India’s policy on Special Economic Zones under fire

The SEZs were promoted by Commerce Minister Kamal Nath as creating a large flow of foreign and domestic investment that would bridge the gap between China and India in infrastructure and exports, and create massive employment opportunities.

The Congress party-led government sought to attract companies to the zones by exempting them from licenses and duties on imported goods and allowing the free repatriation of profits. The commerce ministry’s web site described the SEZs as “designated duty free enclaves to be treated as foreign territory for trade operations and duties and tariffs”.

In addition, the government offered companies operating in SEZs a tax holiday for the first five years and a 50 percent tax reduction for the next five years. SEZ developers receive ten years tax-free.

Although the commerce ministry continues to tout the zones, the International Monetary Fund, India’s finance ministry and the Reserve Bank of India have criticised the policy in recent weeks. All have pointed to hundreds of proposed or approved SEZs that are far too small to improve India’s performance in the long term. These SEZs have proved to be little more than tax loopholes for real estate speculators and developers.

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