India’s SEZs continue to drive exports

The Government of India’s concerted efforts to iron out challenges facing special economic zones (SEZs) are bolstering exports, attracting investor interest and driving up employment opportunities

February 26, 2020

In January, a new high-precision engineering components manufacturing facility was opened by leading auto parts manufacturer Sundram Fasteners in the Sri City SEZ

Currently, there are more than 238 operational SEZs in India that have crossed a milestone by achieving over US$100 billion worth of exports during fiscal 2019-20

In December 2019, the Government of India amended the SEZ 2006 rules to make all existing notified SEZs multi-sector zones, encouraging diversity in investments

India is expected to set up the Sittwe SEZ in Myanmar, where it has already built a port. With such initiatives, India has been driving opportunities in developing regions

The Special Economic Zone (SEZ) ecosystem in Tamil Nadu recently got a boost when Finland headquartered Salcomp, a major supplier of chargers to Apple for iPhones, acquired Nokia’s defunct plant located in the 212-acre SEZ in Sriperumbudur, near Chennai in November last year. Salcomp, which is expected to invest around US$281.7 million over the next five years in this facility, will manufacture charges and other components at the plant, the Union Minister of Communications, Electronics and Information Technology, Ravi Shankar Prasad recently told the media.

Salcomp has purchased another 300,000 sq ft factory as well in the same SEZ facilitating its revival after a span of ten years. Also, Salcomp, which has been recently taken over by Shenzen Stock Exchange Listed Chinese company Lingyi Tech (Guangdong) Co Ltd, will export 70 per cent of its products from this SEZ facility to different countries including China.

An engine for economic growth supported by quality infrastructure and attractive fiscal incentives, SEZs in India continue to attract investor interest, despite some challenges. Take the example of another major investment in SEZs — the acquisition of the 2.4 million sq ft SEZ property Waverock in Hyderabad by SPREF II Pte. Ltd., a joint venture between European company Allianz Real Estate and Shapoorji Pallonji Group for US$250 million. This IT SEZ, which comprises four office towers, is already occupied by large multinational companies such as Apple, Tata Consultancy Ltd, Accenture and DBS among others. 

Also, amid a lull in the Indian auto industry, a new high-precision engineering components manufacturing facility was opened by the leading auto parts manufacturer Sundram Fasteners, part of the US$8.5 billion TVS Group, in the Sri City SEZ on the Tamil Nadu-Andhra Pradesh border, in January this year. And, the company, which has invested US$14.1 million in the facility, has exported its first order to a German manufacturer, said the company release.

SEZs – an export driver for India

SEZ was launched in 2005 in India to generate additional economic activity, to attract domestic and foreign investment, create infrastructure facilities and employment opportunities besides enhancing exports of goods and services.

Indeed, SEZs are proving to be major export earners for the country in a highly volatile global economy, with the 238 operational SEZs in India having recently crossed a milestone by achieving US$100 billion worth of exports in FY 2019-20 (as on February 17, 2020), stated the official release. 

Predictably, the services segment, constituting largely of IT &ITeS services has been the key driver of the export growth this year at 23.69 per cent. However, industry analysts state that IT SEZs, found mostly in Bengaluru, Hyderabad, Chennai, and Pune, have always held the majority share of exports from SEZs and dominate the industry. In FY 2019-20, exports from services reached a high at US$56.9 billion out of the total exports of more than US$98.9 billion (at Rs 71 for one US dollar). 

Sectors in the SEZ such as gems and jewellery, trading and logistics, leather and footwear, non-conventional energy, textiles, and garments too have shown healthy growth in this financial year. Petrochemicals constitute a major segment of SEZ exports, however, growth was muted in this segment, which may be attributed to softening of global crude prices, stated the release.

The development of SEZs in India

Before SEZ was first introduced in 2000, India had a number of export processing zones, having established Asia’s first EPZ in 1965 at Kandla Gujarat, followed by the Santacruz export processing zone in Mumbai in 1973. But they lacked infrastructure, attractive fiscal packages and were heavily regulated.

To overcome these shortcomings, the SEZ Act was passed in Parliament in 2005, for the establishment of a designated duty-free enclave, which will enjoy multiple tax and fiscal benefits. For example, SEZ units enjoy 100 per cent income tax exemption on export income for the first five years, 50 per cent for the next five years thereafter and 50 per cent of the plowed back export profit for the next 5 years. (However, this incentive is expected to be withdrawn from April 1, 2020, under the Sunset Clause).

SEZ enterprises also enjoy exemption from Goods and Services Tax, full freedom for subcontracting, no levies by the state government and do not require an import license.

Primarily private investment-driven initiatives, the current 238 SEZs operating in the country (including seven Central government SEZs and 12 state and private sector SEZs set up before the Act), make India one of the countries with the largest number of SEZs in the world, along with USA, Philippines, and China, etc., according to a report on SEZs by the United Nations Conference on Trade and Development (UNCTAD). Out of the 238 SEZs, 25 are multi-product SEZs, while the rest are sector-specific.

In the past couple of years, the government has been making concerted efforts to iron out challenges facing SEZs and amending the SEZ Act to facilitate more foreign investments and to foster economic growth. Last year in June, the Centre amended the SEZ act in August 2019, to allow a Trust or any entity notified by the Central government to set up units in these enclaves. This option was not available to Trusts earlier. The government introduced this amendment after receiving eight proposals from Trusts with an investment potential of US$1.1 billion, said the Minister of Commerce, Piyush Goyal in the Indian Parliament.

Industry experts say that this amendment will lead to opening up SEZs for infrastructure investment trusts, real estate investment trusts (REITs), business and ports fashioned as trusts. And that SEZs will especially benefit from REITs, which have attracted significant investor attention.

Further, in December 2019, the government amended the SEZ 2006 rules to make all existing notified SEZs into multi-sector zones. The purpose of this amendment is to release land parcels in single commodity SEZs for other sectors. Also, the government has reduced the minimum area required to open an SEZ or Free Trade Warehousing Zone (other than for information technology, IT-enabled services, biotech or health services) to 50 hectares from 500 hectares.

Upcoming SEZs in the Future

To explore new models of SEZs, India plans to enter into an international collaboration with a neighbouring country to jointly set up an SEZ. A model that is increasingly becoming popular in other countries, states the UNCTAD report. For example, India is expected to set up the strategic Sittwe SEZ in Myanmar, where it has already built a port to expand its footprint in the region. 

Also, to boost the number of SEZs, India has plans to create large coastal economic zones comprising many SEZs with key infrastructure port connectivity facilities under the flagship Sagarmala project, say officials. 

Moreover, to enhance agro-exports, which is critical for an agricultural country like India, the government is facilitating the development of food processing SEZs zones in the country. Currently, three food processing SEZs are operational in Mallapuram in Kerala, Tuticorin in Tamil Nadu and Kakinada in AP and three more are notified. These SEZs can encourage farmers to use the latest technology and enjoy better facilities. 

The government has given its approval to establish an SEZ in Sabroom in Tripura, with an agro-product focus. The Sabroom SEZ is expected to catalyse the growth of rubber production in the area. With these projects in the offing combined with the government’s robust efforts to iron out challenges facing SEZs to make them effective, the SEZ sector is teeming with opportunities and poised to grow.

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