Birla Institute Of Technology

Project Report
ON
“Capableness of SEZs on Promoting Export from India ”

Project submitted in partial fulfillment of degree of Bachelor of Business
Administration.

Under the guidance of Submitted By

Dr Roopali Sharma UJJWAL

(Head of Department, Management) 8BBA/4003/09

Department Of Management

BIRLA INSTITUTE OF TECHNOLOGY

Mesra, Ranchi

Ext Centre Jaipur

2011,2012

Acknowledgement

It gives me immense pleasure to express my deepest gratitude towards Dr. Roopali Sharma for
providing me with the opportunity to undertake this project, which helped me to learn so much
about the real world situations happening in different economies related to the economic zones.

I would also like to express our sincere thanks to all other faculty members as well as the staff at
library and computer lab who has helped me on the project work with the necessary inputs. Their
constant support has been the key to our achievements on the projects.

I would also like to thanks my parents, fellow colleagues and friends for helping out in timely
completion of the project report and for providing for their moral support, suggestions and
encouragement.

However, i accept the sole responsibility for any possible error of omission and would be
extremely grateful to the readers of this project report if they bring such mistakes to our notice.

UJJWAL

8BBA/4003/09

PREFACE
BBA is a stepping stone to the management carrier and to develop good manager skills,
it is necessary that the theoretical must be supplemented with exposure to reveal
environment.
Theoretical knowledge just provides base and it’s not sufficient to produce a
good manager, that is why practical knowledge is needed. The main objective of project
report is familiarization with the necessary theoretical input and to gain sufficient
practical exposure to establish a distance linkage between the concept . This project not
only helps the students to utilize his or her skills properly and learn field realities but
also provides a chance to the organization to find out talent among the buddy managers
in the very beginning.

UJJWAL
(8BBA/4003/09)

CERTIFICATE OF APPROVAL
The project titled “Capableness of SEZs on Promoting Export from India” is herbly
approved as a credible study of financial specialization carried out by UJJWAL
(8BBA/4003/09) student of BBA VI semester is in satisfactory manner to warrant its
acceptance as a prerequisite to the dedgree of BBA for which it has been submitted.

(Internal Examiner) (External Examiner)

BONAFIDE CERTIFICATE

This is to certify that the project report “Capableness of SEZs on Promoting Export from
India” is the bonafide work of UJJWAL (8BBA/4003/09) who carried out the project
under my supervision.

Head of the Department Supervisor

TABLE OF CONTENT
Sl NO TOPICS PAGE
NO
1. Objective Of The Study 1

2. Executive Summary 2

3. Introduction 3

4. Research Methodology 5

5. Limitations Of The Study 6

6. Economic Zones 7
• Types of Economic Zones 7
• Regional Distribution of Zones 10
7. Special Economic Zones 11
• History & Evolution of SEZ 14
• International Experiences 15
8. SEZ in India 19

9. Facts about SEZ in India 20

TABLE OF CONTENT
10. Objectives of SEZ 22

11. Genesis & Distinguishing Features 23

12. SEZ Approval Process 27

13. SEZ Act 2005 34

14. Foreign Investment & Finance 38

15. The Key Issues 39

16. Performance Analysis 41

17. Comparative Study – India & China 44

18. Findings 53

19. Suggestion 54

TABLE OF CONTENT
20. Conclusion 55

21. Bibliography 56

22. Annexure 57

A Project Report
on

“Capableness of SEZs
on Promoting Export
from India”

OBJECTIVE OF THE STUDY

1) Effectiveness of SEZs on Promoting Export from India.
2) A Comprehensive Evaluation of Provisions.
3) Comparative Study – India & China
4) Fruits of SEZ for Indian economy.

1

Executive Summary

Special Economic Zones (SEZs) are set to change the entire Indian economic landscape.
They are said to be the engine of the economic growth. With Asian economies competing for
a pie in the international capital flows, tax breaks and hassle-free environment are much
needed to attract investors in the infrastructure and industrial development. The Indian SEZ
Act, announced in May 2005, is a right move in this direction. India is gearing up with the
new act that aims at attracting FDI and domestic investments, to corner benefits of new
business opportunities. The act facilitates single-window clearance, timely disposal of
applications, and tax break for 15 years (instead of the previous 10 years). Learning lessons
from the past failures of SEZs, the government is taking concrete steps to transform current
SEZs into new age Indian factories. Not only are the big industrial houses and real estate
developers taking part, but state government bodies are also a part in the current SEZs wave.
The recent rush to set-up SEZs could fuel the economic growth and provide the cost
advantage to industry in the rapidly changing global market.

SEZs, being islands of opportunity, are offering business opportunity across the sectors. FDI
in SEZs is set to rise rapidly once the development completes. Attractiveness of these SEZs
would depend on products that have low import tariff and high volume products that have a
domestic and international market.

Like anywhere else in the world, the three pillars of the SEZ Act are fiscal incentives,
regulatory freedom, and world-class infrastructure. In the latest SEZ Bill, government has not
talked about the much awaited flexible labor laws. However, state governments have been
granted permission to adopt flexible labor laws, if necessary. If SEZs are to bring desired
benefits to the country, it needs to set-up the right infrastructure. It will help in retaining the
industries, even after the end of tax breaks. Competition is heating up among states to attract
investments into SEZs. Indian SEZs can attract investments from foreign SEZs too. As part
of the de-risking strategies, global textiles and auto component firms could set-up their
facilities in Indian SEZs. Indian SEZs should aim at emulating favorable investment
destinations such as China, Singapore, Malaysia, and Dubai, to pave way for building
competitive advantages gradually.

2

Introduction

Special Economic Zones (SEZs) have been established in many countries as testing grounds
for the implementation of liberal market economy principles. SEZs are viewed as instruments
to enhance the acceptability and the credibility of the transformation policies, to attract
domestic and foreign investment and also for the opening up of the economy. SEZs in India
seek to promote the value addition component in exports, to generate employment as well as
to mobilize foreign exchange.

Special Economic Zones (SEZ) have occupied a center stage in the national
consciousness for the past few months due to the events unfolding in Singur and subsequently
the occurrences in Nandigram (a proposed SEZ). Many economies including India have used
the concept of SEZ in one or the other form to promote exports and boost economic growth.
The Indian experiment began in 1965, complemented by new policies regarding exports, FDI
etc to attract investments and boost exports. Since the implementation of these reforms began
there has been a spate of criticisms from a number of quarters on different aspects of the SEZ
policy. Some of the economic issues raised about the SEZ policy have been improper usage
of arable land, food security, loss of low skilled jobs in agriculture, forestry, and small scale
industries. Despite the opposition the government is determined to go ahead with rapid
creation of new SEZs. At the same time the government also claims to follow a policy of
economic growth that enhances both equity and efficiency. In light of these issues, this paper
tries to analyze some economic facts related to the creation and working of the SEZs in order
to arrive at the ground realities which would help in effective decision making about SEZs.

The concept of SEZs -- Special Economic Zones -- as special engines of rapid
economic prosperity and all round societal development, did spur the flow of FDI and FII
investments into Indian infra structure and manufacture industry. Markets showed growth and
the economy was buoyant. Growth of employment opportunities are growing.

India was one of the first in Asia to recognize the effectiveness of the Export
Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in
1965. With a view to overcome the shortcomings experienced on account of the multiplicity
of controls and clearances; absence of world-class infrastructure, and an unstable fiscal
regime and with a view to attract larger foreign investments in India, the Special Economic

3

Zones (SEZs) Policy was announced in April 2000. This policy intended to make SEZs an
engine for economic growth supported by quality infrastructure complemented by an
attractive fiscal package, both at the Centre and the State level, with the minimum possible
regulations. SEZs in India functioned from 1.11.2000 to 09.02.2006 under the provisions of
the Foreign Trade Policy and fiscal incentives were made effective through the provisions of
relevant statutes.

