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Introduction to Economic Zones
“Export else perish “ these are the words of first Prime Minister of India Pt. Jawaharlal Nehru. India being a continent like country having 30 states, more than 1000 languages and world second largest man power having diversified natural conditions right from Rain Forests of Kerala, Ice Mountains of Himalaya, Runn of Kuch to productive land of Bramahaputra has great potentials of world class export worthy products from various industries like Agriculture, Engineering, Chemicals, Software’s, Gems and Jewellry, Pharmaceuticals, Bio technology and many more.
During last fifty years, mostly ours exports have been less than our imports and the balance of trade been unfavorable. In 1990-1991 India had faced real pressure on the balance of payment. During this period, exports had stagnated and there was a crisis in foreign reserves which lead to an emergency situation in India.
Liberalization policy was announced in June 1991. It is the precious gift of Dr Manmohan Singh to the people of India at a time when the country was in the grip of unprecedented economic crisis and political turmoil. One of the areas in which this policy focused on was on increasing India’s export. And the trickle down effect of these reforms has lead to the advent of SEZ
In this age of Globalisation, there is a need for every nation in the world to perform well economically. With the improvements in science and technology and the raising standards of living worldwide, ensuring economic development assumes primary importance in the policies of every nation.
While striving for economic development, every nation takes steps necessary for the implementation of its ambitious plans. But more often than not, these plans cannot be affected successfully throughout the nation. There are always shortcomings in these economic plans. Every nation wants to give its industries ample facilities for efficient production of goods and services and in order to make them globally competitive in terms of price and quality. Some of these facilities can be used by all industries throughout the nation. But sometimes, some facilities cannot be given on account of reasons like the geographical extent and the possibility of misuse.
For Example: If a country wants to give subsidized power to a specific industry, it cannot do so throughout the nation as keeping a check on whether the subsidized power is going to the right people or not is a Herculean task.
Thus, in order to give the industry certain added advantages, the governments of various nations come up with special schemes and subsidies mostly related to customs duties. These schemes provide an upward thrust to the nation’s products in the global markets on account of lower prices / better quality. Such schemes, if implemented directly, are not allowed by the WTO. This has resulted in many nations coming up with such schemes in an indirect manner. One of the most popular ones is to set up a special area demarked for the purpose of industrial growth. Various facilities can be offered in this area without the fear of them being misused and also, no resistance from WTO (or any other trading partner / nation) is encountered on account of the scheme not being a national policy, but only limited to a small area demarked for the purpose. This is where the concept of ‘Economic Zones’ comes in.
Depending on the facilities provided, the level of government control exercised, the type of industries allowed in the zone, and the type of activities allowed in the zone, they are classified into many types by different countries. A few common types are as follows:
The same zones are also referred to as Free Economic Zones (FEZ) in the Kyrgyz Republic and as Free Trade Zones in many other Asian countries. Essentially, the core concept of all these zones is the same; i.e. to treat the designated zone as a foreign territory for the purposes of customs procedures and to also give them certain added incentives and infrastructure facilities, which are not available to ordinary units operating within the country.
1.1 A permanent solution for corruption: Special Governance Zone (SGZ)
In the 9th International Anti-Corruption Conference in South Africa held from 10-15 December 1999, Shang Jin Wei, Advisor to the World Bank submitted an action plan for the establishment of a new concept; the concept of SGZs (Special Governance Zones).
It advocates establishing a special governance zone (SGZ) within a country as an entry point for an eventual nation-wide anti-corruption program. A SGZ is an enclave within which comprehensive reforms can take place. It is geographically limited so that any unpredictable negative consequences can be contained.
According to the plan, reform measures can easily be explored and fine-tuned within small manageable zones before trying their implementation nationwide. Once successful, its experience can serve as a model for the rest of the country. The World Bank (and other international institutions) can play an important role especially at the initial stage of the program.
The SGZ idea reflects a fundamental belief that the quality of public governance in many developing and transition economies can be significantly improved and corruption can be drastically reduced. The proposal is designed to achieve several objectives: to start the reform program within an area small enough to contain unpredictable consequences, to experiment and fine-tune various components of the anti-corruption program in practice, and by the power of example, to build momentum to implement a nation-wide governance-improving program.
There are a few basic principles for successfully operating a SGZ. First, whenever possible, a fair market mechanism should be used to allocate resources, to produce and/or procure public goods, to cut red tape, and to reduce the need for permits and licenses. This would limit the opportunities for government officials to take bribes (and to be offered bribes). The reward for civil servants to deliver quality service and not to take bribes should be raised. At the same time, the penalty for civil servants for poor performance and for taking bribes should also be raised and fairly applied.
Genesis of Chinese Special Economic Zones
Historically, China has adopted an inward-looking strategy to its economic development. Successive Chinese governments thought that the economy could grow purely through self-reliance. However, there are always limitations to what a country can do by itself, for example limitations in raw materials, natural resources, technology, etc. These can hold back the growth of an economy and certainly China's economic growth lagged far behind much of the rest of the world up to the 1970's.
By contrast, countries like the USA were achieving significant economic growth in this period because they were practising foreign trade policies, which facilitated free trade. Any shortages in the domestic economy, for example oil in the USA or Japan, wheat in the Soviet Union or cars in India could be compensated for by imports. Foreign trade, then, could help to aid economic growth.
The export trade is also vital. Not only can exports be a means of paying for imports, but they also help to earn foreign exchange. Since 1979, the Chinese government has recognised the importance of exports as a means of fostering economic growth. Economic policies and special incentive programmes have been introduced to increase exports.
When it decided to reform the national economic setup in 1978, the Chinese government embarked on a policy of opening to the outside world in a planned way and step-by-step. A decision was made in 1978 to permit direct foreign investment in several small "special economic zones" along the coast. Shenzhen, Zhuhai and Shantou in Guangdong Province and Xiamen in Fujian Province, and the entire province of Hainan were, under this policy, the first five Special Economic Zones to be established.
