Social and economic impact of special economic zones in India

Abstract

The number of Special Economic Zones (SEZs) globally continues to expand. SEZs account for an increasing share of international trade flows and employ a growing number of workers world-wide. India was one of the 1st Asian countries to establish an EPZ in Kandla in 1965 with a view to bring expertise for the country’s export sector. In India SEZs started working from 1st November, 2000 under the provisions of Foreign Trade Policy and eventually SEZ Act was passed in Parliament of India in May 2005. Chinese established the first Special Economic Zones 1979. The new regulation created the Shenzhen and Zhuhai Special Economic Zones in Guangdong and Fujian provinces respectively mainly to attract the foreign investors. Chinese experience over the years has shown that single-minded pursuit of growth has lowered the efficiency and effectiveness of economic policies, besides incurring huge resource and environmental costs. SEZ act passed in year 2005 provide for drastic simplification of procedures and for single window clearance on matters relating to Central as well as State Governments. Various special features of this act are studied. We also examine the impact of Special Economic Zones (SEZs) on human development and poverty reduction in India. We identify three channels through which SEZs address these issues: employment generation, skill formation (human capital development), and technology and knowledge upgradation. The study reveals that ‘employment generation’ has been the most important channel through which SEZs lend themselves to human development concerns, in India. Employment generated by zones is remunerative. Wage rates are not lower than those prevailing outside the zones. Besides, working conditions, non monetary benefits (such as transport, health and food facilities), incentive packages and social security systems are better than those prevailing outside the zones, in particular, in the small/informal sector. The role of SEZs in human capital formation and technology upgradation is found to be rather limited. While analysing the impact, we further come up with the shortcomings and policy level issues related to the SEZ act, 2005. We can say that the shortcomings are broadly divided into three categories. The first one involving the tax structure and the losses faced due to the same, the second one being the land acquisitions related regulations and finally the shortcomings of the SEZ process and functions itself. To give an instance of the flaws that exist in the SEZ policy, we study the Nandigram violence incidence that occurred. SEZs will be able to attract investments from the manufacturer/service provider only if certain factors are favourable to do the business. We finally recommend a model SEZ and also few policy level recommendations for the case of India.