To instill confidence in investors and signal the Government's commitment to
a stable SEZ policy regime and with a view to impart stability to the SEZ regime thereby
generating greater economic activity and employment through the establishment of SEZs, a
comprehensive draft SEZ Bill prepared after extensive discussions with the stakeholders. A
number of meetings were held in various parts of the country both by the Minister for
Commerce and Industry as well as senior officials for this purpose. The Special Economic
Zones Act, 2005, was passed by Parliament in May, 2005 which received Presidential assent
on the 23rd of June, 2005. The draft SEZ Rules were widely discussed and put on the website
of the Department of Commerce offering suggestions/comments. Around 800 suggestions
were received on the draft rules. After extensive consultations, the SEZ Act, 2005, supported
by SEZ Rules, came into effect on 10th February, 2006, providing for drastic simplification
of procedures and for single window clearance on matters relating to central as well as state
governments. It is expected that this will trigger a large flow of foreign and domestic
investment in SEZs, in infrastructure and productive capacity, leading to generation of
additional economic activity and creation of employment opportunities.

4

RESEARCH METHOLODOGY

Secondary Data:

Any data, which have been gathered earlier for some other purpose, are secondary data in the
hands of researcher. Those data collected first hand, either by the researcher or by
someone else, especially for the purpose of the study is known as primary data.

The data collected for this project has been taken from the secondary source. Sources of
secondary data are:-

 Internet

 Magazines

 Publications

5

LIMITATIONS OF THE STUDY

1) Limited knowledge about operations , as most of the study was done only by secondary
data.

2)Limited exposure to the operations of offices.

3)Non-discloser of their procedures and methods on the way they operate. It was an
observation based study.

4)Limited availability of data by the finance department.

5)Non availability of recent datas.

6

Economic Zones
Countries all over the world create fenced-in, geographically delimited ‘enclaves’ within their
sovereign territories. Such enclaves have become known as ‘zones’ in economic and business
parlances. These zones are distinguished from the rest of the land in the terms of their
specific administrative authority, benefits enjoyed by industries located in them and
availability of better business facilities. Some of the zones are often deliberately conceived as
‘foreign’ territories functioning with a different set of economic laws compared with those
applicable to the rest of the country. Being ‘foreign’ also implies that zones are different
customs areas. Depending upon their specific purposes, benefits offered, economic
regulations and administrative frameworks, the zones are called industrial zones (or estate),
free trade zone (FTZ), export processing zone (EPZ), enterprise zone, special economic zone
(SEZ) or free economic zone (FEZ).

Types of Zones
The different types of economic zones found around the globe are:-

Special Economic Zone (SEZ)
A special economic zone usually covers a distinct administrative region (e.g. province,
municipality) and is more than 100 sq km in size. It can be located anywhere. It is resident
Population.

Objectives – Integrated development, deregulated economic conditions for encouraging
private enterprise.
Incentives – Duty-free imports, lower business taxes compared with other parts of the
country, liberal labour laws and limited foreign exchange controls.
Activities – Multi-purpose, includes all industries and services, domestic sales are permitted
but foreign markets and exports are thrust areas.
Example – China (Shenzhen), India (Surat), Philippines (Subic Bay), Poland (Kotawicka),
Ukraine (Donetsk)

7

Export Processing Zone / Free Trade Zone (EPZ/FTZ)

The export processing zone or free trade zone is an enclave or park, usually less than 200
hectares in size. It is usually located close to seaports and airports.

Objectives – Increasing of manufacturing exports, broader range of products usually includes
light industry and manufacturing.
Incentives – Duty-free imports of imported inputs particularly raw materials and capital
goods, export profits are tax exempted, liberal foreign exchange rules and labour laws.
Activities – Main emphasis on exports with units having minimum export obligations,
restricted sales in domestic markets.
Example – Bangladesh (Chittagong), Jamaica (Kingston), India (Kandla), Kenya (Athi
River)

Industrial Zone

Industrial zone is an enclave or industrial park which can be located anywhere. The size is
usually up to 100 hectares.

Objectives – Industrial development, usually targeted at small and medium manufacturing
enterprises, infrastructure development can also be a priority.
Incentives – Duty-free imports of imported inputs particularly raw materials and capital
goods, export profits are tax exempted, liberal foreign exchange rules and labour laws.
Activities – Producing for domestic market as well as exports.
Example – Bulgaria (Rakovski), Vietnam (Quang Phu), China (Xinzhuang in Shanghai)

Enterprise Zone

Enterprise zone is usually found in inner city areas. It might be an entire city as well.

Objectives – They are meant for urban area renewal (US). But might be for promoting local
area development also through private participation.
Incentives – Duty free imports are not allowed. The main incentives include zoning relief,
reduced local taxes and relief from licensing. However, labour laws are flexible.
Activities – Manufacturing, trading and various other commercial activities.
Example – Japan (Kobe), UK (Tyne Riverside), US.

8

Information Processing Zone

Information processing zone can either be part of a city or part of any other zone.

Objectives – Development of information processing and IT.
Incentives – Duty-free capital goods imports, easy access to telecom and other
communication services and labour laws are flexible.
Activities – Data processing, software development and computer graphics.
Example – IT parks in India. UAE (Dubai Technology, Electronic Commerce and Media
Free Zone)

Financial Services Zone
Financial services zone can be either part of a city or part of any other zone.

Objectives – Developing as a financial hub.
Incentives – Relief from local taxes, Currency laws are liberal and there are no restrictions on
profit repatriation.
Activities – Financial services.
Example – Bahrain, UAE (Dubai), Turkey

Commercial Free Zone
Commercial free zone is usually meant for warehousing and is located close to air/sea ports.
Its size is usually less than 50 hectares.

Objectives – Facilitate exports and imports of goods.
Incentives – Duty-free imports for re-export tax relief on reinvested profits and no restriction
on domestic sales.
Activities – Warehousing, packaging, distribution and transshipment.
Example – Iran (Kish Island), UAE (Dubai – Jabel Ali Free Zone), US (Miami Free Zone)

9

Fee Port / Zone

Free port/zone is an island/province city or even a country. It can be part of a city or more
commonly part of international airports. The areas have resident population.

Objectives – Facilitate export and import.
Incentives – No customs duties, labour laws are very flexible and utilities are deregulated.
Activities – All activities are permitted.
Example – South Korea (Incheon), Japan (Nagasaki), Morocco (Tangier), Mauritius (Port
Louis), Venezuela (Isla Margarita)

Regional Distribution of Zones
Zones abound all over the world in various forms and classification. There are several new
zones coming up in different parts of the world. So, the number of zones at any point of time
keeps changing. During the financial year 2005-2006, the regional distributions of zones were
as follows.

S. No. Region EPZ/FTZ (Nos.) Other Zones (Nos.)
1. North Africa 18 49
2. Sub-Saharan Africa 77 13
3. Indian Ocean 1 3
4. Middle East 41 10
5. Asia (South, East and South-East) 173 631
6. Transition Economies 69 332
7. North America 272 Not Available
8. Central America and Mexico 72 170
9. South America 43 Not Available
10. Caribbean 89 160
11. Pacific 3 13
12. Europe 45 1
TOTAL 903 1382

10

Special Economic Zones
A Special Economic Zone (SEZ) is a geographical region that has economic laws that are
more liberal than a country’s typical economic laws. The category “SEZ” covers a broad
range of more specific zone types, including Free Trade Zones (FTZ), Export Processing
Zones (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Ports, Urban Enterprise Zones
and others. Usually, the goal of a structure is to increase foreign direct investment by foreign
investors, typically an international business or a multinational corporation (MNC).

There is empirical evidence to show the positive influence of SEZs in reducing the gap
between developing and developed countries.
 Objectives, features and benefits offered differ from country-to-country
 Administrative mechanism and Regulatory framework also vary from country-to-
country

In the People’s Republic of China, Special Economic Zones were founded by the central
government under Deng Xiaoping in the early 1980s. The most successful Special Economic
Zone in China, Shenzhen, has developed from a small village into a city with a population
over 10 million within 20 years.

Following the Chinese examples, Special Economic Zones have been established in several
countries, including Brazil, Iran, Jordan, Kazakhstan, Pakistan, the Philippines, Poland,
Republic of Korea, Russia, Ukraine, United Arab Emirates. Currently, Puno, Peru has been
slated to become a “Zone Economica” BY ITS President Alan Garcia.

A single SEZ can contain multiple ‘specific’ zones within its boundaries. The most prominent
examples of this layered are approach are Subic Bay Freeport Zone in the Philippines, the
Aqaba Special Economic Zone Authority in Jordan, Sricity Multi product SEZ and Mundra
SEZ in India and According to the World Bank estimates, as of 2007 there are more than
3000 projects taking place in SEZs in 120 countries.