The aims of the establishment of the SEZs were to earn foreign exchange, to enhance employment, to attract foreign investment and to accelerate the introduction of technology and management expertise. The five SEZs established were Shenzhen, Zhuhai, Shantou in Guangdong province, Xiamen in Fujian province and Hainan Island. In order to attract foreign investors and develop foreign trade, the five SEZs offered similar packages of favourable incentives to foreign firms. One of the most attractive points of these packages was that income tax was fixed at the rate of 15 per cent, lower than that in other parts of China. Other advantages given were tax exemptions, land use rights, and banking and finance privileges, which were available to firms operating outside the SEZs.
China lacked the legal infrastructure and knowledge of international practices to make this prospect attractive for many foreign businesses, however. In later years steps were taken to expand the number of areas that could accept foreign investment with a minimum of red tape, and related efforts were made to develop the legal and other infrastructures necessary to make this work well.
Many other non-financial advantages were provided inside the SEZs. Firms were provided relatively free-market environments with minimal government intervention. This means that private and joint-venture enterprises were free to hire their own workers. They were also free to set wages to reflect market conditions. Bonuses could be awarded to workers for outstanding performance.
The common threads of these reforms are the search for efficiency and an assumption that management of the economy by large governmental bureaucracies is unlikely to produce this result.
Primarily geared to exporting processed goods, the five special economic zones are foreign-oriented areas, which integrate science and industry with trade, and benefit from preferential policies and special managerial systems. They have summed up their rich experiences in absorbing foreign investment and developing foreign trade for China to open up to the international market. In recent years, the special economic zones have led the country in establishing new systems, upgrading industries and opening wider to the outside world, serving as national models. In 1999, Shenzhen’s new-and high-tech industry became one with best prospects, and the output value of new-and high-teach products reached 81.98 billion Yuan, making up 40.5 percent of the city’s total industrial output value and coming out in front in the country.
China has so far created 124 export-processing zones. Some 18 million were employed in firms with foreign investment alone, and many millions more in Chinese-owned zone enterprises. Shenzhen has become a window of the country to the outside world and a platform for reform measures, along with Xiamen, Zhuhai and Shantou.
In the period between 1984-85, China further opened 14 coastal cities and three coastal regions to foreign investment. All of these places provide tax treatment and other advantages for the foreign investor. Laws on contracts, patents, and other matters of concern to foreign businesses were also passed in an effort to attract international capital to aid China’s development. The largely bureaucratic nature of China’s economy, however, poses inherent problems for foreign firms that want to operate in the Chinese environment, and thus the policies to attract foreign capital have had to evolve continually in the direction of presenting more incentives for the foreigner to invest in China.
Since 1992, the State Council has opened a number of border cities, and in addition, opened all the capital cities of inland provinces and autonomous regions. In addition, 15 free trade zones, 32 state-level economic and technological development zones, and 53 new- and high-tech industrial development zones have been established in large and medium-sized cities. As a result, a multi-level, multi-channel, omni-directional and diversified pattern of opening, integrating coastal areas with riverine, border and inland areas has been formed in China. As these open areas adopt different preferential policies, they play the dual roles of ‘Windows’ (in developing the foreign-oriented economy, generating foreign exchanges through exporting products and importing advanced technologies) and of ‘Radiators’ (in accelerating inland economic development).
All these efforts of the Chinese government were fruitful and resulted in the success of the concept of Special Economic Zones (SEZs). The most prominent amongst the Chinese SEZs is the Shenzhen SEZ. The growth of SEZs in China has been explained with the example of Shenzhen SEZ in the following Chapter.
‘Window to the World’ – Shenzhen SEZ
Only twenty years ago, Shenzhen was a small fishing village located in China's southern province of Guangdong. Today, after two decades of rapid economic expansion, the city enjoys the highest income per-capita among the 35 major Chinese cities at US$ 225 per month. At close to US$ 3,000 per year the income per capita is approximately four times the national average. This coastal city, which shares a border with Hong Kong, has become one of China's most prosperous cities averaging an economic growth rate of 34 percent between 1980 and 1998. Now that China is being accepted into the World Trade Organization, Shenzhen may be the quintessential model for the central government to follow when taking its nation, gripped in authoritarian rule, and preparing it to operate in an increasingly open market environment.
The city of Shenzhen was founded in 1979 and a year later was established as China's first special economic zone (SEZ) by Chinese leader Deng Xiaoping. The special economic zones were implemented by the Communist government as a virtual laboratory for experimentation with a free market economy. The SEZs operate under an entirely different economic premise than that of the mainland, specifically, with an emphasis on exporting and creating an attractive environment for foreign direct investment through favorable tax incentives.
When the SEZ was first established, the majority of the new businesses that settled in Shenzhen were Hong Kong-based enterprises drawn to the zone to take advantage of, among many other things, the abundance of cheap labor and the customs-free industrial environment. Since this time, the economic border between Shenzhen and Hong Kong has grown increasingly vague. Hong Kong dollars flow freely in Shenzhen and many residents of Hong Kong invest in the Shenzhen stock exchange.
The cultural border has eroded over the years as well. With the proximity that Shenzhen enjoys to Hong Kong, the population is able to pick-up Hong Kong based radio and television signals. Those in Shenzhen who speak Cantonese can receive news and other content that is restricted on the mainland. Residents of Shenzhen are therefore, able to perceive world events from a more objective point of view than the one presented by the communist government's news outlets. Currently, there are a dozen or more crossing venues between Hong Kong and Shenzhen either by land or by sea. According to the Shenzhen Municipal Foreign Investment Bureau, at the end of 1998 Hong Kong was engaged in 1,078 projects in Shenzhen accounting for over 78 percent of the total projects undertaken. Remarkably, Taiwan was the second leading project forum with 119 or 8.5 percent of the total projects.
