It was in early 2000 that the late Murasoli Maran, the then Union Commerce and Industries Minister, went on a visit to China to garner first-hand knowledge of how a socialist economy suddenly became the most attractive investment destination in the world. During that trip he visited the Special Economic Zones (SEZ) in China. Inspired by the impressive impact of these industrial enclaves on China's economic growth, Maran introduced the concept of SEZs in the Indian economy through the annual Export-Import (Exim) Policy in March 2000.

The effort has been to create delineated, duty-free zones with world-class infrastructure, internationally competitive production environment and fast track clearance system for attracting private investments, especially foreign direct investment (FDI) for setting up export oriented units. In order to convince the investors about the commitment of the country on SEZ scheme and to provide them with the protection and stability of a policy regime, Parliament passed a comprehensive legislation in May last year. When the Special Economic Zones Act 2005 and new rules came into effect on February 10 this year, it made headlines in the national and regional media. Newspapers and news channels quoted the Commerce Minister Kamal Nath, "The SEZ Act and Rules will provide comfort to and instill confidence in prospective investors." He also said that investment of Rs.1,00,000 crores was expected to flow into the zones in the next three years providing employment to over 5 lakh people. The mood was clearly upbeat. (1 crore = 10 million)

The country is now promoting the SEZ programme more vigorously than in the past. In fact, India's experience with SEZ predates that of China. India was the first country in Asia-Pacific region to follow the international trend of setting up a separate zone with special incentives for earning foreign exchange through export promotion and employment generation. The first special export processing zone (EPZ) was set up in Kandla, Gujarat, as early as 1965. It was followed by Santacruz Electronics Export Processing Zone which became functional in 1973. The Central government set up five more zones in mid 1980s at Cochin (Kerala), Chennai (Tamil Nadu), Visakhapattanam (Andhra Pradesh), Falta (West Bengal), Noida (Uttar Pradesh). Under the new SEZ scheme, all these seven EPZs and the first private zone at Surat which started operations in 1998 were converted to special economic zones. China established its first zone much later in 1980.

SEZ units produce ready-made garments, gloves, spices, processed food, electronic parts, jewellery, diamonds, etc. The companies keep their buyers' list confidential. There are now 17 functional zones in the country, and the New Delhi-based Board of Approval of SEZ has given its green signal to about 120 new zones in private sector in the last few months.

A snapshot of Textile and Garment SEZ enterprises listed the Government of India's SEZ website:

Costs and benefits

To woo investors to the zones, the central government has been offering a number of fiscal incentives and concessions. For instance, the zones are deemed as foreign territories as far as trade operations, duties and tariffs are concerned. The units (100% export oriented) also have full flexibility in operations. They are exempt from all direct and indirect taxes. No export and import duties, no excise duty, no central or state sales tax and no service tax. The units do not require license for importing capital goods and raw material. 100 per cent FDI is allowed in the zones. Repatriation of export profits is also allowed.

With the new SEZ Act 2005, a new sop is available to firms operating in the zones. The firms are eligible for getting an extended Income Tax holiday for 15 years: 100 percent exemption for the first 5 years, 50 per cent for next 5 years and then in the next five years, the income ploughed back for investment in capital goods is exempt up to 50 per cent. SEZ developers are also entitled for exemption from income tax for 10 years. The only condition imposed on the firms is that they must have a positive net foreign exchange earning (NFE).

Recently, a zone developed by the cell telephone giant Nokia has started operations in Tamil Nadu. All the units in the zone manufacture components of Nokia mobile handset.

SEZ rules stipulate a minimum area of 1000 hectares for multi-product zones. To develop these zones, only big players can enter the fray.

What does India, or for that matter any other developing economy, benefit from providing the zones and their units with fiscal, forex and exim incentives and making them secure by administrative, legal and regulatory regime? A report on the Export Processing Zones by the Comptroller and Auditor General Of India (CAG Report 1998) had highlighted that "Customs duty amounting to Rs 7500 crores was forgone for achieving net foreign exchange earnings of Rs 4700 crores and the government does not seem to have made any cost benefit analysis." In spite of this caustic comment, the Central Government, in the 1999-2000 Budget raised the corporate tax holiday period in EPZs from 5 to 10 years.

It may be of relevance here to refer to another CAG report, which covers not just EPZs, but all export promotion schemes. The Union Government has forgone a whopping Rs 39,704 crore of duty under export promotion schemes during 2003-04, accounting for 82 per cent of customs duty collected in that year, a CAG report has said. The duty was forgone under schemes relating to advance license, duty exemption pass book (DEPB), export promotion capital goods (EPCG), export promotion zones (EPZ), export oriented units (EOUs) and refund under drawback and other schemes, the report said. In the previous two fiscal years, the concessions amounted to 62 per cent of customs duty collected and in 2000-2001 it was 43 percent.

But those who argue for SEZs underline that thanks to the incentives offered, foreign investors have been encouraged to invest in countries that would otherwise not be the natural choice for FDI. A report "SEZs in India: Attracting Investment" sponsored by the Commerce Ministry and prepared by the Industrial Development Bank of India (IDBI) in 2002 contends that "national loss" should be weighed against benefits such as foreign direct investments, export potential, generation of employment, transfer of technologies and skills, and economic growth of the country as a whole.

The reality

But do these general claims hold water? What kind of jobs do these zones generate? Are these investments secure from the host nation's point of view? Will the investors remain in these countries if the financial incentives are withdrawn or if the cost of labour increases?

A world-wide study conducted by the International Confederation of Free Trade Unions revealed in 2004 that despite the incentives offered by the governments, the zones (SEZs, EPZs and FTZs) often fall short of their goals. The ICFTU was set up in 1949 and has 234 affiliated organizations in 152 countries with a membership of 148 million. The study highlights many reasons for the limited benefits derived by the host countries from these zones.

First, investments are usually short term, with companies moving to other zones that offer better incentives. Globalisation of economy and trade liberalisation accentuates the tight competition between the zones of different countries. To win the race for investments and to retain them, more and more incentives and concessions are offered to multinationals often resulting in less gain for the host country. Legislations also allow easy exit for investors whenever they want.

A study of female factory workers at the Madras Export Processing Zone by the Madras Institute of Development Studies revealed that the women suffered from a number of pains, allergies and other ailments due to tension and working conditions.

 •  Special Exploitation Zone
 •  Minimised by the law