SEZs have been implemented using a variety of institutional structures across the world
ranging from fully public (government operator, government developer, government
regulator) to fully private (private operator, private developer, public regulator). In many
cases, public sector operators and developers act as quasi-government agencies in that they
have pseudo-corporate institutional structure and have a budgetary autonomy. SEZs are often

11

developed under a public-private partnership arrangement, in which the public sector
provides some level of support (provision of off-site infrastructure, equity investment, soft
loans, bond issues, etc) to enable a private sector developer to obtain a reasonable rate of
return on the project (typically 10-20% depending on risk levels).

Export Processing Zone

A clearly demarcated industrial zone which constitutes a free trade enclave outside a
country's normal customs and trading system where foreign enterprises produce principally
for export and benefit from certain tax and financial incentives
- WEPZA

Foreign Trade Zone (USA)

A designated site licensed by the Foreign-Trade Zones (FTZ) Board at which special customs
procedures may be used. These procedures allow domestic activity involving foreign items to
take place prior to formal customs entry. Duty-free treatment is accorded items that are re-
exported and duty payment is deferred on items sold in the U.S. market
- Dept of Commerce, USG

Special Economic Zone (Poland)

An administratively separate part of Polish territory, in which a more favourable business
climate is created. However, the zones are neither ex-territorial, nor fenced, nor isolated in
any physical way. A SEZ offers preferential tax conditions, as well as special premises on
which entrepreneurs may conduct business activities without being subject to the payment of
income taxes

Special Economic Zone (Philippines)

Selected areas … to be developed into agro-industrial, industrial tourist/recreational,
commercial, banking, investment and financial centers; may contain any or all of the
following: industrial estates (IEs), export processing zones (EPZs), free trade zones, and
tourist/recreational centers
- Philippines SEZ Act, 1995

Types of SEZ

Wide Area Zone
The focus of Wide Area Zone is on scale predominantly in government domain.
 Large zones with a resident population such as Chinese Special Economic Zones or
new cities.
 12 countries have adopted this Wide Area Zone concept (Notably Singapore, Russia,
China and Brazil).

12

Small Area Zone

The focus of small area zone is on private participation.
 Zones that are generally smaller than 1000 Ha. normally surrounded by a fence.
 133 countries have adopted the Small Area Zone Concept.

Industry Specific Zones
The focus of Industry Specific Zones is to create or exploit industry competitiveness.
 Zones that are created to support the needs of a specific industry such as banking,
jewellery, oil and gas, electronics, textiles, tourism, etc. Companies invested in zone
may be located anywhere and receive the benefits.
 17 countries have experimented with Industry Specific Zone Concept (Notably USA,
Taiwan, Japan, Hong Kong, France and Germany)

Performance Specific Zones
 Zones that admit only investors that meet certain performance criteria such as degree
of exports, level of technology, size of investment, etc. Companies can be located
anywhere.
 Only 4 countries have adopted Performance Specific Zone concept (notably Mexico
and Mauritius).

13

History and Evolution of SEZ

1947 Puerto Rico, US seeks to industrialize, via industrial parks focused on
import substitution, attracting investments from the US mainland and
hefty tax breaks.

1960 The world’s first EPZ is set up near Shannon Airport, Ireland – duty
free production zone for high value-added goods.

1965 Asia’s first EPZ created at Kandla.

1966 Kaohsiung, Taiwan designated as for new EPZ.

1980 China’s first Special Economic Zones, Shenzhen, Zhuhai, Shantou and
Xiamenm set up.

1985 Jebel Ali Free Zone, UAE, set up by royal decree on 100 sq km.

2000 India announces its SEZ policy – focus on export promotion.

2005 Passage of India’s SEZ Act.

Today The WEPZA estimates >1000 zones worldwide, across 120 countries,
employing 40 million people.

Puerto Rico

World’s first Special Economic Zone came up in Puerto Rico in 1947.
 In 1947, Puerto Rico, decided to attract firms from the mainland USA to invest
 In 1951, it passed a tax exemption law as an incentive to foreign and mainland
investors
 It also created the Economic Development Administration (Fomento) and the Puerto
Rican Industrial Development Company (PRIDCO) to build infrastructure
 By 1963 it had attracted 480 manufacturing firms to its 30 industrial parks.

Impact of SEZ in Puerto Rico

 Per capita GNP grew over 45 times in 40 years
 Employment grew by 9% per annum for 40 years
 Life expectancy went up from 37 years to 75 years
 Access to higher education went up from 2% to 60% in 40 years

14

More notable examples are
- Shannon, Ireland: 1960
- EPZA, Kaohsiung, Taiwan: 1960s
- Mauritus: 1970s & 1980s
- Singapore
- Mexico: One million jobs in 10 years in “Maquiladoras”
- Korea
- Dubai
- UAE
- And of course, the Chinese success

SEZ – International Experiences

The aim of creating special economic zones (SEZ) is to promote economic development in
depressed regions. SEZ can be used to facilitate the process of attracting modern technologies
into the national economy, promote competitiveness of goods and services, expand exports,
and create new job opportunities.

Creation and Operation of SEZ in the World
SEZ are established through granting privileges to companies investing in particular activities
in specific regions. Investors usually receive custom and tax privileges, rights for simplified
registration and customs procedures, and right for priority use of the SEZ infrastructure.

Commonly, SEZ are divided into the following groups, according to their economic
specialization:

 Free Trade Zones: Such SEZ are established to ensure free goods turnover and
develop customs free trade. These areas are used for storing and primary processing
of imported commodities (packaging, marking, assembling, etc.). Such zones include
both international and free (e.g., Porto Franco) ports.

 Technological Zones: These SEZ include areas where domestic or foreign firms
conducting research and development or innovative activities are concentrated
(techno parks, business incubators).

15

 Service Zones: These SEZ are located in areas with preferential treatment of
companies providing financial or non financial services (zones for banking and
insurance services, offshore, and recreation zones).

 Industrial Zone: These SEZ include areas where customs and tax privileges are
granted to industrial companies producing export or import substituting products.

 Combination Zones: These zones, with broad specialisation, combine the features of
the previous types of SEZ (common in China, Brazil, Eastern European countries, and
CIS).

Goals of SEZ Creation

Economic Goals:

 Enhancement and expansion of foreign economic and foreign trade
activity
 Attraction of foreign and national investments
 Promotion of export of industrial products
 Increasing of competitiveness of national production and its economic
efficiency

Social Goals:
 Creation of new work places and increasing employment
 Training and increasing of qualification of employees

Scientific and Technical Goals:

 Active using of modern foreign and domestic technologies
 Concentration of scientific and technical personnel, including foreign
one, for development of priority sectors

In creating SEZ, governments usually seek to attract foreign investment. One sector of
specialization is chosen in each zone (except for combination zones). Mostly, investments are
channeled into electronics, light, food, and wood processing industries, where output is
oriented at the final consumer and has high added value.

16

In order to evaluate SEZ performance, experts use economic, social, environmental, and other
criteria, particularly:
* ROI
* The amounts of investment attracted
* Production capacity and potential increase in the competitiveness of the products
* Application of high technologies export volumes and changes in its structure
* Level of employment in the region
* Living standards of the population in the region
* Level of environmental pollution in the region.

International experience indicates that SEZ are not always effective. This is mainly caused by
incoherent government policy, namely:
1. Unstable and non transparent legislative regulation of SEZ, resulting in low levels of
investment, corruption, and privilege abuse for money laundering purposes
2. Lack of strict requirements concerning SEZ specialisation, leading to unjustified
expansion of privileges for practically all activities in the zone;
3. Improper planning of SEZ, namely:
a. Poor Selection of SEZ Location – Area with underdeveloped infrastructure,
insufficient amounts of natural and labour resources, or insufficiently large
market. In this case, SEZ is not attractive for investors.
b. Improperly Determined Zone Size – For instance, in China, Malaysia, and
Singapore large areas of SEZ turned to be the main source of industrial
development; however, large zones require enormous initial investment into
developing their infrastructure. Moreover, organization of proper management
in these zones is quite complicated; this factor is very important for countries
establishing SEZ for the first time and having no experience in their
management.

Operation of SEZ can give positive results, if it is properly planned. For example, in China 5
combination zones, 14 open cities, and 10 research and development zones were established.
These zones generate almost 40% of total exports and show an annual industrial production
growth of 70%. In the Philippines, 19 SEZ were introduced (including industrial, export
oriented, tourist recreation, and free trade zones). During 1994–1999, these zones achieved
almost 5.8 times increase in exports, and 2.7 times increase in employment (388,000 jobs).