Even with its unprecedented track record for growth, things have at times been less than perfect for Shenzhen. In 1980, Shenzhen's appeal as a SEZ made it an attractive area for entrepreneurs and fortune hunters, but by 1992, seventeen hundred special economic zones had been established. Over time Shenzhen was not as unique as it had once been. Fortunately, in that same year Shenzhen was the first Chinese city to be given legislative authority in the way of a Municipal People's Congress. To a small degree this gave the city a level of control over local policy which was not seen anywhere else.
Additionally, the few years leading up to the return of Hong Kong to China can be described as a time of over exuberant expectation. The extraordinarily hot Shenzhen stock market in 1996 goes a long way in illustrating this point. The people of Shenzhen were under the impression that when Hong Kong rejoined China in the middle of 1997, Hong Kong residents would spill into the city buying up property as well as goods and services from companies listed on the Shenzhen stock exchange. Investors, including small individual investors who laid out their modest savings, began pouring money into the stock exchange. When the time finally came for Hong Kong to reunite with the mainland, the conclusion was anticlimactic. Many of the anticipated benefits simply did not occur, and while some experienced asset appreciation others lost their entire savings.
Technologically, Shenzhen did not mature as fast as some had originally anticipated. Recently, that trend has changed. The goal of making Shenzhen one of China's most prevalent high-tech centers is definitely being realized. The combination of favorable economic policy, coupled with a highly educated work force, explains the progress being made in Shenzhen's high technology industries. In 1998 nearly a third of all Chinese individuals holding a doctorate degree resided in Shenzhen. Additionally, 10 percent of all residents are estimated to be college graduates while less than half of one percent of the national population has obtained a college degree. In 1998 Shenzhen was responsible for approximately half of China's information technology output, and the Internet industry is now beginning to gain international exposure. Overseas investors, such as IDG and Pacific Venture Capital Co., are starting to channel money into the Shenzhen Internet industry.
According to a release from the Xinhua News Agency in mid-March of this year, Shenzhen has 180,000 Internet users in the city and over 40 companies offering Internet related services. Furthermore, an estimated 70 percent of these Internet users are said to be using e-commerce to buy goods. Additionally, an impressive list of multinational IT corporations that are increasingly being drawn to Shenzhen including Microsoft, IBM, Lucent Technologies, Compaq and Intel to name a few.
To believe that Shenzhen can maintain this level of sustained growth forever would be irrational. As the cost of labour grows higher and other areas of China begin to adopt more market-oriented policies, businesses will ultimately begin migrating to other parts of this vast nation. This assumption is supported by the shear size of China and the magnitude of natural, as, well as human resources that have remained untapped for so many years. The only question remaining is at what speed will the central government allow this to occur.
The wealth will inevitably begin to spread, but that does not mean Shenzhen will fade into China's background. The wealth generated in this city over the last twenty years has given rise to a burgeoning service sector and is home to one of China's two stock markets. The city has become a regional financial center. At the end of 1999 there were 100 financial institutions operating in Shenzhen employing an estimated 30,000 professionals. According to the Shenzhen Municipal Foreign Investment Bureau, at the end of 1999 there were 736 projects involving foreign direct investment in excess of US$ 10 million per project, 109 projects involving amounts in excess of US$ 30 million per project and 18 projects currently underway involving over US$ 100 million per project.
A major dilemma that China, as well as its trading partners face, is how to effectively access and deliver goods and services to a large percentage of the population that is geographically isolated from the major economic hubs in China. Shenzhen is very important in this respect. Over the years, the city has developed an advanced infrastructure that is now well poised to assist in alleviating the burden that this problem presents. The city possesses 8 harbors and 12 cargo docks and is home to the Huangtian International Airport, which is the fourth largest airport in China. Additionally, both the Beijing-Canton Railway and the Beijing Kowloon Railway converge in Shenzhen. Take the fact that Shenzhen already has the infrastructure in place to be considered a regional distribution center, and its continuous advancement in both the financial and technology sectors, one can see that as China enters the WTO and the global economy, it will look to Shenzhen as a road map for the future.
Already, 48 of the world's 500 top enterprises have taken root in Shenzhen. Coupled with the rapid development of its export-oriented economy, the city achieved an export volume worth US$26.4 billion in 1998, amounting to one-seventh of China's total, topping the list of China's big and medium -sized cities for six consecutive years. Output value of the city's high and new technology products was worth 65.52 billion Yuan (US$7.89 billion) in 1998, making up 35.4 per cent of the city's total industrial output.
The International Architecture Association awarded Shenzhen this year, marking the first urban planning award in China and Asia. Shenzhen's educational, scientific and cultural undertakings have also achieved one success after another.
Computer hardware, software and phone-related products made up 70 per cent of the city's total high-tech exports. Asian markets receive 60 per cent of these goods. North America gets 26 per cent and Europe gets about 10 per cent. And 31 per cent of Shenzhen's high-tech exports were from State-owned enterprises. Wholly foreign-funded enterprises shipped out 30 per cent, and joint ventures made 28 per cent of the exports.
Shenzhen has become one of the world's most important manufacturing bases for high and new technology, namely electronics. City's encouragement of local enterprises to update technology and protect their intellectual property rights has sharpened Shenzhen's competitive edge.
As a hub of domestic and international market, Shenzhen boasts the unique advantage in developing information industry. We are going to strengthen the corporation with world's leading information service organizations, exploit information sources in conjunction with these organizations to form a wide connecting, highly efficient information network.
