Critically examine the contribution of Special Economic Zones (SEZs) in promoting foreign trade in India.

Positive Contributions to Foreign Trade

SEZs have demonstrably contributed to India’s foreign trade in several ways:

• Export Growth: SEZs have consistently accounted for a significant share of India’s exports. According to data up to 2019-20 (knowledge cutoff), SEZs contributed approximately 29.8% of the country’s total exports.
• Foreign Direct Investment (FDI): SEZs have attracted substantial FDI, providing capital for export-oriented industries. Cumulative FDI received by SEZs between 2006-07 and 2018-19 was INR 4.5 lakh crore.
• Employment Generation: SEZs have created employment opportunities, both directly and indirectly. As of March 2020, SEZs employed over 2.3 million people.
• Infrastructure Development: The establishment of SEZs has led to infrastructure development in designated areas, including roads, ports, and power supply, benefiting surrounding regions.
• Diversification of Exports: SEZs have facilitated the diversification of India’s export basket, promoting the export of manufactured goods, engineering products, and services.

Negative Aspects and Criticisms

Despite the positive contributions, SEZs have faced criticism and haven’t lived up to their full potential:

• Revenue Loss: The tax incentives offered to SEZ units have resulted in significant revenue loss for the government. A 2019 report by the Comptroller and Auditor General (CAG) highlighted substantial revenue foregone due to tax exemptions.
• Displacement and Land Acquisition Issues: The establishment of SEZs has often involved land acquisition, leading to displacement of local communities and social unrest. The Nandigram controversy in West Bengal is a prime example.
• Limited Linkages with Domestic Tariff Area (DTA): The lack of strong linkages between SEZs and the DTA has hindered the broader economic benefits. Limited value addition within the DTA has been observed.
• Enclave Economy: Critics argue that SEZs have created ‘enclave economies’ isolated from the rest of the country, with limited spillover effects.
• Non-Compliance and Smuggling: Instances of non-compliance with regulations and alleged smuggling activities within SEZs have raised concerns about governance and security.

Challenges Faced by SEZs

Several challenges have hampered the effectiveness of SEZs:

• Global Economic Slowdown: Global economic slowdowns and trade wars have impacted export demand, affecting SEZ performance.
• Changes in Tax Regime: Changes in the global tax regime, such as the Base Erosion and Profit Shifting (BEPS) project, have reduced the attractiveness of tax incentives offered by SEZs.
• Competition from Other Countries: SEZs in other countries, particularly in Southeast Asia, offer more competitive incentives and infrastructure.
• Administrative Issues: Bureaucratic delays and complex regulatory procedures have hindered SEZ operations.

Government Response and Reforms

The government has undertaken several measures to address the challenges faced by SEZs:

• SEZ Rules Amendment (2019): The SEZ Rules were amended in 2019 to address some of the concerns raised by stakeholders, including streamlining procedures and promoting DTA linkages.
• Integration with the Production Linked Incentive (PLI) Scheme: The government has integrated SEZs with the PLI scheme to incentivize domestic manufacturing and exports.
• Denotification of Non-Functional SEZs: Several non-functional SEZs have been denotified to free up land for other uses.
• Focus on Multi-Sector SEZs: A shift towards multi-sector SEZs to promote diversification and reduce dependence on specific industries.

Feature	Pre-2019 SEZ Policy	Post-2019 Reforms
Tax Incentives	Extensive tax exemptions	Rationalized tax incentives, linked to performance
DTA Linkages	Limited linkages	Promoted linkages through simplified procedures
Focus	Export-oriented	Integrated with domestic manufacturing (PLI scheme)