17

In Mauritius, improper planning was the source of the SEZ not accomplishing its
predetermined objectives. Thus, SEZ performance was poor. In India, the SEZ were given
too many objectives, consequently privileges were extended to almost all activities in the
zones. In Liberia, expenditures on the development of SEZ infrastructure ($15 million)
significantly exceeded the amount of investment attracted ($60 thousand).

18

SEZ in India
India is predicted to become one of the world’s leading economic powers. This poses new
challenges for international firms and others willing to take advantage of India’s
development. It also increases the need for proper knowledge about India’s corporate
environment – its strengths, constraints and the implications for Sweden, Europe and the rest
of the industrialized world.

India’s share of the world’s population is 17 percent, but it accounts for less than two percent
of the global GDP and only one percent of world trade. It lags behind China and other
emerging East Asian economies in key indicators such as per capita income, adult literacy
rates, quality of infrastructure endowment and volume of foreign trade and investment.

However, it must be noted that India’s economy predominantly continues to concentrate on
absorption of existing technology rather than development of new R&D or innovation at the
global knowledge frontier. The country has much to gain from increased absorption of
existing knowledge by promoting economy wide transfer and diffusion of local and
internationally available technology. There is considerable scope for more effective
absorption of existing knowledge by expansion of foreign investments and trade, building
effective capacity among Indian corporations, public education and research institutions
coupled with various forms of collaboration between Indian and foreign partners.

The Indian economy is expected to grow at a rapid rate of 6–10 percent between 2007 and
2012 and beyond. By the year 2032, China will have the world’s largest economy, followed
by the U.S. and India. In terms of purchasing power parity (PPP), even today India’s GDP is
already the third largest in the world after the U.S. and China. While much of the country is
likely to remain poor and industrially backward, other parts have the potential to grow as fast
as China or other East Asian economies.

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Facts about Special Economic Zones in India

Number of Formal 585
approvals
Number of Notified 381 (out of 585)+(7 Central Government+12 State/Private
SEZs (as on 5 SEZs)
October 2011)

No. of Valid In- 39
Principle Approvals
Operational SEZs 143 (Break up: 17 are multi product SEZs, remaining are
(as on 30th June IT/ITES, engineering, electronic hardware, textiles,
2011) biotechnology, gem & jewellery and other sector specific SEZs)
Units approved in 3,245
SEZs (as on 30th
June 2011)
Land for SEZs Notified SEZs Formally Approved (FA) including
notified SEZs
45,897 Hectare 67,066 Hectare
Land is a state subject. Land for SEZs is procured as per the
policy and procedures of the respective State Government.
Investment (as on Incremental Investment Total Investment
30th June 2011)

SEZs Notified under US$ 37.42 billion US$ 37.42 billion
the Act
State/Pvt. SEZs set US$ 1.16 billion US$ 1.49 billion
up before 2006
Central US$ 1.59 billion US$ 2.03 billion
Government SEZs
Total US$ 40.18 billion US$ 40.94 billion

Employment Incremental Employment Total Employment

(as on 30th June
2011)
SEZs Notified under 4,33,876 persons 4,33,876 persons
the Act
State/Pvt. SEZs set 54,718 persons 67,186 persons
up before 2006
Central 91,114 persons 2,13,350persons
Government SEZs
Total 5,79,708 persons 7,14,412 persons

20

History of SEZ in India

The History of SEZs in India suggests that the seeds of the basic concept of Special
Economic Zone (SEZ) were sown in the mid sixties. Further, the History of SEZs in India
suggests that the basic model of the present day Indian Special Economic Zone was
structured with the establishment of the first Export Processing Zone (EPZ) at Kandla in the
year 1965. Several other Export Processing Zones were set up at various parts of India in the
subsequent years. The lack of good Government of India economic policy and inefficient
management soon became the detrimental factors for the success of these Export Processing
Zones. Thus, the performance of these Export Processing Zones of India fell short of
expectations.

The modern day Special Economic Zone came in to existence because the economic reforms
incorporated in the early 1990s did not resulted in the overall growth of the Indian economy.
The SEZ policy of India was devised to act as a catalyst to promote the economic growth
attained in the early 1990. The economic reforms incorporated during the 1990s did not
produce the desired results. The Indian manufacturing sector witnessed a sudden dip in the
overall growth of the industry, during the second-half of 1990s. The History of SEZs in India
suggests that red tape, lengthy administrative procedures, rigid labor laws and poor physical
infrastructural facilities were the main cause of deterioration of Foreign Direct Investments
(FDI) inflow in to India. Further, the Indian markets were not mature enough to facilitate
easy entry of Foreign Institutional Investors (FIIs) in to the Indian economic system.
Furthermore, the legal framework of Indian economy was not strong enough to prevent
misuse of Indian markets by the foreign investors. Thus, the lack of investor friendly
environment in India prevented growth of Indian industry, in spite of implementation of
liberal economic policy by the central government. This resulted in the formation of a much
larger and more efficient form of their predecessors with world-class infrastructural facility.

The History of SEZs in India suggests that the present day Special Economic Zone policies of
India are well complimented by the provisions of the Acts and Rules of Special Economic
Zone. A number of meetings were held across India for the formulation of - 'The Special
Economic Zones Act, 2005', which was subsequently passed by Parliament in May 2005. The
SEZ Act, 2005 and SEZ Rules became effective on and from 10th February 2006. The SEZ

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Act 2005 defines the key role for the State Governments in Export Promotion and creation of
infrastructural facilities. A Single Window SEZ approval mechanism has been facilitated
through a 19 member inter-ministerial SEZ Board of Approval or BOA. And the decision of
the SEZ Board of Approval is binding and final.

India’s Economic Potential and SEZ
With a population of 1.1 billion and a GDP per capita of US$3,400, India is a rising power
that no international company can afford to ignore. In 2005, the International Monetary Fund
(IMF) reported India’s GDP to be US$3.63 trillion in terms of purchasing power parity,
ranking fourth in the world. By some definitions, India’s middle class consists of 300 million
people and its expansion will raise consumption and make economic growth faster and more
sustainable. As is well-known, India has developed a world-class information technology and
business process outsourcing (“BPO”) sector that exports its services globally. Yet for all of
India’s achievements, the country is still wrestling with high poverty and unemployment
rates. India may have excelled in BPO, but when it comes to export manufacturing, India is
the poorer cousin of China. Hence, there is great interest within India to promote the export-
oriented manufacturing sector through Special Economic Zones or SEZs.

Objectives of SEZ
 The primary objective of SEZ is to facilitate exports.

 The secondary objective is to
o Attract export-oriented Foreign Direct Investment
o Transfer of state-of-art technology
o Enable Indian entrepreneurs to operate under international conditions, i.e.,
world class infrastructure facilities

 The tertiary objective includes creation of global industries and practices which would
eventually spill over to the mainland through backward linkages and generation of
employment

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Genesis and Distinguishing Features
The new law is aimed at encouraging public-private partnership to develop world-class
infrastructure and attract private investment (domestic and foreign), boosting economic
growth, exports and employment. Investment of the order of Rs.100, 000 crores over the next
3 years with an employment potential of over 5 lakh is expected from the new SEZs apart
from indirect employment during the construction period of the SEZs. Heavy investments are
expected in sectors like IT, Pharma, Bio-technology, Textiles, Petro-chemicals, Auto-
components, etc.

The SEZ Rules provides the simplification of procedures for development, operation, and
maintenance of the Special Economic Zones and for setting up and conducting business in
SEZs. This includes simplified compliance procedures and documentation with an emphasis
on self certification; single window clearance for setting up of an SEZ, setting up a unit in
SEZs and clearance on matters relating to Central as well as State Governments; no
requirement for providing bank guarantees; contract manufacturing for foreign principals
with option to obtain sub-contracting permission at the initial approval stage; and Import-
Export of all items through personal baggage.

Indian SEZ policy has following distinguishing features:

 The zones are proposed to setup by private sector or by state Govt. in association with
Private sector. Private sector is also invited to develop infrastructure facilities in the
existing SEZs.
 State Governments have a lead role in the setting up of SEZ.
 A framework is being developed by creating special windows under existing rules and
regulations of the Central Govt. and State Govt. for SEZ.