2.3 China's Special Economic Zones gear up for WTO, future
To hit the goal, analysts say, the SEZs should give national treatment to overseas investors for more funding while making efforts to open up overseas markets for their own companies products. By changing the past practice of offering preferential policies to overseas investors in certain fields, the SEZs have lifted all restrictions for them. According to officials, the expansion of reform in the SEZs will focus on systematic innovations, including adjustments in the ownership structure, and transformation of functions of government departments in accordance with international common practices.
Impact of SEZs on Chinese Economy
The favourable impact of the SEZs on the economy of China is fivefold:
These points are discussed below in detail:
1. Foreign Investment – The preferential treaties of the SEZ's have attracted foreign investors to invest a huge amount of money in China. For instance, Hainan and Xiamen have attracted investments mostly from Taiwan. By June 1987, a total foreign investment of $2.12 billion had been made in the five zones, amounting to one quarter of the total foreign investment in China during this period. The most marked success was registered in Shenzhen. By the end of 1986, it accounted for $1.4 billion through more than 4000 economic cooperation agreements. One significant factor is that the investment has not been confined to the export industry, but has permeated other sectors such as infrastructure construction, commerce, tourism and real estate.
2. Growth of Exports – As all five SEZs are coastal cities, they are convenient for ocean transport routes and help to promote the export industry. Preferential policies have encouraged foreigners to set up export- oriented factories in the territories. From 1985 to 1987, an annual average real growth rate of 83% was recorded for exports from the five zones. Shenzhen's exports, for example, grew at an average rate of 70% during this period. At the same time the proportion of the SEZs' industrial products that went to export had risen to 53% by 1987.
3. Foreign Exchange – The establishment of the SEZs has opened a way for China to increase its trade with foreign countries. They not only enhance trading activities such as foreign investment and tourism but also help China to earn foreign exchange through these activities.
4. Employment Opportunities – Since the beginning of the open-door policy, small-scale private businesses have been allowed to coexist with state enterprises. This has increased employment opportunities for local people and raised the level of economic activity. Also, many state workers sense that going into business on their own may provide greater income potential. They generally adopt an attitude commonly known in China as "I Bu Zho Er Bu Shu", which, loosely translated, means ‘refusing to work and refusing to relax’. Many prefer to work for joint-venture firms for higher wages. So the average income in SEZs now ranks as the highest in China.
5. Improvement in Technology – In theory advanced technology and know-how will also flow into the country as a result of foreign investment. In turn, with increasing exports the force of international competition may bring greater pressure on Chinese firms to adopt more efficient work practices. It is perhaps questionable how much benefit the wider Chinese economy has reaped from these investments. The technology, patents and know-how remain firmly the property of, and are controlled by the parent companies. It may however be the case that in the long run the work culture and practices adopted by foreign companies could have some wash-back effect over wider economic practices in the country.
In conclusion, the establishment of the SEZs has helped to increase the export trade, which in turn has helped to improve the Chinese economy. Preferential treaties have been offered in the five SEZs to attract foreign investment. A large amount of foreign investment has occurred not only in the export trade, but also in infrastructure construction, commerce and tourism. Foreign companies have been encouraged to set up factories in the territories and the export industry has grown. Jobs opportunities have been provided for locals as factories need labour and the average income of the people has increased. In addition, advanced foreign technology has been brought in with the inflow of foreign investment. All these factors have contributed to the growth of the Chinese economy. It remains to be seen if these quantitative advances, in which the SEZs have played an important role, are matched by commensurate advances in the quality of life for the majority of Chinese people.
3.1 Not all roses - Unwanted byproducts of SEZ developments
WHILE celebrating the 20th anniversary of China's four earliest Special Economic Zones (SEZs) on August 26, the cities of Shenzhen, Xiamen, Zhuhai and Shantou, and Hainan Province mapped out development blueprints for the new century. Analysts believe that by setting the goals for modernization, the SEZs are still leading other parts of the country in development as they were 20 years ago.
Two decades ago, local authorities in Shenzhen, encouraged and supported by senior Chinese leaders including Deng Xiaoping, were determined to blaze a trail for China's reform and opening-up drive. Shenzhen has then become a window of the country to the outside world and a platform for reform measures, along with Xiamen, Zhuhai and Shantou.
To ensure successful reform and opening up in the SEZs, China introduced a wide range of special preferential policies. As the opening-up drive swept other parts of the country, the preferential policies were applied to more regions. The saying that special economic zones are no longer special prevails in the country. However, the SEZs have not lost their vitality. And observers say that the SEZs still shoulder a historical mission today.
In recent years, the SEZs have been focusing on improving the overall economic quality and on developing high-tech industries and other economies with special features. Compared with other parts of China, the SEZs still hold an edge in utilizing domestic and overseas resources and markets and in adapting themselves to international practices to boost economic development.
While fully expanding economic co-operation with multinationals, Shenzhen is tightening ties with Hong Kong, and Xiamen and Hainan with Taiwan. In Shantou, efforts have been made to attract overseas Chinese, one of the major channels of overseas investment to the Chinese mainland.
Experts say that improving overall economic performance is a necessary choice for the SEZs, as China will face fiercer competition after its entry into the World Trade Organization. It is the only way for them to realize modernization. To hit the goal, analysts say, the SEZs should give national treatment to overseas investors for more funding while making efforts to open up overseas markets for their own companies' products.
By changing the past practice of offering preferential policies to overseas investors in certain fields, the SEZs have lifted all restrictions for them. According to officials, the expansion of reform in the SEZs will focus on systematic innovations, including adjustments in the ownership structure, and transformation of functions of government departments in accordance with international practices.
The government should also simplify procedures to make it easier to get businesses up and running and give a bigger role to the market, while improving services, experts say. At the same time, efforts must be made to improve the social security system and the financing system, and have intermediary organs operating according to standards.
