fdi in india and its growth linkages - Department Of Industrial Policy ...

SPECIAL ECONOMIC ZONES (SEZS) AND FDI IN INDIA
Another ingredient is the availability of power at competitive rates. Apart from cheap power, there are no power failures
in China. Also, interest rates on bank loans is lower in China than in India. All these facilities make the Chinese SEZs
a viable proposition for foreign investors. However, India has also begun to emulate the Chinese model and power units
are being allowed to be set up in SEZs as per the power sector guidelines and single-window clearance facilities.
Decentralisation of the decision-making authority was also a major reason for the SEZ success in China. Provincial and
local authorities were made partners and stakeholders by delegating to them the power to approve of foreign investment.
In India, the powers for foreign investment approval are vested with Development Commissioners, who are the
representatives of the central government.
The flexible labour laws with the hire-and-fire policy in SEZs have been one of the biggest attractions for foreign
investors in China. The new Labour Law consists of 107 articles, but none of these is more than one paragraph. All jobs
are on a contract basis which stand terminated on the expiry of the term; the terms are flexible for a specific job. In
contrast, in India, labour laws are very problematic for employers, with the Industrial Dispute act of 1947 not allowing
companies that have 100 or more employees to retrench labour without prior permission from the concerned state
government.
With the intention of emulating the Chinese model of promoting exports, India announced the Export and Import (EXIM)
Policy in 2000-01 (with effect from April 1, 2000).Thereafter, the Special Economic Zone Policy was announced in 2000. SEZs
in India functioned from November 1, 2000 to February 9, 2006 under the provisions of the Foreign Trade Policy, and fiscal
incentives were made effective through the provisions of relevant statutes. In the meanwhile, the Special Economic Zones Act,
2005 was passed by Parliament in May 2005, which received Presidential assent on June 23, 2005. After extensive consultations,
the SEZ Act, 2005, supported by SEZ Rules, came into effect on February 10, 2006, providing for drastic simplification of
procedures and for single-window clearance on matters relating to central as well as state governments. It also provided a firm
legislative and operative framework for the operation of SEZs in the country. The main objectives of the scheme are export
promotion, generation of economic activity and investment stimulation. The other objectives included earning foreign exchange,
attracting foreign investment, generating employment, attracting the latest technology into the country, backward and forward
linkages by way of sourcing of raw material from and supply of finished goods to DTA, upgrading skills and creating a source of
skilled manpower, development of backward areas, etc.
A few policy measures to enhance the performance of the SEZs include a vision in the design, establishment and operations of
the SEZ; it is necessary to develop zones as industrial clusters of specific products. The backward linkages would also benefit
the growth of accessories units. They, perhaps, could also encourage downstream industries; zones in the long run need to give
way to industrial clusters of horizontally and vertically integrated industries, in general, and high-tech industries, in particular.
This would not only help jump-start manufacturing processes, but would also improve export competitiveness with greater
returns. At present, there is no autonomous authority responsible for the development of zones and for providing single-window
clearances in India; the zone administration functions as a government department office. It is recommended that the SEZs
should be managed by autonomous authorities, which should be constituted under specific Acts and should be assigned the
responsibility of promoting the zones.
Undoubtedly, SEZs are a major instrument for attracting foreign investment for most developing countries like India and
China. However, China started its reform process in 1978-79 and, therefore, has begun to reap the benefits of the SEZ policy
in terms of increased employment and investment. The performance of India’s SEZs after the implementation of the SEZ
Act in 2005 has improved. Indian SEZs are growing significantly, their contribution to exports is growing, and an increasing
number of units are coming forward to invest in SEZs. With a proper system, policy framework and incentives in place,
Indian SEZs have begun to play a crucial role in promoting foreign investment in the country.
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