The salient features of the Indian SEZ initiative further include the following points:

 Unlike most of the international instances where zones are primarily developed by
governments, the Indian SEZ policy provides for development of these zones in the
government, private or joint sector. This is meant to offer equal opportunities to both
Indian and international private developers.

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 100 per cent FDI is permitted for all investments in SEZs, except for activities
included in the negative list.
 SEZ units are required to be positive net foreign-exchange earners and are not subject
to any minimum value addition norms or export obligations.
 Goods flowing into the SEZ area from a domestic tariff area (DTA) are treated as
exports, while goods coming from the SEZ into a DTA are treated as imports. In
addition to the duty exemptions, the units in the Indian SEZs do not have to pay any
income tax for the first five years and only pay half their tax liability for the next two.
SEZ developers also enjoy a 10-year “tax holiday”. The size of an SEZ varies
depending on the nature of the SEZ. At least 50 per cent of the area of multi-product
or sector-specific SEZs must be used for export purposes. The rest can include malls,
hotels, educational institutions, etc. Besides providing state-of the-art infrastructure
and access to a large, well-trained and skilled workforce, the SEZ policy also provides
enterprises and developers with a favorable and attractive range of incentives.
 Facilities in the SEZ may retain 100 per cent foreign-exchange receipts inv Exchange
Earners’ Foreign Currency Accounts.
 100 per cent FDI is permitted for SEZ franchisees in providing basic telephone
services in SEZs.
 No cap on foreign investment for small-scale-sector reserved items which are
otherwise restricted.
 Exemption from industrial licensing requirements for items reserved for the small-
scale-industries sector.
 No import license requirements.
 Exemption from customs duties on the import of capital goods, raw materials,
consumables, spares, etc.
 Exemption from Central Excise duties on procurement of capital goods, raw
materials, and consumable spares, etc. from the domestic market.
 No routine examinations by Customs for export and import cargo.
 Facility to realize and repatriate export proceeds within 12 months.
 Profits allowed to be repatriated without any dividend-balancing requirement.
 Exemption from Central Sales Tax and Service Tax.

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Types of SEZ

The Special Economic Zones in India can be categorized into three main types:-

 Sector – Specific SEZ
o Manufacture one or more goods in a particular sector
o Render one or more services in a particular sector

 Multi – Product SEZ
o Manufacture multiple goods in one sector or across multiple sectors
 Trading & Warehousing
o Render two or more services in a sector or multiple sectors

 SEZ in a Port or Airport
o SEZ in an existing port or airport for manufacture of goods falling in two or
more sectors or for trading and warehousing or rendering of services.

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Layout of SEZ

Notified Area of SEZ Processing Area

Entry/Exit FTWZ
Points

IFSC
Non-Processing Area

The whole SEZ Area may be divided into two parts:-

1. Processing Area
2. Non-Processing Area

Processing Area – Processing area is the demarcated area in SEZ where units can be located
for manufacture of goods or rendering of services. Minimum processing area has been
uniformly fixed depending upon the type of SEZ i.e. multiproduct or product specific.

Non – Processing Area – Non-processing area is intended to provide support facilities to
SEZ processing area and may include educational institutions, hospitals, hotels, recreation
and entertainment facilities, residential and business complexes.

Facilities such as Free Trade & Warehousing Zones, International Financial Services Centre
may be approved for establishment within the Processing Area.

Land / built-up space in the processing area to be leased:

 To entrepreneurs holding valid letters of approval, with lease period co-terminus with
LOA
 For facilities for exclusive use of the Units such as canteens, public telephone booths,
first aid centres, crèches, etc.
 To a person desiring to create infrastructure facilities for use by prospective Units

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SEZ Approval Process

Developers and units have different approval processes. Developers have to fill the specific
form for applying and submit it to the state government depending upon the location of the
planned zone. Then, states have a maximum time of 45 days for forwarding the application
with their recommendation to the board. Before giving the recommendation, the states need
to ensure that some key facilities will be available for developers and units in the proposed
zone. The states have to also equip the prospective Development Commissioners of the zone
with powers. And while recommending the states must clarify to the Board whether the area
required by the zone is reserved or ecologically fragile.

However, the developers can also send their proposals directly to the Board. In such cases,
following the Board’s decision to approve the proposal with or without modification, the
developer needs to obtain the state government’s nod within six months. So, either through
the state government or otherwise, the BoA has the final say in deciding the SEZs in the
country.

Within a month of receiving the formal go ahead from the BoA, developers are handed over a
letter of approval (LoA) by the Central Government. The LoA allows developers three years
for carrying out their plans. Armed with the LoA, the developers move ahead for acquiring
land. Such land can be either freehold or leasehold. Following land acquisition, developers
submit to the Central Government evidence of legal right over the land along with other
particulars. They also provide certificated from state governments saying that land is free
from encumbrances. Thereafter, the Central Government notifies the areas as SEZs.
Appointing Development commissioners (DC) for the zones follows immediately, as does the
setting of Approvals Committees for judging the proposals from units keen on moving in the
SEZs.

The main work of the zone begins only after notification. The DC has the responsibility of
demarcating processing and non-processing areas within zones. Operations commence in the
processing zone after demarcation. For building SEZs, developers enjoy exemption from all
possible taxes that businesses in India attract otherwise.

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The Board of Approvals

A Board of Approval (BoA) for granting formal approval to proposals for setting up SEZs
was constituted by the Government of India.

The Board is empowered to carry out the following functions:-
1) Approve, reject or modify proposals for setting up SEZs.
2) Approve authorized operations to be carried out in SEZs.
3) Approve Developers or Units in SEZs for foreign collaborations for developing and
maintaining the Special Economic Zone.
4) Approve, reject or modify proposals for creating infrastructure in SEZs.
5) Grant a license to industries for being set up in SEZs.
6) Suspend approval of a Developer and appoint an Administrator for discharging
functions in an appropriate manner.
7) Dispose of appeals and perform any other functions as may be assigned to it by the
Central Government.

The Board has 19 members. It is chaired by Special Secretary, Department of Commerce,
Ministry of Industry, Government of India. The Director or Deputy Secretary from the same
department or ministry is the Member-Secretary of the Board. Among the others, 14
members are from the Government of India. The other three members include a nominee
from the concerned state government, the concerned development commissioner and a
professor from Indian Institute of Management (IIM) or the Indian Institute of Foreign Trade
(IIFT). The Board can co-opt other members if it feels so.

Beginning from 17th March 2006, till 11th August 2009, the Board has met on 35 occasions
for considering SEZ proposals. The approvals issued by the Board are of two categories. In-
principle approval is granted for one year during which the developer is allowed to obtain
legal rights over the proposed land in which the zone will be set up. During this time,
developers are to take approvals from various statutory authorities in Central, State and local
governments, provide for rehabilitation of displaced persons, satisfy environmental
requirements and mobilize funds for the project. Formal approvals are granted only after
providing documentary evidence of rights over land and satisfying other requirements. The
Board also grants co-developer approvals for building infrastructure facilities in SEZs.

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Authorized Operations in SEZs

The different operations which are authorized in SEZs depend on the nature of SEZ.

IT / ITES, Biotechnology, Gems and Jewellery SEZs

1. Roads with street lighting, signals and signage.
2. Water treatment plant, water supply lines, sewage lines, storm water drains and water
channels of appropriate capacity.
3. Sewage and garbage disposal plant, pipelines and other necessary infrastructure for
sewage and garbage disposal, sewage treatment plants.
4. Distribution network for electricity, gas and petroleum natural gas, including
necessary substations of appropriate capacity, pipeline network, etc.
5. Security offices and police posts at entry, exit and other points within and along the
periphery of the site.
6. Effluent treatment plant, pipelines and other infrastructure for effluent treatment.
7. Office space.
8. Parking including multi-level car parking.
9. Telecom and other communication facilities including Internet connectivity.
10. Rain water harvesting plant.
11. Electricity generation.
12. Air conditioning.
13. Swimming pool.
14. Fire protection system with sprinklers, fire and smoke detectors.
15. Recreational facilities including clubhouse, indoor and outdoor games, gymnasium.
16. Employee welfare facilities like automated teller machines, crèche, medical centres,
etc.
17. Shopping arcade and/ or retail space.
18. Business and / or convention centre.
19. Common data centre with inter-connectivity.
20. Housing or service apartments.
21. Playground.
22. Bus bay.