The forthcoming 50 years will be an important historical period in China's drive to realize modernization and make the Chinese nation's long-cherished dream of building a powerful China come true. Experts are confident that Shenzhen, Zhuhai, Shantou, Xiamen, and Hainan will set the pace in China's drive toward modernization.
Beginning of Economic Zones in India
Thus, EPZs were set up with the aim of boosting export-oriented investment and for eliminating the constraints imposed by India’s trade and industrial policies. As a concept, EPZ dates back to 1962. Some of the first EPZs were founded in Puerto Rico in 1962, Mexico (1964), Kandla (1965), Taiwan (1966), South Korea (1971), Philippines and Malaysia (1972). The EPZ set up in Mauritius is not based on geographical and locational advantages but is more a functional concept.
Most of these countries have had a good and fulfilling experience by setting up EPZs. EPZs have helped promote an export-oriented industrialization strategy with increasing value-additions in domestic production. Studies have shown that countries where EPZs function have had excellent performances on the trade front.
Of the 850 EPZs worldwide, a large number of them operate in developing countries. The world over, it has been observed that processing exports have outperformed others. In fact, most Asian and Latin American countries have excelled in trade only due to the processing trade.
The Government of India had established seven EPZs over a period of time. These were:
Kandla was the only Free Trade Zone in India and was the first zone to be established in India.
While the Santa Cruz Electronics Export Processing Zone (SEEPZ) was meant exclusively for the exports of electronics and gems and jewellery, all other zones were multi-product zones. 100% foreign equity was welcome in EOUs and EPZs.
Shortcomings & Problems of EPZs
According to an Audit Report conducted on EPZs and FTZs in 1999, SEEPZ earned only US$ 1.25 bn. net foreign exchange in the past 8 years.
The reasons for this were attributed to the following causes:
On 12th March 1994, a memorandum was submitted to Shri Zafar Saifullah, Cabinet Secretary, Government of India regarding the problems of EPZs and EOUs. The Development Commissioner, SEEPZ, Santacruz Electronics Export Manufacturers’ Association (SEEMA), and the SEEPZ Gems & Jewellery Manufacturers’ Association, SEEPZ submitted this memorandum in association with the Federation of Indian Export Processing Zones Industries Association.
The main problems highlighted in this report were:
Also, there were problems with the formation of Trade Unions, multiplicity of bonds, fax copies not accepted by customs, hassles in sub-contracting, DTA sales regulations, etc. These, and many other such trivial matters were barriers in the proper working of the units in the zones. Over a period of time, some of these hassles were done away with. But there was never a situation when the units in the zones were really satisfied with the procedures.
The experience of Export Processing Zones (EPZs), which were duty-free enclaves, has not been up to expectations. Even with flexibility to sell 50 per cent of exports in DTA at concessional rates of duties, most EPZ units have failed. The eight EPZs together contributed barely 3.7 per cent of the country’s total exports.
In fact, other than Santacruz Electronic EPZ, the other seven EPZs together contributed to only about 1.41 per cent of the country’s exports. There is a very strong view in the revenue department that the dismal performance of the EPZ units does not justify the revenue sacrifice or revenue leakage inherent in the schemes. In their eyes, the EPZs have failed.
These shortcomings were responsible for the recent makeover of these EPZs into SEZs. The transition process is covered in the next Chapter.
5.2 Customs probe Bharat Shah's export units for diamond smuggling
In January 2001, SEEPZ customs conducted a stock taking of two units from Jan 31, 2000. B V Star and B V Jewels (both owned by Bharat Shah) were probed for suspected diamond smuggling. The following was found:
EXIM Policy changes
Realising the failures and shortcomings of the EPZ Scheme in India, the Commerce Ministry decided to improve the existing situation. The changes and fine-tuning done in the existing EPZs was to no avail and was not yielding the required results. An Indian delegation headed by the then Director-General of Foreign Trade, Mr. N.L. Lakhanpal visited UAE and saw the Jebel Ali Free Zone (JAFZ), Dubai and Fujairah Free Zone (FFZ) there. This was the birth of the idea of having similar zones in India.
After the delegation came back, it submitted a report on the findings of the visit. The report recommended that the Development Commissioners of each zone (in India) should be vested with all the authority regarding their respective zones, thus making them the ultimate local authority on all issues, as is the case in UAE. Also, like their UAE counterparts, the Indian DCs should be required to prepare a Business Guide. The report also stated that the Free Zones in UAE accounted for all duty-free raw material, ensuring it was used for export. Even in the case of DTA, they would ensure that it was after payment of full customs duty on the value of the finished goods. The commerce ministry then decided to convert all existing EPZs into FTZs with SEEPZ, Noida and Kandla being converted that year, and the rest to follow.
Reducing role of Customs
According to the proposed policy, the role of customs was to reduce and the new zones would be exempt from all customs department rules and regulations from July 1, 1999. After the proposed conversion of the units to FTZs, the role of the customs department officials was to be confined to working outside the units, giving them total operational flexibility, as proposed in the revised export and import policy (1997-2002). The FTZs would have been outside the customs ambit with checks only at the entry and exit points by customs officers.
Under the new scheme, FTZs would be permitted to sell 50 per cent of their production in the DTA, subject to payment full customs duties. This means the remaining half alone needed to be exported. But, according to ministry officials, for their own survival, the units would have to find markets for their entire production, as DTA sale will prove rather prohibitive.
The Indian labour laws ere to apply to FTZs though the commerce ministry's ultimate objective is to make these inapplicable. The practice the world over is to exempt FTZs from the purview of labour laws.
Arrival of SEZs
The plans for the FTZs got shelved eventually. Mr. Murasoli Maran, the Minister for Commerce & Industry, suggested the setting up of Special Economic Zones in India, similar to the ones in China. This decision to set up SEZs was the highlight of the EXIM Policy.
