Overview: Kandla to Odisha

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Fifty-two years ago, sometime before the terms ‘free-zone’ and ‘special economic zone’ had entered the lingua-franca, the burgeoning industrial state of Kandla opened its seaports to duty free exports; becoming Asia’s first designated duty-free enclave. Despite this early move towards a new model of incentive-based industrial activity, the announcement of India’s Special Economic Zones (SEZ) policy was not until much later, at the turn of the century. The years since 2000 have witnessed the official inauguration of an official SEZ Act (2005) and the coming into full operation of more than 200 SEZs, producing exports of US$68.6 billion, or roughly 25 percent of total exports, in 2015.

In 2015, the government of Odisha state, home to the Tata Steel SEZ, outlined a policy for Special Economic Zones, aimed at drawing investment toward the country’s steel industry and exempting resident companies from stamp duty, value added tax, entry tax and electricity duty. The steel major, Tata Steel, which posted global revenues of $20 billion in 2015, has been successful in drawing foreign investment to heavy industries at its SEZ project at Gopalpur in Odisha, and is a major driving force behind India’s steel production growth, which stood at 8.5 percent for the 12 months from September 2015.

A difficult road

The bold incentive framework and the Tata Steel SEZ are a sign of how far the nation’s SEZ landscape has advanced. But the road toward the development of tax-free trade zones has not been an easy one for India’s policymakers or industrialists. Following the introduction of the SEZ Act in 2006, protests broke out in the western state of Maharashtra and elsewhere, as local landowners aired their discontent with the government’s plan to purchase farmland cheaply and re-sell it as industrial acreage within newly formed free trade townships. By 2012, 589 SEZs had been approved by the national Board of Approval (BoA), but only 153 were operational. In the same year, the Union Budget, the annual fiscal statement, withdrew a number of direct tax exemptions from the stable of SEZ incentives, including Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT). Despite this, the share of SEZs in total exports (including service exports) increased from approximately 3 percent in 2005–06 to 19.5 percent in 2012–132. In 2016, India’s finance ministry reinstated the MAT exemption for foreign portfolio investment companies (FPIs) and those foreign companies not having a permanent establishment in India, precipitating calls from domestic industry for equal treatment.

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Achievements

In February 2006, commercial activity directly related to SEZ companies had created US$888 million in investment and 134,704 jobs, according to the East Asia Forum. By January 2015, these figures were US$54 billion and 1.5 million, respectively, while the share of SEZs in total exports also continued to rise in line with the country’s economic performance over this period. In 2014, India received $25 billion in foreign direct investment inflows and was rated a ‘most favoured nation for foreign investors’, according to a study by global financial services firm, Ernst & Young. The government now aims to improve exports to $900 billion by 2020, which would place the nation within the top five global exporters (it is currently ranked outside the top ten). Using the WTO’s 2015 export data, the objective would require a compound annual growth rate of 27.5 percent to 2020, significantly higher than the 3.4 percent achieved between 2010 and 2015. The target will put the role of SEZs ‘front and centre’ in economic policy discussions, particularly as a difficult 2015 saw India achieve exports of US$267billion, from US$322 billion in 2014.

A greater focus on the ability of SEZs to promote value-added industrial activity and economic diversification has spurred the emergence of free-zone hubs in sectors such as biotechnology, renewable energy, and aviation. The volume of intermediate and consumer goods exports as a percentage of total exports can be used as a measure of ‘value added’ success in Indian industry. According to the World Bank, in 2015, these figures were 32.5 and 44.4 percent, respectively, which compared favourably with India’s industrial competitor, China, for whom consumer goods accounted for 36.4 percent of exports. Meanwhile, the 2016 budget statement allocated US$3.7 billion over the next five years to establish biotech clusters for innovation via SEZs and through the formation of a National Biotechnology Council. However, the majority of the nation’s SEZs are in the IT sector, according to East Asia Forum data, approximately two thirds, meaning diversification is still an issue.

Framework pioneers

By all accounts, Kandla’s ‘Export Processing Zone’ framework pioneered the idea of allowing manufacturing companies to import and export without customs duties and taxes. India now looks to innovate the SEZ model by setting up reverse SEZs in Mozambique and Iran, countries rich in raw materials such as oil and gas, with a view to opening channels of bilateral trade and supporting the growth of value-added industries. The move, supported at the highest levels of government, is evidence of a political willingness to support and grow the role of India’s SEZs, at home and abroad, as the nation grapples with an ever shifting set of challenges, in an increasingly competitive global economy.