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23. Food services including cafeteria, food court(s), restaurants, coffee shops, canteens
and catering facilities.
24. Landscaping and water bodies.
25. Clinic and medical centres.
26. Wi Fi and / or Wi Max Services.
27. Drip or micro-irrigation systems.
28. Such other operation(s) specified above from 1 to 27 which the BoA may authorize
from time to time.

Sector Specific SEZs

7. Office space.
12. Swimming pool.
etc.
16. Shopping arcade and/ or retail space, construction of multiplexes.
17. Playground.
18. Bus bay.

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21. Clinic, medical centres and building hospitals.
24. School and / or technical institution and / or educational institution.
25. Rail head
26. Access control and monitoring system.
from time to time.

Multi – Product SEZs

7. Office space.
12. Swimming pool.
etc.

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16. Shopping arcade and/ or retail space, construction of multiplexes.
17. Housing or service apartments and construction of hotels.
29. Playground.
30. Bus bay.
18. Clinic, medical centres and building of hospitals.
21. School and / or technical institution and / or educational institution.
22. Rail head
23. Access control and monitoring system.
from time to time.

Additional activities which are allowed are:-
i. Port.
ii. Airport and / or air cargo complex.
iii. Inland container depot.
iv. Banks.

Land Rules
The minimum land requirement for the SEZ depends upon the nature of the SEZ. The land
rules for different SEZs are:-

Multi-Product SEZ

For a multi-product SEZ, a contiguous area of 1000 ha is the minimum requirement.
However, in the states of Assam, Meghalaya, Nagaland, Arunanchal Pradesh, Mizoram,
Manipur, Tripura, Himachal Pradesh, Uttaranchal, Sikkim, Jammu & Kashmir, Goa and in a
Union territory, it can be 200 ha.

Processing Area – At least 35% of the total area will be earmarked for developing the
processing area. However, this may be relaxed by the Central Government up to 25% if
recommended by the Board of Approvals.

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Sector-Specific / For One or More Services / In a Port or Airport

For a sector-specific / for one or more services / in a port or airport, a contiguous area of 100
ha is required. However,
i. The minimum area will be 10 ha foe electronics hardware and software including IT
enabled services, biotechnology and non-conventional energy sectors (including solar
energy equipments/ cells but excluding non-conventional energy production and
manufacturing) and gems and jewellery.
ii. The minimum area will be 50 ha in Assam, Meghalaya, Nagaland, Arunanchal
Pradesh, Mizoram, Manipur, Tripura, Himachal Pradesh, Uttaranchal, Sikkim, Jammu
& Kashmir, Goa and in a Union territory, unless they belong to specific sectors
mentioned above.
Processing Area
i. For electronic hardware and software, including IT-enabled services, the minimum
built-up processing area will be 1 lakh sq m.
ii. For biotechnology and non-conventional energy sectors, the minimum built up area
will be 40000 sq m.
iii. For gems and jewellery, the minimum built-up processing area will be 50000 sq m.
iv. In Assam, Meghalaya, Nagaland, Arunanchal Pradesh, Mizoram, Manipur, Tripura,
Himachal Pradesh, Uttaranchal, Sikkim, Jammu & Kashmir, Goa and in a Union
territory, at least 50% will be earmarked for processing area unless they figure in
sectors mentioned above.

Free Trade and Warehousing Zone (FTWZ)

For free trade and warehousing zone, the minimum area will be 40 ha. However, a standalone
FTWZ can also be set up as a part of multi-product SEZ, as well as that of a sector-specific
zone with no minimum area requirement. However, the maximum area of such FTWZ will
not be more than 25% of the processing area of the SEZ.

Processing Area – A FTWZ must have a minimum built-up area of 1 lakh sq m. In
standalone FTWZs, at least 50% of the area will be earmarked for processing area.

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Special Economic Zones Act 2005

The policy relating to SEZs was earlier contained in Foreign Trade Policy. However, to give
a long term and stable policy framework with minimal regulation, the SEZ Act was enacted.
In 2005, a comprehensive Special Economic Zones Act 2005 was passed by Parliament in
May 2005. The SEZ Act 2005 and the rules of the SEZ Act came into force from February
10, 2006. Investment of the order of Rs 100,000 crore over the next three years with an
employment potential of over 500,000 was also expected from the new SEZs, apart from
indirect employment during construction period of the SEZs.

The SEZ Act 2005 is mainly divided into 7 different chapters and 3 schedules.

Chapter I Preliminary
Chapter II Establishment of Economic Zone
Chapter III Constitution of Board of Approval
Chapter IV Development Commissioner
Chapter V Single Window Clearance
Chapter VI Special Fiscal Provisions for Special Economic Zones
Chapter VII Special Economic Zone Authority
Chapter VIII Miscellaneous
Schedule I Enactments (See Section 7 and 54)
Schedule II Modifications to Income Tax Act, 1961
Schedule III Amendment to Certain Enactments (See Section 56)

Key Issues
The SEZ Act deals primarily with the following matters:-
* Establishment of the SEZ and the various authorities constituted in this connection.
* Appointment of the Developer, Co-developers and approval for units to be located in
the notified area.
* Exemptions, drawbacks and concessions including exemptions from customs duty (on
goods brought into or exported from the SEZ), excise, service tax, securities
transaction tax, sales tax and income tax.

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* Offshore Banking Unit & International Financial Services Centre. Setting up of
offshore banking units / International Financial Services Centre in SEZs.
* Notified Offences & Civil Suits. A single enforcement agency/officer for certain
notified offences as well as the designation of courts by the state governments for
such offences committed in and for civil suits arising in SEZs.

Salient Features of SEZ Act

The SEZ Rules provide for:
• Single window clearance for setting up of an SEZ;
• Single Window clearance on matters relating to Central as well as State Governments;
• Single window clearance for setting up a unit in a Special Economic Zone;
• Simplified compliance procedures and documentation with an emphasis on self
certification.

Governance
An important feature of the Act is that it provides a comprehensive SEZ policy framework to
satisfy the requirements of all principal stakeholders in an SEZ – the developer and operator,
occupant enterprise, out zone supplier and residents. Earlier, the policy relating to the EPZs/
SEZs was contained in the Foreign Trade Policy while incentives and other facilities offered
to the SEZ developer and units were implemented through various notifications and circulars
issued by the concerned ministries/departments. This system did not give confidence to
investors to commit substantial funds for development of infrastructure and for setting up
units.

Another major feature of the Act is that it claims to provide expeditious and single window
clearance mechanisms. The responsibility for promoting and ensuring orderly development of
SEZs is assigned to the board of approval. It is to be constituted by the central government.
While the central government may suo motu set up a zone, proposals of the state
governments and private developers are to be screened and approved by the board. At the
zone level, approval committees are constituted to approve/reject/modify proposals for
setting up SEZ units.

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In addition, the Development Commissioner (DC) and his/her office is responsible for
exercising administrative control over a zone. The labour commissioner’s powers are also
delegated to the DC. Finally, clause 23 requires that designated courts will be set up by the
state governments to try all suits of a civil nature and notified offences committed in the
SEZs. Affected parties may appeal to high courts against the orders of the designated courts.

Infrastructure

Provisions have been made for:-

1. The establishment of free trade and warehousing zones to create world class trade-
related infrastructure to facilitate import and export of goods aimed at making India a
global trading hub.
2. The setting up of offshore banking units and units in an international financial service
centre in SEZs.
3. The public private participation in infrastructure development.
4. The setting up of a “SEZ authority” in each central government SEZ for developing
new infrastructure and strengthening the existing one.

Fiscal Benefits
Chapter 6 of the SEZ Act of 2005 deals with the special fiscal provisions for SEZs. On the
basis of this chapter, the available benefits are as follows:-

The benefits available to the Developers are:-

 Income tax exemption for ten years (in a block of 15 years) from the date of
commencement of operations. Entire profits from developing SEZs are eligible for tax
concession. The developers have to choose their block period of 10 years.
 Exemption from payment of Minimum Alternate Tax (MAT).
 Developers are exempted from paying taxes on dividend declared out of the current
income.
 Exemption from payment of service tax on taxable services provided to a developer.
 Sales taxes are not charged on sale or purchase of goods (other than newspapers) by
developers.