The decision was commendable, but it did not take into account several things. The initial proposed SEZ Scheme was not a major improvement over the existing EPZ Scheme at that time. Basically, almost all the features of the original SEZ Scheme already existed in the form of incentives available to EPZ units. The major advantage for SEZ units was that they had to now achieve only positive net foreign exchange earning as a percentage of exports (NFEP), where as EOU/EPZ units with investment of less than Rs 5 crore in plant and machinery had to achieve minimum stipulated NFEP.
Inadequate extra facilities over EPZs
The relaxation for SEZ units was significant but not sufficient enough to sway the decision of the entrepreneurs in favour of setting up units in SEZ. The major advantage for EOU/EPZ units was that they could sell upto 50 per cent of their exports in the DTA at half the rates of customs duties, whereas SEZ manufactures could sell in DTA only on payment of full duties. DTA sale was a very important option for EOU/EPZ/SEZ units, as the international markets are not always booming or lucrative.
Trading units in SEZ/EPZ were not allowed to sell in DTA. Ideally, so long as the trading unit paid full import duties on DTA sales, there should have been no restrictions.
The commerce minister had announced that the EPZ at SEEPZ, Kandla, Cochin and Viskhapatnam would be converted to SEZ. The transitional arrangements for existing EPZ units who did not want to opt for SEZ scheme was that they had to convert into EOU or de-bond. In either case, they had to move out of EPZ, which was difficult for existing units.
The industry felt that the government needed to make SEZs an attractive destination for entrepreneurs. The most oft-repeated request was that the government should treat SEZ as foreign territory for all purposes. There was also a feeling that the supplies from DTA to SEZ must be treated as physical exports and that all the customs notifications should apply to sales from SEZ to DTA as they apply to physical imports.
The existing EPZs were converted to SEZs and activated on 1st November 2000. Also, proposals for the establishment of new SEZs were cleared. This was followed by some notifications being issued which made the necessary changes in the SEZ Scheme. The most prominent among them was the declaration of SEZs as foreign territory. The Finance Ministry declared the area under the SEZs as `foreign territory' for the purpose of duties and taxes. This means that goods supplied to the SEZ from the Domestic Tariff Area (DTA) will be treated as `deemed' exports and goods brought from the SEZ to the DTA will be treated as `imported' goods. Thus, was evolved, the present concept of SEZs in India.
Present SEZ Concept
The facilities available to SEZ units are as follows:
Foreign exchange related:
The labour laws of the land will apply to all units inside the Zone. However, the respective State Governments may declare units within the SEZ as public utilities and may delegate the powers of the Labour Commissioner to the Development Commissioner of the SEZ.
State Governments will have a very important role to play in the establishment of SEZ. Representative of the State Government, who is a member of the Inter-Ministerial Committee on private SEZ, is consulted while considering the proposal. Before recommending any proposals to the Ministry of Commerce & Industry (Department of Commerce), the States must satisfy themselves that they are in a position to supply basic inputs like water, electricity, etc.
The main differences between the EPZ and SEZ Schemes are:
Salient features and schemes of an SEZ in India
The SEZ units are also allowed to undertake job-work for export on behalf of DTA units. This is subject to the condition that the finished goods are exported directly from SEZ units and export documents are made in the name of the DTA unit. On export of such goods manufactured by SEZ unit on behalf of the DTA unit, the DTA unit is entitled to refund of duty paid on the inputs by way of brand rate of duty drawback.
The SEZ units are allowed to remove the moulds, jigs, tool, fixtures, tackles, instruments, hangers, patterns and drawings without payment of duty to the premises of the sub-contractors subject to the condition that such goods are brought back to the unit on completion of the job work within the period specified in this behalf.
Generally speaking, sub-contracting is not allowed to gem and jewellery units. However, the gem and jewellery units in SEZ are allowed to take out gold/silver/platinum for sub-contracting subject to the condition that goods, finished or semi-finished, including studded jewellery, containing quantity and purity equal to the gold/silver/platinum so taken out are brought back to the Zone within 30 days. It is to be noted that diamonds, precious or semi-precious stones are not allowed to be taken out for sub-contracting. The gem and jewellery units are also allowed to receive plain gold/silver/platinum jewellery from DTA in exchange of gold/silver/platinum of equal quantity and purity. These units are, however, not eligible for any wastage or manufacturing loss against the jewellery received from DTA after processing or against exchange of gold/silver/platinum. The DTA units undertaking job work or supplying jewellery against exchange of gold/silver/platinum are not entitled to deemed export benefits. The gem and jewellery units are also allowed to sub-contract part of the production or production process through other units in the same SEZ subject to records being maintained by both the supplying and the receiving units.
Further, the gem and jewellery units in SEZ are allowed certain other facilities as mentioned below:
(i) Taking out the items of gem and jewellery into DTA temporarily without payment of duty for the purpose of display and return thereafter;
(ii) Personal carriage of gold/silver/platinum jewellery or precious or semi-precious stones or beads and articles as samples up to US$ 1,00,000 for export promotion tours and temporary display or sale abroad subject to the condition that the exporter would bring back the jewellery or the goods or its sale proceeds within 45 days from the date of departure through normal banking channel;
(iii) Export of jewellery including branded jewellery for display and sale in the permitted shops setup abroad, or in the showroom of their distributors or agents provided that items not sold abroad within 180 days, shall be re-imported within next 45 days;
(iv) Removal of parts & tools of machine temporarily without payment of duty for the purpose of repair and return thereof.
(v) Taking out gem and jewellery manufactured in the SEZ to the retail outlets or showrooms set up in the departure lounge at international airports for sale to a tourist, as defined in the Baggage Rules, 1998, leaving India.
(vi) Sale of gem and jewellery manufactured in the SEZ to a foreign-bound passenger and transferring the same to the retail outlets or showrooms set up in the departure lounge or Customs warehouse at international airports for being handed over to the said passenger for the purpose of export.
