Date: 15/09/2022

Relevance: GS-3: Indian Economy, mobilization of resources, growth, development and employment.

Relevance: GS-2: Government policies and interventions for development in various sectors

Key Phrases: Special Economic Zone, Foreign Trade Policy, Dispute Settlement Body, World Trade Organization, Agreement on Subsidies & Countervailing Measures, export processing zones, foreign direct investments, Rule 43A in the SEZ Rules, 2006, Development of Enterprises and Services Hubs, work-from-home.

Why in News?

• SEZ units need more operational flexibility to boost growth.

Background:

• The government formulated the Special Economic Zone (SEZ) policy in 2000 and implemented it through the Foreign Trade Policy.
• After the initial momentum, the SEZ framework lost steam leaving a yawning gap between the initial promise and actual delivery.
• Moreover, India’s SEZ framework was under challenge before the Dispute Settlement Body (DSB) of the World Trade Organization, which eventually ruled that India’s SEZ policy was inconsistent with the WTO guidelines.
• SEZs faced operational difficulties in obtaining permission for work-from-home during the pandemic and thereafter due to certain restrictions on the use of capital goods including laptops for specified purposes, movement of goods from/to SEZs, issuance and validity of identity cards, etc., leading to business losses and a compulsion to start ‘on-site’ work and even prompting units to reimagine their continuation under the SEZ scheme.

Special Economic Zone

• The Indian government had long used export processing zones (EPZs) to promote exports. In fact, Asia’s first EPZ was established in 1965 at Kandla, Gujarat.
• While these EPZs had a similar structure to SEZs, the government began to establish SEZs in 2000 under the Foreign Trade Policy.
• The Special Economic Zone Act, 2005 further amended the country’s SEZ policy. Many EPZs were converted to SEZs.
• The SEZ Rules, 2006 lay down the complete procedure to develop a proposed SEZ or establish a unit in an SEZ.
• A special economic zone (SEZ) is an area in which the business and trade laws are different from the rest of the country.
• The objective behind creating SEZs was to
  • Attract foreign direct investments,
  • Develop infrastructure,
  • Facilitate access to global markets for domestic companies,
  • Encourage exports.

New rule Inserted related to SEZs:

• The government acknowledged the work-from-home challenges (WFH) faced by SEZs and to address the concerns, the Ministry of Commerce issued a notification on July 14, 2022, inserting a new Rule 43A in the SEZ Rules, 2006, setting out a policy for permitting WFH for employees of SEZ units.
• The new rule lays down the categories of employees who shall be permitted to WFH or any place outside the SEZ, subject to a limit of 50 per cent of the total employee strength. It Includes:
  • Employees of IT and IT-enabled services
  • Temporarily incapacitated employees
  • Travelling employees
  • Offsite working employees
• The validity of this permission will be for a year from the date of such consent, subject to an extension that cannot exceed one year at a time.
• Further, the Ministry issued instruction No.110, dated August 12, 2022, providing standard operating procedures for implementing provisions contained in Rule 43A.
• The new Rule comes with several procedural and administrative compliances on SEZs, taking away the required flexibility.

Baba Kalyani Committee:

• The Baba Kalyani Committee was constituted by the Ministry of Commerce and Industry to study the existing SEZ policy of India.
• The objectives of the committee were to
  • Evaluate the SEZ policy and make it WTO compatible,
  • Suggest measures for maximizing utilization of vacant land in SEZs,
  • Suggest changes in the SEZ policy based on international experience,
  • Merge the SEZ policy with other Government schemes like coastal economic zones,
• A detailed report was submitted by the committee, underscoring the need for a major revamp of the SEZ scheme.

Development of Enterprises and Services Hubs (DESH):

• To address the operational and compliance challenges and to redraw the scheme to make it more attractive, the government is formulating a new scheme — the ‘Development of Enterprises and Services Hubs’ (DESH).
• It will overhaul the existing Special Economic Zone law of 2005, aiming to revive interest in SEZs and develop more inclusive economic hubs.
• It is expected that a WTO-compliant DESH Bill will be implemented during the current fiscal, which would promote economic activity, generate employment, attract investments, remove bottlenecks and adopt key recommendations of the Baba Kalyani report.
• DESH is expected to provide more flexibility to the units currently operating under a stricter SEZ law and for new units that register under DESH.

Way forward:

• The Commerce and Industry Ministry has pushed for a new Act for SEZs to be able to sell goods in the domestic market at low duties, easier exit for loss-making units and units to be able to accept payment in Indian currency.
• With the WTO ruling that the SEZ scheme was not compliant with multilateral trade norms as it gave incentives for exports, the Commerce Ministry’s proposal that the (Net Foreign Exchange criteria (which makes exports mandatory) be replaced with other conditions, such as minimum employment or R&D, is being seriously considered.
• SEZs are counting on the government to implement the DESH Bill at the earliest to address the current challenges, so that units can operate more flexibly and foster growth.

Source: The Hindu BL

Mains Question:

Q. What are the challenges faced by the industries in SEZs? Suggest measures to address these challenges. Discuss.