Special zones: SEZ policy demands all-round reform, not frequent changes

Recent policy relaxations to encourage the manufacturing of hi-tech items such as semiconductors and electronic components in special economic zones (SEZs) mark yet another effort by the Union government to strengthen a nearly two-decade-old effort to encourage exports of manufactured products. The new rules have reduced the minimum land requirement for SEZs from 50 hectares to 10 hectares, offered concessions in net foreign exchange calculations, allowed the sourcing of capital, raw materials, and components from domestic markets from the earlier provision of imports only, and eased stipulations for the movement of finished goods. These new rules, which came into effect recently, represent a proactive strategy to boost the four-year-old Indian Semiconductor Mission, which aims to develop a robust semiconductor and display ecosystem and position India as a global hub for electronics manufacturing and design. It is an open question, however, whether the SEZ policy relaxations can be a game changer for the sector.

 

In theory, the SEZ environment would be ideal for the requirements of semiconductor manufacture, which requires stable power, clean water, and access to a skilled workforce. The problem, however, is that the objective of creating SEZs that would follow the highly successful Chinese model and act as the dynamo for manufacturing and exports has not worked out. India has 276 operational SEZs with an investment of around ₹7 trillion. But in almost two decades, these units have managed to generate employment for just about 3 million people  — far less than the 5.4 million employed in the information-technology (IT) and IT-enabled services businesses in India and far below the requirements of the workforce. In China, the mammoth SEZs account for 60 per cent of exports; in India, they account for just about a fifth, and the ratio has barely changed for years. Nor is manufacturing the main driver in India; instead, IT and IT-related services account for 60 per cent of SEZ exports. The gradual shrinking of minimum land size stipulations also reflects a critical infirmity for any mega-project in India — land acquisition. This factor alone has proven a major hurdle in SEZ development, which includes obtaining necessary permits and developing the world class infrastructure necessary to sustain streamlined manufacturing operations.

 

There is also the question of policy discrepancies, with poor coordination between government departments causing delays in the application of incentives. The poor response prompted the government to introduce a Development of Enterprise and Service Hubs (DESH) Bill in 2022 to encourage companies to produce both for global and domestic markets. This, too, has gone nowhere, as the government has shelved the DESH Bill. The prospect of poor connectivity, social infrastructure, and other support services in India’s more rural regions has meant that SEZs tend to be located near areas that are already developed. If SEZs are to develop beyond a lucrative real estate play for developers, they need an enabling ecosystem — from transport and internet connectivity to flawless infrastructure, world-class housing, security services, schools, and hospitals. That implies envisaging these units as integrated socioeconomic structures, as they are in China, rather than as hubs insulated from the various vicissitudes of India. Solving the age-old structural problems in the investment environment rather than frequent policy shifts would be the best bet for India’s faltering SEZ policy.