(vii) Removal of moulds, tools, patterns, and drawings into the DTA for job work without payment of duty and to be returned to the unit thereafter.
For availing of the above mentioned facilities, prior permission of Assistant Commissioner / Deputy Commissioner is required.
In case of gem & jewellery units, scrap, dust or sweepings generated in the unit is allowed to be forwarded to the Government Mint or Private Mint for conversion into standard gold bars and return thereof to the Zone subject to the observance of procedure laid down by the Commissioner of Customs. The said dust, scrap or sweepings are also allowed clearance into DTA on payment of applicable customs duty on the gold content in the said scrap, dust or sweepings. Samples of the sweepings/dust are taken at the time of clearance and sent to mint for assaying. The assessment is finalized when the reports are received from the mint.
Inter unit transfer of goods amongst units in a SEZ does not require any prior permission, but the supplying and receiving units are required to maintain proper accounts of the transaction
A provision has been made in the notifications that duty would not be levied on capital goods, raw materials, components, waste or scrap etc. if these goods were destroyed in the presence of the Customs authorities. This provision, however, does not apply to gold, silver, platinum, diamond, precious stones and semi-precious stones. The officers supervising destruction are required to ensure that goods are destroyed fully rendering them unfit for further use and give certificate to that effect. After destruction of capital goods, raw materials, components, waste or scrap etc., if the remains have scrap value, the unit in DTA on payment of duty applicable to scrap can clear the same
The facility of DTA sale is available to the SEZ units. Under the Scheme, finished goods including by-products and services and waste/scrap/remnants/rejects etc. can be sold in the DTA on payment of applicable duty and in accordance with the Export-Import Policy in force. However, where such finished goods (including rejects, waste and scrap materials) are not excisable, duty equal in amount to that leviable on the inputs imported/indigenously procured under the notifications and used for the purpose of manufacture of such finished goods, which would have been paid but for the exemption under the said notifications, is payable at the time of clearance of such finished goods. In case of service sector SEZ units, the rendering of services in DTA is allowed subject to the condition that the unit has achieved the positive NFE, cumulatively, as specified in the Policy. This would mean that service units would not be eligible for making DTA sale if the NFE is not positive cumulatively at any point of time. Further, if any of such services are taxable under provisions of Chapter V of Finance Act, 1994, then rendering of such services in DTA would require payment of service tax as per the provisions of Finance Act, 1994.
Levy of Central Excise Duty on Goods Produced or Manufactured by SEZ Units and Cleared into Domestic Tariff Area:
In terms of section 3 of the Central Excise Act, 1944, the excise duty leviable on goods manufactured in an SEZ unit and cleared into Domestic Tariff Area is an amount equal to the customs duty leviable under section 12 of the Customs Act, 1962 or under any other law for the time being in force on like goods produced or manufactured outside India, if imported into India. Thus, the duty is worked out exactly in the same manner as applicable to imported goods.
A SEZ unit is required to maintain proper account in the format convenient to it and financial year-wise, of all foreign exchange inflow by way of exports and other receipts, all foreign exchange out flow on account of imports, payment of dividend, royalty, fees etc., consumption and utilisation of the materials and sale in the DTA. The units are required to submit regularly quarterly statement to the Development Commissioner and the Customs in this regard in the format prescribed at Appendix 16H of the Hand Book of Procedures.
All activities of the SEZ unit, unless otherwise specified, are through self-certification procedure and are monitored by a Committee comprising Development Commissioner and Customs. The Development Commissioner in charge of the Zone heads the Committee. The Committee is also required to see that wastage / manufacturing loss on gold/ silver/platinum jewellery and articles are within the overall percentage prescribed in Appendix-41 of the Handbook (Vol-1). In case of higher wastage/manufacturing loss, the Committee is required to satisfy itself of the reasonableness of the same.
The Customs officials posted in SEZs are not supposed to visit the units for verification of records or even otherwise in routine. However, in case of specific information/intelligence which, prima facie, show that there is fraud, collusion, mis-declaration, suppression of information etc having a bearing on the export performance of the unit or where there is specific information regarding clandestine/unauthorized removal of goods into DTA etc, the Customs officials can visit the units for verification of records, goods etc. so as to initiate proceedings under Customs Act, 1962. The Assistant Commissioner/Deputy Commissioner may keep a watch on the export performance of the units and in the event of non-achievement of positive NFE within the stipulated period; action can be taken against the units for recovery of the duty and interest. So far as utilization of imported/indigenously procured goods is concerned, the same may be utilized within the period of five years. In case of failure to utilize the imported / indigenously procured goods within the period of five years, the unit is liable to pay duty on the said unutilized goods along with the interest at the rate of 24% per annum from the date of importation or procurement of the said unutilized goods till the date of payment of such duty.
SEZ is an evolving Scheme and more features would be added as required.
6.1 Structure & Role of Trade Unions in China
A study of Chinese trade unions will be interesting. Comparison with Indian labour laws almost certainly makes it clear that Indian SEZs will not enjoy same level of labour cooperation that their Chinese counterparts enjoy.
Chinese trade unions are organized on a broad industrial basis. Membership is open to those who rely on wages for the whole or a large part of their income – a qualification that excludes most agricultural workers. In theory, membership is not compulsory, but in view of the unions' role in the distribution of social benefits; the economic pressure to join is considerable. The lowest unit is the Enterprise Union Committee. Individual trade unions also operate at the provincial level, and there are trade union councils that coordinate all union activities within a particular area and operate at county, municipal, and provincial levels. At the top of the movement is the All-China Federation of Trade Unions, which discharges its functions through a number of regional federations.