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 Exemption from customs duty on goods imported by developers for carrying on
authorized operations.
 Exemption from payment of central excise on goods brought from outside the SEZ
(that is Domestic Tariff Area) by developers for authorized operations.
 Drawback or such other benefits on goods brought or services provided from the
Domestic Tariff Area by the developer for authorized operations.

The benefits available to the Units are:-

 Income tax exemption on 100% export profits for the first five years from the date of
commencement of production, 50% of profits for the next five years, and finally,
deduction up to 50% of the ploughed back export profits for another five years.
 Offshore banking units (OBUs) in the SEZs are allowed complete tax holidays. 100%
exemption is permitted for the first five years and 50% for the next five years.
 No taxes are imposed on interest income received by a non-resident on a deposit made
in an OBU situated in an SEZ.
 No taxes are imposed on OBU for interest paid on deposits to non-residents, as well
as on those for borrowings by non-residents.
 Units are exempt from payment of taxes on capital gains during transfer of assets
involved in shifting from urban areas to SEZs. However, such exemption requires that
one year or before, or three years after the transfer
o Machinery/ plant was purchased for operations in SEZ
o Building or land was acquired or constructed in the SEZ
o The original asset was shifted and the establishment was transferred to the
SEZ
o Other expenses as indicated by the Central Government were notified.
 Exemption from paying of service tax.
 Exemption from securities transaction tax (STT) on transaction of taxable securities
entered into by non-residents through the International Financial Services Centre.
 Exemption from customs duty on goods imported by units for authorized operations.
 Exemption from payment of central excise on all goods purchased from the DTA.
 Exemption from payment of sales taxes.

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Foreign Investments & Finance
Attracting FDI is also one of the objectives of the SEZ policy. The background note on
Special Economic Zones in India put up on the departmental Website of the Ministry of
Commerce for SEZs mentions: ‘With a view to overcome the shortcomings experienced on
account of the multiplicity on controls and clearances, absence of world class infrastructure
and an unstable fiscal regime, and with a view to attract larger foreign investments in India,
the Special Economic Zones (SEZ) Policy was announced in April 2000’.

FDI under the ‘automated’ route, that is, the route which does not require foreign investors to
take prior permission for investing in India, is allowed up to 100% for developing SEZs and
FTWZs. The guidelines for FDI in townships, housing and construction-development projects
in India are prescribed in Press Note no. 2 issued by Department of Industrial Policy and
Promotion (DIPP), ministry of Commerce and Industry, Government of India, on 3 March
2005. As a result, the appeal of SEZs has increased that much more for prospective investors.
As far as units in SEZs are concerned, foreign investors are eyeing these needs to apply to the
Development Commissioner of the concerned zone. In most cases, these are likely to qualify
under the automatic approval route, unless they attract compulsory licensing or are
incompatible with the location norms.

On 2nd July 2007, The RBI has come out with clear instructions mentioning that for setting up
branch offices or new units in SEZs, it is not necessary for foreign investors to take prior
permission. In a decision that enables SEZ units to dig into capital markets for mobilizing
resources, they have been permitted to issue equity shares to non-residents against import of
capital goods. On a purely ‘stand alone’ basis these units can enter into contracts in
commodity exchange markets with the objective of hedging against price risks. And
according to regulation 6A of the Foreign Exchange Management Act (FEMA), SEZ units
can open, hold and maintain foreign currency accounts with authorized dealers (AD) of
foreign exchange. There are two main restrictive provisions on the operations of the account.
First, no foreign exchange purchased in India against Rupees can be credited to the account
without the approval of the RBI. Second, the funds will not be lent to any equity resident in
India that is not a unit in SEZ.

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The Key Issues

1. Loss of Livelihoods – Inadequate Employment Opportunities

There has been no Cost-Benefit analysis conducted for SEZ projects or assessment of
economic losses as a result of diversion of agricultural land to non-agricultural purposes and
resultant impacts on local livelihoods.

SEZs will not create employment for local population but will lead to distress migration of
locals since the jobs created will need education and skill levels unreachable for most of the
people. Therefore the communities such as those of the fisher folks, farmers, landless
labourers, women, Dalits and other marginalized will remain untouched by all new
employment opportunities arising out of the SEZs.

2. Increasing Burden on Natural Resources and Environment
The democratic spaces available to the people to voice their dissent or consent to the projects
may not even be applicable to these industries under the available Environmental Clearance
Regulations because of the “Single Window Clearance’ provisions of the SEZ Act (Section
13). There are no provisions for monitoring of the cumulative environmental impacts of all
the units coming under one SEZ.

3. Creating Real Estate Zones

The SEZs are but creation of –‘Real Estate Zones’ to compliment the rich and elite in
country. As per the SEZ Act, only 35% land would be for industrial set up while the
remaining would be for other non-industrial purposes. Rest of the land could be left to
develop recreation centers and housing etc.

4. Revenue Loss due to subsidizing SEZs

The Finance Minister himself has consistently raised the issue of loss of taxes stating that we
will loose almost 1, 00,000 Crore due to tax sops offered to SEZs. (TOI, 25th August 2006).
Under the SEZ Act (Section 26 to 30) and SEZ rules, excessive Tax and Tariff concessions
are being given to companies for a consecutive period of 15 years. This would increase the
burden of taxation on the common people. Once given the status of SEZs private industries

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will simply reap the benefits of all leverages provided by the government, the most critical
being land acquisition in the name of ‘public purpose’. The disproportionate growth as a
result of SEZs will adversely hit the farming sector, small scale industries, manufacturers and
entrepreneurs in the long run.

5. Over Ruling of Local Self Governments

The status of deemed foreign territory to SEZs will encroach upon the rights of the local self
governments like Gram Panchayats’ and will be violation of the 73rd Constitutional
Amendment.
The SEZ Act is taking away this power back to the center and bureaucracy (by creating
‘Board of Approvals’ and ‘Development Commissioner’ and ‘SEZ Authority’, the most
powerful in SEZs), the accountability of whose is not certain.
The fact that the SEZs would have their own regulations, the rights for environmental and
labour related clearances, security arrangements, which actually means that they would be
‘self contained privatized autonomous entities’. This is against the Indian Constitution and
nationhood.

6. Adverse Impact on Labour Conditions

In India 93.2% of total work force still comes under the unorganized sector.
Liberalizing of labour laws under SEZ Act (Section Sec.49) would adversely impact the
social security and livelihoods of this large labour force. This would only worsen the
condition of labour in our country further.

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Performance Analysis

The performance of SEZs is improving a lot as from the past. As Indian SEZ policy has been
introduced in 2001, the potential of SEZs in India is still to be discovered. The exports from
SEZ grew by 16.4% from 2001-2004. In the same period the total exports in India grew by
12.1%.

Trend in Export Performance of SEZs
The export from SEZs in the year 2006-2007 was Rs. 13854 Crore and in the 2007-2008, it
went up to Rs. 18314 crore i.e. it grew at 39%. The most important fact to notice is that the
export from SEZs grew by 381% from 2005-2006 to 2010-2011. Interestingly, in the year
2010-2011, the export went to Rs. 66638 crore from Rs. 34615 in 2006-2007 i.e. it grew at
92% from the previous year.

Year Export (Rs. Crore) Growth Rate(Over Previous Year)

2006-2007 13854 39%

2007-2008 18314 32%

2008-2009 22840 24.7%

2009-2010 34615 52%
2010-2011 66638 92%

41

Contribution of SEZs in Country’s Total Export

In the year 2006 – 2007, the contribution of SEZs in country’s total export was 4.72% and in
the next year, it just increased to 4.88%. The biggest increment was seen in the 2010 – 2011.
In that year the contributions of SEZs were around 10.16%, which shows that the
contributions of SEZs are increasing.

