It is an unsaid rule that capital investments and their outcomes follow specific cycles. If it does not provide result in 1 cycle, it does not mean that the investments have failed. We wait for few more before tinkering with the structure. 17 years have been too long to be patient with SEZs. The new DESH framework is going to bring in fundamental changes in SEZs.
DESH bill to revamp SEZs
Soon the Modi government will be introducing a new bill altering the motive as well as operational structure of Special Economic Zones. It is named as Development of Enterprise and Service Hubs (DESH) Bill. DESH bill goes way beyond promoting exports and if passed, the act will allow companies operating in SEZs to boost domestic manufacturing leading to more job creation. It is not that earlier companies could not sell in the domestic market, but their exports were statutorily required to be more than their domestic sales. In other words, their bank accounts were required to have more foreign exchange than the domestic currency.
DESH legislation is more in line with ease-of-doing-business mantra of the Modi government. According to the bill, there will be online single window portal for the time bound regulatory approvals. Additionally, working on the cooperative federalism principle, Modi government has designed more roles for states in the bill. Instead of decision making largely centred at Ministry of Commerce, now states would have the powers to approve imports or procurement of goods, monitor the utilization of goods and services, warehousing, and trading in the SEZs.
Establishment of SEZs
DESH bill is the much needed change necessitated by the evolving consumption pattern all around the world. SEZs were quickly becoming outdated. SEZs act was passed in 2005 by the Manmohan Singh government and it came into force in 2006. The act was mainly aimed towards boosting India’s exports. For the purpose, the act provided various regulatory exemptions to the businesses established in these Zones. SEZs units can procure goods duty free for development, operation and maintenance of the units.
To boost exports, government exempts companies from paying income taxes on the export revenues for first five years. For the next five years, they were needed to pay only half of the statutory requirement. They have exemptions from the GST as well as minimum alternate tax as well. Moreover, companies are availed land at cheaper rates. Even electricity duty is exempted at some places. To facilitate all these processes, custom officers are appointed by the government.
SEZs gave mixed results
Naturally, if you are provided higher incentives, the expectations will be high. SEZs have performed well in the past. In 15 years, the exports from these units increased by nearly 33 times from ₹ 22,840 crores to ₹ 7,59,524 Crore. It came on the back of investments, which increased from ₹ 4,035.51 Crore in 2005-06 has increased to ₹ 6,17,499 Crore in 2020-21. Even the employment generation went several notches up from 1,34,704 in 2005-06 to 23,58,136 in (2020-21).
But, even that is not enough and nowhere close to the potential these Economic Zones hold. For instance, total 425 units have been approved by the government. Ideally, they should all have been running till now. Unfortunately, and also due to decreasing enthusiasm, only 376 have been notified, out of which 111 are not even operational. Various Free Trade Agreements have also played a key role in the downfall of SEZs. These FTAs allowed importers outside SEZs to garner more profits.
Need of the hour
Additionally, liberalised regulatory regime in neighbouring countries also forced companies to look towards them before having close look on SEZs. Off late, SEZs have been finding it hard to fulfill its stated obligation, which is increasing exports. Their contribution in India’s overall exports is under the risk of falling below 25 per cent.
Clearly, the alarm bell was ringing. But, India’s increased consumer spending gave government a hope. Now, with easier access to domestic market, SEZs are expected to reemerge in upcoming years.
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