In theory, the appropriate trade union organizations are consulted on the level of wages as well as on wage differentials, but in practice their role in these and similar matters is insignificant. They do not engage in collective bargaining – not at all surprising, since their principal duties include assisting the party and promoting production. In fulfilling these tasks, they have a role in enforcing labour discipline. From the point of view of the membership, the most important activities concern the social and welfare services. Thus, it is the unions that look after industrial safety; organize social and cultural activities; provide services such as clinics, rest and holiday homes, hostels, libraries, and clubs; and administer old-age pensions, workers' insurance, disability benefits, and other welfare schemes.
SEEPZ (Santacruz Electronics Export Processing Zone) was formed in 1974 exclusively for electronics. SEEPZ was established on land leased by the Government of India (Ministry of Commerce) from MIDC for a period of 99 years. MIDC, in turn had taken this land on lease from the Maharashtra Government. MIDC and the Government of India together developed the basic infrastructure needed for such an EPZ to exist. The Government of India did all the funding and MIDC cleared the land, laid the roads, provided adequate water supply and arranged for an uninterruptible power supply source. Thus, SEEPZ was finally established basically for the electronic industry as government had identified it as a strategic sector and wanted rapid growth in it. In 1988-89, seeing the potential of the Gem & Jewellery industry, this industry was also made a part of SEEPZ.
Infrastructure Facilities at SEEPZ
The Philosophy while landscaping SEEPZ was to have Mother Nature live in harmony with industrial manufacturing and technology. All set in a sophisticated infrastructure catering to all basic needs of industry.
At SEEPZ, plots are given on lease for a period of 30 years, at rates fixed from time to time. The initial rates were Rs. 10/- per sq. metre per annum for an SDF plot. Entrepreneurs can construct their own buildings on these plots. For this purpose the SEEPZ administration will obtain all necessary permissions and clearances. Also, Standard Design Factories (SDFs) are available on a 5-year renewable lease basis at the rate of Rs. 650 per sq. metre per annum plus Municipal Taxes (10%). When an entrepreneur begins production in the very first year of obtaining the SDF shed, he is entitled to a concession of 50% of the lease rent in the first year, 40% in the second year and 25% in the third year. Again the space allotted to an entrepreneur inside the SDF shed is based on his export projections. All internal partitions, air conditioning, electrical wiring, etc. are to be carried out by the entrepreneur.
The generating stations of western Maharashtra ensure uninterrupted supply of power at the rate of Rs. 4.74 per unit. SEEPZ is exempt from the payment of taxes on the purchase of power or on its sale. The units are also allowed to generate and/or sell their own power without any obligation to pay taxes.
The Zone has an assured supply of 4.55 million litres of water a day at the rate of Rs. 21 for every 1000 litres.
Hi-Tech Communication Facilities
The most important facility that lures software enterprises to SEEPZ is the hi-tech 64KB/128KB/256KB line, that enables these companies to communicate and videoconference over the satellite to any of the branches around the world. A telephone / telex connection is given to SEEPZ units on priority basis.
Adequate Warehousing and Forwarding Facilities
A large warehouse called an Inland Container Depot (ICD) is situated within SEEPZ for storing at very nominal rates. This is the central warehouse for all the units inside SEEPZ. Also Clearing & Forwarding facilities are available here.
In-Zone Custom Clearances
SEEPZ has its own ports of entry with a fully dedicated customs wing similar to that at the Mumbai Port. Since this customs wing is solely for the clearances within SEEPZ, the procedures for clearing incoming and outgoing consignments are simple and very fast. Also, there is no need for the same to be carried out either at the airport or the docks. This facility at SEEPZ is provided specially keeping in mind the delay and trouble that occurs to the exporter while obtaining clearances. This speedy and efficient system is available to all the units within SEEPZ at no extra cost. The number of pending cases with this Customs department is also less, as they have to cater only to the EPZ units.
The proximity of available spares, components and raw materials affords Zone units the advantages of lower freight costs and lower inventory levels. The feedback necessary for effective quality control on supplies will be quicker, easier and simpler, as the supplier will be almost next-door.
A Regional Testing Centre of the Department of Electronics (ERTL) located just outside SEEPZ provides facilities for meeting the evaluation needs of manufacturers and designers of electronic products.
Due to the huge workforce in SEEPZ and lack of residential areas nearby, the employees need to be transported everyday to large distances. The transport industry has developed to a huge extent in this area because of this need.
Development of the land
With the establishment of SEEPZ, the surrounding area has increased in land value. There has been an increase in demand for residential housing near SEEPZ. There have also been a number of ancillary industries springing up to serve the needs of the SEEPZ Community.
Many fast food joints, small shops and industries near MIDC, communication centers, banks, etc. have developed in this previously underdeveloped area.
A residential colony has been constructed for the SEEPZ authority near SEEPZ. There is access to many more regions due to the presence of a Bus Stop exactly at the entrance/exit gate of SEEPZ.
General Information on SEEPZ
According to the Annual Report of SEEPZ for the year 1999-2000:
Growth of Electronics Industry (India & SEEPZ): 1990-94
The electronics industry has always played a significant role in India’s exports. In recognition of the catalytic role electronics plays in global development, the industry has been accorded the status of a priority area in the new industrial policy. A significant move was made with the establishment of an Export Processing Zone exclusively for electronics at SEEPZ (Santacruz Electronics Export Processing Zone), Mumbai in 1974.
Growth of Gems & Jewellery Industry (India & SEEPZ): 1990-94
Another industry that has recorded a significant growth in recent years is the gem and jewellery industry. In fact India has established its place on the world map along with such centres as Antwerp and Tel Aviv for gem and jewellery processing and exports. To catalyze growth of this sector, the Government along with the apex trade bodies, has set up a number of training institutes specialising in imparting the requisite skills for gem and jewellery processing and manufacture. In fact, a special gem and jewellery complex was set up in 1987-88 inside SEEPZ, entirely dedicated to exports.
Latest Happenings at SEEPZ