Why have Special economic zones (SEZ) not taken off in India?

Special economic zones (SEZs) were set up to promote export-oriented manufacturing, domestic investments and improve ease of doing business. Business units in these zones were given a host of incentives including tax exemptions, duty free exports, access to better infra among others.

Units in SEZ enjoy 100% income tax exemption on profits from export for the initial five years. And 50% for the next five years. But the World Trade Organization has ruled that these export incentives were against its rules. Nations are not allowed to directly subsidize exports, as it kills competition and distorts market prices.

Even though the exports from SEZs increased to Rs 7.59 trillion in FY21 from just Rs 22,840 crore in FY06, it was nowhere close to the success achieved by China.

One of the main reasons was the size of the special economic zones in India as compared to China, which has manufacturing zones in the size of mega cities strategically located close to ports and trade-friendly locations such as Hong Kong.

The competitive advantage that Indian SEZs enjoyed also waned over the years. Several businesses have also moved away from these zones due to alleged lack of consistency in policy. The withdrawal of tax concessions and the sunset clause along with several ASEAN countries relaxing their regulatory laws lured these business units to shift shops. The huge parcels of land under the SEZs are also under-utilised and lying vacant due to sector-specific restrictions.

Now through the Development Enterprise and Services Hub (DESH) Bill, 2022, the government is moving away from the original idea of export-oriented production and is proposing to allow the business units in SEZs to sell in domestic markets more easily and boost domestic manufacturing. The draft bill also talks about setting up an integrated and decentralised single window clearance mechanism for time-bound approvals hubs.

If indeed India needs the special hubs, the govt must address the critical gaps in existing SEZ law through the DESH bill and it must be thought through before bringing it to the Parliament. Effective implementation of the law could act as a lever to India's growth.