Reforming Special Economic Zones in India

• 10 Jun 2025

For Prelims: Special Economic Zones (SEZ) Rules, 2006, Semiconductor, Foreign Exchange, Foreign Trade Policy, External Commercial Borrowing (ECB), OECD, World Trade Organization (WTO), Production Linked Incentive (PLI) Scheme, Baba Kalyani Committee, Industrial Corridors, National Investment and Manufacturing Zones (NIMZ), National Industrial Corridor Development Programme (NICDP).                

For Mains: Key reforms in SEZ rules to boost semiconductor and electronics manufacturing, Key challenges faced by SEZs and Baba Kalyani committee recommendations, Steps need to be taken to strengthen SEZs.  

Source: PIB 

Why in News? 

The Ministry of Commerce & Industry has introduced key amendments to the Special Economic Zones (SEZ) Rules, 2006, to encourage investment and streamline operations in semiconductor and electronics component manufacturing.  

• These changes aim to foster high-tech sector growth, which is capital-intensive, import-dependent, and requires long gestation periods to become profitable. 
• Following recent amendments, Micron will develop a semiconductor SEZ in Sanand, Gujarat. Aequs Group will also set up an electronics component SEZ in Dharwad, Karnataka.

What are the Key Changes in SEZ Rules for Semiconductor and Electronics Manufacturing? 

• Reduced Land Requirement for SEZs: The minimum land requirement for SEZs in semiconductor and electronics manufacturing has been reduced from 50 Ha to 10 Ha, lowering entry barriers and facilitating the setup of high-tech units. 
• Relaxation in Land Encumbrance Rules: The Board of Approval can now relax the encumbrance-free land requirement if land is mortgaged or leased to the Central/State governments or their agencies, offering greater flexibility in land acquisition and financing. 
  • The Board of Approval is the apex body for SEZs and is headed by the Secretary, Department of Commerce (Ministry of Commerce and Industry). 
• Inclusion of Free-of-Cost Goods in Net Foreign Exchange: The amended rule allows free-of-cost goods to be included in Net Foreign Exchange (NFE) calculations i.e., their value can be added to exports or subtracted from imports, improving the SEZ unit’s NFE performance. 
• Allowance to Domestic Sales: SEZ units in semiconductor and electronics manufacturing can now supply to the Domestic Tariff Area (DTA) after paying duties, enhancing viability by accessing the Indian market and reducing export dependence.

What are Special Economic Zones (SEZ)? 

• About: A SEZ is a duty-free enclave treated as foreign territory for the purpose of trade, tariffs, and operations. Any private/public/joint sector or State Government or its agencies can set up SEZ. 
  • SEZs were first introduced in India in 2000 under the Foreign Trade Policy, replacing the earlier Export Processing Zones (EPZs). They are governed by the SEZ Act, 2005 and SEZ Rules, 2006. 
  • The Development of Enterprise and Service Hubs (DESH) Bill, 2022 aims to replace the SEZ Act, 2005 and transform SEZs into more flexible and inclusive Development Hubs.  
    • These hubs will be exempt from many existing regulatory restrictions and will support both export-oriented and domestic investments, functioning as integrated zones for international and domestic trade. 
• SEZ Types: The area under SEZ includes a wide range of zone types, such as Export Processing Zones (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Trade Zones (FTZ), Free Ports, Urban Enterprise Zones, and others. 
  • Currently, 276 SEZs are operational in India. Total exports from SEZs in 2023-2024 stood at USD 163.69 billion. 
  • E.g., Gujarat International Finance Tec-City (GIFT City, India). 
• Objective:  
  • To create additional economic activity 
  • To boost the export of goods and services 
  • To generate employment 
  • To boost domestic and foreign investments 
  • To develop infrastructure facilities 
• Incentives offered to SEZs:  
  • Duty-free import/domestic procurement of goods for the development, operation, and maintenance of SEZ units 
  • Exemption from Central Sales Tax, Service Tax, and State Sales Tax (now subsumed under GST) 
  • Other levies exempted by respective State Governments 
  • Supplies to SEZ are zero-rated under the IGST Act, 2017 
  • Single-window clearance for Central and State level approvals 
  • External Commercial Borrowing (ECB) by SEZ units is allowed up to USD 500 million per year with no maturity restriction, through recognized banking channels.

What are the Key Challenges Faced by SEZs in India? 

• Declining Cost Competitiveness: Indian SEZs face declining cost competitiveness mainly due to rising input costs such as raw materials, energy, and logistics, which are significantly higher than in competing countries like China and Vietnam. 
  • OECD tax norms (15% minimum corporate tax) may further reduce SEZ incentives for multinational companies in SEZs. 
  • SEZ subsidies are under World Trade Organization (WTO) scrutiny, with rising pressure to phase out export-linked incentives to align with global trade rules. 
• Land Acquisition & Infrastructure Issues: SEZs face challenges such as high land costs, poor connectivity and logistics, and irregular power and water supply, all of which hinder timely development and reduce manufacturing efficiency. 
• Regulatory & Compliance Burdens: Despite single-window clearance, SEZs face delays from multiple agencies, while positive forex obligations, frequent audits, and high compliance costs burden startups and R&D-focused firms. 
• Limited Domestic Market Access: SEZ units face high duties on Domestic Tariff Area (DTA) sales and unequal competition from non-SEZ firms receiving Production Linked Incentive (PLI) Scheme benefits, reducing their overall attractiveness. 
  • Furthermore, with around 70% of SEZs concentrated in IT and related services, manufacturing occupies a much smaller portion, potentially hindering wider industrial development goals. 
• Underutilization & Vacant SEZs: A 40% gap between approved and notified SEZs and over 60% gap between notified and operational ones highlight long gestation periods, poor viability assessment. 
  • Some SEZs are misused for real estate development, shifting focus from export-oriented manufacturing to commercial hubs. 
• Environmental & Sustainability Concerns: Rapid industrialization in SEZs often causes pollution and resource depletion, worsened by weak enforcement of environmental regulations.

