.
- Export-led growth and creation of fast-growing, employment-generating
areas main objectives.
- Advantages of coastal regions in export zones – experience of Mongolia which
turned the whole country into a free-travel investment zone.
 SPECIAL ECONOMIC ZONES (SEZs)
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CHINA & INDIA

SEZs in China
Policy Background

- Reforms since 1978 (Lecture 1) Aim : Quadrupling GDP in 20 years – 1980

to 2000
- Four modernizations – Liberalization of Agriculture; Rural & Town
Industrialization through TVEs; Defence; Urban & Area Export-oriented
enterprises through ETDZs and SEZs
- Importance of the last in faster economic growth, modernization of
Industry & Trade and export growth
- Policy of preferred regions – unequal growth – open-door policies
- Hong Kong and East Asian factors
- Overriding approach based on Deng’s Observation: “For us to establish
SEZs and adopt open-door policies, we must have a clear guiding ideology:
that is, “Not to constrain but to release”
 SPECIAL ECONOMIC ZONES (SEZs)
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CHINA & INDIA

SEZs in China

Development over the years

- Started soon after beginning of reforms in 1978.

- Four SEZs started in 1979 – three in Guangdong adjacent to Hong Kong and one at Xiamen in
Fujian (See Map in Annexure 1)
- Established principally to test the effectiveness of alternative market-based export-led growth
strategy, as in East Asian countries.
- Heavy government investment in infrastructure. Each zone could introduce its own Regulation
to growth investment, approvals and tax concessions.
- Based on the success, in 1984, the SEZ benefits were extended to 14 coastal open cities.
- Economic & Technology Development Zones (ETDZ) and High Tech and New Technology Industry
Development Zones encouraged in coastal open cities.
- In 1985, three development triangles – Pearl River Delta (PRD), the Yangtze River Delta (around
Shanghai) and Minum Delta (around Xiamen) were designated as coastal open areas.
- Hainan Island was declared as fifth SEZ in 1988
- Since then, 52 cities (including all provincial capitals) have become open cities
- Uncontrolled proliferation and later consolidation (Annexure 2)
 SPECIAL ECONOMIC ZONES (SEZs)
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SEZs in China

Reasons for Success:

- Unique locations – of the five SEZs, Shenshen, Shantou and Zhuhai are in Guangdong Province
adjoining Hong Kong. Fourth, Xiamen, is in Fujian Province and nearer Taiwan.
- Large size with government and local authorities providing improved infrastructure with foreign
collaboration (Annexures)
- Investment-friendly attitudes towards Non-Resident Chinese and Taiwanese!
- Attractive incentive packages for foreign investment
- Liberal customs procedures
- Permission to sell in DTA
- Flexible Labour Laws providing for contract appointments for specified periods
- Powers to Provinces and local authorities to frame additional guidelines and in administering the
Zones.

These arise out of the over-all ‘releasing’ open-door policy mentioned earlier

Emerging Challenges

- Over-capacity
- Heavy burden of non-performing laws
- Declining competitiveness
- WTO constraints
 SPECIAL ECONOMIC ZONES (SEZs)
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CHINA & INDIA

SEZs in India

Experience with EPZs

- Starting with Kandla in 1965; SEEPZ in 1972, Based on reviews of working,

Cochin, Falta, Madras (Chennai) and NOIDA in 1984 and Vizag in 1989
- Very limited impact
- Less than 40% of approvals fructified
- Rest cancelled or lapsed
- Employed only 0.01% of labour force
- FDI was less than 20% of total investment
- Accounted for less than 4% of exports. Net export much lower as imports
were over 60% of exports
 SPECIAL ECONOMIC ZONES (SEZs)
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SEZs in India

The reasons were:

(i) Very Small Size of EPZs
Location Size (Sq.miles)
Kandla (Gujarat) 1.17
SEEPZ (Mumbai) 0.15
Cochin (Kerala) 0.16
Surat (Gujarat) N.A
NOIDA (UP) 0.48
Chennai (TN) 0.41
Vizag (AP) 0.56
Falta (WB) 0.44
 SPECIAL ECONOMIC ZONES (SEZs)
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SEZs in India

(ii) Inadequate infrastructure

(iii) Restrictive policies
(iv) Lengthy procedures – No Single Window
(v) Locational disadvantages
(vi) Stringent labour laws

