Problems undermine aims of special economic zones

Created as open markets within an economy that is dominated by distortionary trade, exchange regulation and other regulatory governmental controls, India’s special economic zones (SEZs) are seen as an instrument to stimulate economic growth by attracting investment and generating foreign exchange through exports of goods and services. SEZs aim to increase economic activity by promoting both domestic and international investment, and the development of infrastructural facilities.

The SEZ scheme was introduced in 2000 to encourage foreign direct investment (FDI) by providing havens where investors could establish internationally competitive industrial, service and trade operations. The SEZ Act, 2005, and the rules under it, aimed to give the scheme a long-term and stable framework and to assure investors of the government’s commitment to the scheme. This legal framework was designed to satisfy the requirements of the principal stakeholders in the SEZ: the developer and operator, occupying enterprises, external SEZ suppliers and residents.

The form of governance in these zones makes investment easier. Income tax exemptions of 100% for five years and 50% for an additional two years, and exemptions from central sales and service taxes, encourage the free flow of goods and services in the SEZs and economic growth in the country.

Amitabh Chaturvedi is the managing partner of Mine & Young, where Ekta Sukhramani is an associate.