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Unit 13: Special Economic Zones

political and peasant problems leading to inertia in mindset. For instance, the Salim Notes
Group (chemicals), TCS (IT) and Infosys (IT and ITES) have refused to begin operations in
Bengal due to unfavourable business climate.
3. Misuse of agriculture land: There were also allegations that a large portion of agriculture
land was being converted into SEZs. This statement, however, holds no ground, as the
total proposed area for SEZs is about 75,000 hectares, i.e., only 0.000625% of India’s total
area under cultivation.

4. Most SEZs are driven by tax benefits only: The current mushrooming on filing of SEZs is
largely aimed at winning tax benefits offered to developers as well units under the present
Act and Rules, which allow 100% exemption from corporate income tax for the first five
years; 50% for the next five years and, for the final five years, 50% of the profits ploughed
back will be exempt from tax to the units and an exemption for 10 years in block of 15
years to the developer. Another factor that has driven companies for filing many
applications is that existing tax exemptions to export-oriented units such as STP/BTP are
supposed to expire in financial year 20104.
5. Indian SEZs do not have scale advantages: We believe that one of the key purposes of
SEZs is to build scale-related advantages. However, most of the SEZs currently being
planned are minuscule in size. The new law allows the minimum area for SEZs to be 1,000
hectares (3.9 square miles) for multi-product zones, 100 hectares for product specific zones
and just 10 hectares for IT, gems and jewellery and biotechnology zones (subject to minimum
built-up area norms).
We believe that with the rapid globalisation of manufacturing scale, small SEZs appear to
have outlived their relevance in today’s environment. Among the ones announced, there
are probably only two medium-scale SEZs being taken up for development. Both these
zones are being set up by Reliance Industries, India’s largest private-sector company.

The largest (in terms of size) is being set up in the state of Maharashtra near Mumbai. This
is a twin SEZ project, a merger of Navi Mumbai SEZ and Maha Mumbai SEZ. The total size
of this project is 12,000 hectares or 46 square miles. Phase I of the project, to be implemented
by 2007, envisages an investment of US$1.1 billion. The big advantage of the twin SEZs is
their location. Given its proximity to the city of Mumbai, this SEZ should be able to
leverage the city’s infrastructure and will have easy access to quality manpower. The
other large SEZ is being set up by Reliance in the northern state of Haryana. This SEZ will
have a size of 10,000 hectares or 38 square miles. Both the Mumbai twin SEZs and Haryana
SEZ projects are being set up on a PPP basis.
We believe that both these SEZs should be a big improvement over the current SEZs and
better than most other new SEZs announced in the country. However, they will still be
smaller than the major SEZs operating in China. The top three SEZs in China (i.e., Shenzhen,
Xiamen and Zhuhai) cover 126, 51 and 47 square miles, respectively.
6. Labour laws will still be an issue: The new SEZ law is unlikely to address the critical issue
of labour flexibility. A restrictive labour law environment has, in our view, been one of
the major hurdles to the development of the Indian manufacturing sector. Currently, over
40 labour-related statutes have been enacted by the central government. In addition, state
governments have enacted various statutes on this subject. The most restrictive central
government regulation is the one that requires all employers with more than 100 employees
to gain compulsory government approval (normally a long drawn-out process) before
retrenching workers or closing part of an enterprise. This provision has not changed since
1982. As highlighted in the official report on employment released by the Planning

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