- In the 1990s, as a part of reforms, powers delegated to zone

authorities, additional fiscal incentives were given, policy provisions
were simplified and greater facilities were provided leading to some,
not very significant, improvements.
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SEZs in India
SEZ Policy of 2000

- New Policy in April 2000. SEZs permitted to be set up in the public, private, joint sector
or by the State Governments
- Minimum size of 1000 hectares (4 sq. miles)
- Simplified procedures and more incentives
- Main measures were:
• Conditions for automatic approval relaxed considerably
• Customs procedures simplified
• Units could produce items reserved for SSI units in domestic market
• 100% FDI investment for manufacturing
• Profits could be repatriated fully
• Freedom for sub-contracting
• 100% I.T. exemption for five years
• Exemption from Central Excise Duty on capital goods, raw materials, consumable
spares from domestic market
• Reimbursement of CST paid on domestic purchases

Some states also promulgated SEZ Policies (including Kerala)

 SPECIAL ECONOMIC ZONES (SEZs)
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CHINA & INDIA

SEZs in India
- Since 2000

• 11 functioning SEZs
• About 40 were approved in addition
• Growing interest by private developers to go in for large projects –
Mumbai Integrated Special Economic Zone, Reliance Petroleum Zone
at Jamnagar and so on.

- The special Economic Zones Act 2005

– Comprehensive law providing for larger tax incentives
– Covers all aspects of establishment of zones, operation and fiscal
regime
 SPECIAL ECONOMIC ZONES (SEZs)
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CHINA & INDIA
SEZs in India

Incremental changes over 2000 Policy: main are:

• Corporate I.T. exemption increased to a block period of 15 years

• 100% I.T. exemption for 5 years, 50% for next five years and 50% of ploughed-back profits for last five
years
• Other fiscal incentives in the form of exemption from Service Taxes and Securities Transaction Tax
• Greater operational freedom, eg., Free to fix user charges
• Approval committee for each zone to provide ‘single-window’ clearance in all matters.
• 10 more SEZs were sanctioned since the Act was passed in June 2005
• Bigger than before. Investment of over 15000 crores in all. Big players like WIPRO, Reliance, Biocon,
etc., in action
• SEZs are public utilities under I.D. Act, but no changes in Labour Laws.

General perception among foreign investors that SEZs won’t play a great part in Indian manufacturing

• Reasons – Problems of infrastructure, continued small size despite some increase; continued
centralization of power with GoI & its functionaries, over-all restrictive climate for foreign
investment. Role of FIPB and FIIA.
 SPECIAL ECONOMIC ZONES (SEZs)
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Special Economic Zones in Kerala
1. SEZ for Electronics at Kalamassery, Ernakulam District
The SEZ is planned in an area of 30 acres. Expressions of interest have
been called for getting a co-developer. However, the response has not
been very encouraging and hence KINFRA, who is the implementing
agency, is on the lookout for a co-developer. Government of India has
already given approval.

2. SEZ for Food Processing Kakkanchery, Malappuram District

The SEZ is planned in an area of 30 acres for which KINFRA on the
lookout for a co-developer. Government of India has already given
approval.

3. SEZ for Animation and Gaming, Trivandrum District

This SEZ is planned in Trivandrum District within the already existing
video park of KINFRA. SEZ is planned in an area of 25 acres. KINFRA
has also constructed a building 1.5 lakh sq.ft. and is on the lookout of a
co-developer. Government of India has already given approval.
 SPECIAL ECONOMIC ZONES (SEZs)
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Special Economic Zones in Kerala
4. Infopark, Ernakulam District
Approval obtained from Government of India for converting the existing
Infopark into a SEZ. Discussions are being held with Dubai Internet City
for handing over the Infopark to be developed as Smart City.

5. Technopark, Trivandrum District

Inprinciple approval has been obtained by the existing Technopark,
Trivandrum from Government of India for converting 100 acres of their 3rd
phase expansion into a SEZ for IT & IT enabled services.

6. New SEZs being proposed by KSIDC are:-

SEZ for health care products in Trivandrum District (100 acres)
SEZ for textiles at Cherthala, Alappuzha District (250 acres)
SEZ for petrochemical products at Kasargod District (1000 acres)
 ANNEXTURE
CHINA’S SEZ’S, COASTAL OPEN CITIES, AND OPEN ECONOMIC
REGIONS