Baba Kalyani Committee (2018) 

• The Ministry of Commerce and Industry constituted a committee in June 2018, chaired by Mr. Baba Kalyani to review India’s SEZ policy and recommend strategic measures to align with global opportunities and domestic economic goals. 
• Major Recommendations: 
  • Rename SEZs as 3Es – Employment and Economic Enclaves: Shift focus from export-centric zones to employment and economic growth hubs. 
    • Target domestic demand, not just exports. 
  • Delink from Net Foreign Exchange (NFE) Performance: Allow domestic supplies and payments in Rupees 
    • Incentives to be based on investment, job creation, women employment, value addition, and technology differentiation. 
  • Separate frameworks for manufacturing and services SEZs: Create sector-focused enclaves for better demand and synergy 
  • Ease of Doing Business (EoDB): Establish one integrated online portal for investment, operations, and exits 
  • Infrastructure Development: Develop high-quality infrastructure including high-speed rail, expressways, ports, warehouses, and airports. 
    • Enable walk-to-work zones for integrated industrial-urban development. 

What Measures can be Adopted to Strengthen SEZs in India? 

• Policy & Regulatory Reforms: Replace the SEZ Act, 2005 with the more flexible Development of Enterprise and Services Hub (DESH), and simplify de-notification and exit policies for non-performing SEZs. 
  • Implement Baba Kalyani Committee (2018) recommendations by renaming SEZs as Employment & Economic Enclaves (3Es), and creating separate rules for manufacturing and services. 
• Infrastructure & Connectivity Upgrades: Integrate SEZs with industrial corridors and enhance last-mile connectivity to ports and airports for seamless logistics.  
  • Ensure 24/7 power, water recycling, and pre-approved infrastructure while promoting sector-specific clusters to attract global investment and boost manufacturing efficiency. 
• Enhancing Competitiveness & Global Integration: Provide R&D tax incentives and link SEZs with National Research Foundation to promote innovation in semiconductors, AI, and biotech.  
  • Strengthen export infrastructure through customs hubs, e-commerce zones, and fast-track approvals for major global firms. 
• Skill Development & Employment: Set up Skill Parks near SEZs in collaboration with ITIs/NSDC, offering industry-aligned training and German-style dual vocational programs.  
  • Incentivize local job creation through tax breaks and EPF support, and provide special visas for foreign experts in advanced manufacturing. 
• Adopt Global Best Practices: India can adopt global best practices like China’s mega-cluster model (Shenzhen), and UAE’s tax-free zones with 100% foreign ownership (Dubai) to enhance SEZ competitiveness.

What are the Other Key Government Initiatives Related to Industrial Development?   

• National Investment and Manufacturing Zones (NIMZ): NIMZs (like Prakasam in Andhra Pradesh and Sangareddy in Telangana)  are large, integrated industrial townships developed under India’s National Manufacturing Policy (NMP), 2011 to boost manufacturing growth, create jobs, and enhance global competitiveness. 
• Industrial Parks: Industrial Parks (or Industrial Estates or Industrial Zones) are designated areas developed with infrastructure, utilities, and policy incentives to promote manufacturing, logistics, and industrial activities.  
  • They provide businesses with ready-to-use facilities, reducing setup costs and operational hassles. 
  • E,g., Manufacturing Parks (for factories & production units), Food Processing Parks (for agri-based industries). 
• National Industrial Corridor Development Programme (NICDP): NICDP aims to develop world-class industrial nodes, smart cities, and logistics hubs along key transport routes, with 11 industrial corridors planned to connect major economic hubs across India.

Conclusion 

The recent SEZ rule amendments aim to boost semiconductor and electronics manufacturing by easing land norms and allowing domestic sales. However, challenges like policy instability, infrastructure gaps, and WTO compliance persist. Implementing Baba Kalyani reforms, improving logistics, and adopting global best practices can strengthen SEZs, making India a competitive hub for high-tech manufacturing and exports.

Drishti Mains Question

Evaluate the challenges faced by Special Economic Zones (SEZs) in India and suggest a roadmap for their revitalization.

UPSC Civil Services Examination Previous Year Question (PYQ)  

Prelims 

Q. Consider the following statements: (2009) 

1. The first telegraph line in India was laid between Kolkata (formerly Calcutta) and Diamond Harbour.
2. The first Export Processing Zone in India was set up in Kandla.

Which of the statements given above is/are correct? 

(a) 1 only  

(b) 2 only 

(c) Both 1 and 2   

(d) Neither 1 nor 2 

Ans: (c) 

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Mains 

Q. There is a clear acknowledgement that Special Economic Zones (SEZs) are a tool of industrial development, manufacturing and exports. Recognizing this potential, the whole instrumentality of SEZs requires augmentation. Discuss the issue plaguing the success of SEZs with respect to taxation, governing laws and administration. (2015)