Year Export from SEZs Total Export Contribution of SEZs
(In Rs. Crore) (In Rs. Crore) (%)
2006 – 2007 13854 293366.74 4.72

2007 – 2008 18314 375339.53 4.88

2008 – 2009 22840 456417.86 5.0

2009 – 2010 34615 571779.26 6.05

2010 – 2011 66638 655863.52 10.16

Sector-wise Breakup of Physical Exports from SEZs

Sector Export in 2008-09 Export in 2009-10
(In Rs. Crore) (In Rs. Crore)
Biotech 33.4 159.45
Computer/ Electronic Software 1854.46 3985.26
Electronics Hardware 3846.342 11121.327
Electronics 0.13 518.71
Engineering 1389.17 1651.68
Gems and Jewellery 16068.84 23006.065
Chemicals & Pharmaceuticals 1106.29 1423.05
Handicrafts 6.49 30.33
Plastic and Rubber 393.22 657.66
Leather, Footwear and Sports Good 168.47 237.02

42

Ceramics 22.78 24
Food and Agro Industry 573.08 645.58
Non-Conventional Energy --------- 126.01
Trading and Service --------- 20866.97
Textile and Garments 133.87 1316.61
Tobacco related Products 3.17 18.48
Misc 4701.89 849.48
TOTAL 25358.45 66637.682

Employment Generation

The total direct employment in Special Economic Zones as of 30th June 2011 is 7, 14,412
persons. The total incremental employment generated in SEZs since Feb., 2007 is 5,79,708
persons. 199330 persons is the direct employment in 7 SEZs established by the Central
Government, whereas 48988 persons is the direct employment in private/ state government
SEZs which came into force prior to SEZ Act 2005 and 100885 persons are employed in
notified SEZs.

Private Investment in Special Economic Zones

The total private investment in Special Economic Zones as of 30th June 20010 is Rs. 81093
crore out of which Rs. 77058 crore is the incremental investment since Feb., 2008. The
investment in notified SEZs is Rs. 73348 crore and the investment in private/ state
government SEZs which came into force prior to SEZ Act, 2005 is Rs. 3701.91 crore whereas
Rs. 4043.28 crore is the investment in 7 SEZs established by the Central Government.

43

Comparative study – India and China
SEZs in China
Special Economic Zones (SEZ's) are development zones established by the PRC to encourage
foreign investment in China, bringing much need jobs, technical knowledge, and future tax
revenues in return for significant tax concessions at start-up of the operations and over a
number of years. They are not unlike SEZs in other part of the world.

Current SEZ's are located in:

• Guangdong Province
• Fujian Province
• Hainan Province
• Hunchun
• Pudong Development Zone(Shanghai)

Lessons from China’s SEZs

China’s opening has not been easy. It’s prudent choice of location, careful personnel and
economic arrangements, local reform initiatives and leadership helped ensure the success of
these SEZs. Chinese economic reformers’ key political challenge in setting up SEZs was to
engineer a successful start of reform in localities. They understood that if a major area or SEZ
conducting experimental reforms succeeded, it would encourage other provinces to follow
suit. They also wanted to sum up useful lessons from these experiments. They made careful
location, personnel, and policy arrangements.

First, they picked the provinces and areas with the strongest local political, economic, and
social backings, a premium geographic location and the best external economic links to start
the reform experiment. Between the two provinces that hosted the earliest SEZs, Guangdong
was close to Hong Kong and Fujian to Taiwan. Both provinces had a large number of
families whose relatives lived and worked overseas. These provinces had a long recent
history of foreign economic contact and domestic commerce. Finally, the two provinces,
especially Guangdong, had open-minded local leaders and population who would be
receptive to opening up and commerce.

44

Second, national reformists headed by Deng shrewdly staffed Guangdong with committed
liberals and experienced politicians for distinct purposes. Between late 1978 and late 1980,
Deng sent Xi Zhongxun, an outspoken and liberal veteran, to cleanse the Maoist influence in
Guangdong. As the cleanup mission ended, Deng replaced Xi with the moderate,
consultative, yet politically skilful Ren Zhongyi. Ren stimulated and protected reform
initiatives in Guangdong until 1985.

The Guangdong leaders, with the backing of national reformists, also picked able reformists
to lead the major SEZs. Wu Nansheng, an open-minded provincial party secretary, briefly
served as the leader of Shenzhen SEZ. Liang Xiang, a Guangdong native with high seniority
in the province and strong ties with Premier Zhao, succeeded him. His determined, decisive,
effective and brisk working style proved critical in rapidly transforming Shenzhen from a
rural backwater into a thriving industrial and trading base and a premier laboratory for the
earliest reform in the nation. A bold and liberal leader, Liang Guangda, also headed the
Zhuhai SEZ.

Third, the central government also granted Guangdong and Fujian privileges in economic
reform. Until April 1984 the four SEZs enjoyed the exclusive right to host foreign
enterprises, various preferential treatments for foreign enterprises, and free market prices.
Similarly, SEZs enjoyed a low fiscal remittance rate and unparalleled leeway in reforming
systems of prices, employment, and circulation of goods. These “particularistic concessions”
provided policy space, fiscal incentives, and insurance for reform experiments in the two
provinces.

Fourth, local initiatives helped stimulate local growth in SEZs. As stated, from the early years
on, the Shenzhen authority eagerly attracted talented people by offering high pay and good
welfare. It also wisely used bank loans to rapidly develop urban infrastructure in the largely
rural city. It improved governmental efficiency, reformed political and economic institutions,
and helped foreign investors to make high profits. Through these measures the city attracted
talent, foreign capital, and domestic entrepreneurs to the SEZ, and generated rapid
development.
These clever arrangements helped reforms and the Open Policy to take off in Guangdong and
Shenzhen. In fifteen years, Guangdong became the largest provincial economy, whereas
Shenzhen emerged as the most dynamic metropolis with the highest per capita GDP and the
45

largest foreign trade volume in China. The meteoric rise of Guangdong and Shenzhen
demonstrated to all the other provinces that reform and opening did pay off. This set off their
demands for their own SEZs and reform experiments. Economic reforms thus spread across
the provinces.

The Chinese Communist Party also used its power of appointing officials as a lever to push
forth reforms. In promoting young leaders, Deng favoured those who had a good record of
stimulating reform and generating economic development. As a result, local officials invested
their energy in attracting foreign and domestic investment in order to generate economic and
fiscal growth. The party’s nomenclature was turned into a powerful growth machine.

Institutional Arrangements and Local Initiatives in SEZs
Only proper arrangements could motivate local efforts to promote reform, opening, and
development. National administrative and economic arrangements helped lay an institutional
foundation for the operation and development of SEZs. Given the institutional structure, the
Chinese did a good job of sustaining national institutional linkages with SEZs, while
providing considerable economic incentives and leeway for local authorities to press ahead
with experimentation in local reform and development.

Administrative Arrangements
In September 1979 the Guangdong Party Committee decided to upgrade the administrative
rank of Shenzhen and Zhuhai from counties to cities separately listed in the province’s
economic planning. In November both cities were made municipalities under the direct
jurisdiction of the province (MDJP). In June 1982, the State Council under Zhao’s leadership
created a Special Economic Zones Affairs Office (SEZAO). The office was led by Premier
Zhao and Vice Premier Gu Mu. Hence Shenzhen, along with other SEZs, could communicate
directly with the office while also earning the support of leaders of their home province.

During 1981 and 1982, the government of Shenzhen was downsized and its structure and
organization streamlined. First, oversized bureaucracy was trimmed. By early 1982 the
number of party and governmental officials in the zones was cut by 65 percent and the
number of vice-mayors dropped from seven to three. Second, the SEZ and non-SEZ portion

46

of Shenzhen were clearly distinguished. Third, three new offices responsible for economic
policies in the SEZ were placed under the jurisdiction of the Mayor’s Office: the General
Office of the city government, the SEZ Development Company, and the SEZ Construction
Company. These changes installed the predominant control of the mayor (who was also the
party secretary) over the course of the city’s development. This centralized and efficient
economic decision process in the hand of local leaders paved the way for rapid formation and
operation of the SEZ, which was much needed for the newly established zone in its very early
years.

Economic Arrangements

SEZs enjoyed a number of special policies until April 1984. First, joint ventures and foreign-
owned enterprises were allowed in the SEZs, but needed special approval outside them.
Second, prices and distribution of goods were regulated by the market within the SEZs, but
by central plans outside the zones. Third, SEZs had jurisdiction in approving much larger
investment projects than non-zone localities. Fourth, SEZs enjoyed preferential treatment in
tax and tariff reductions and exemptions. For example, the corporate income tax at the SEZs
was set at a preferential rate of 15 percent, even lower than the 18.5 percent in Hong Kong.
Finally, SEZs were granted preferential fiscal arrangements. For example, according to
national and provincial provisions, Shenzhen did not have to remit revenue to the national
and provincial governments until 1989, nor would the province and Beijing provide
subsidies. Fiscal autonomy generated tremendous fiscal incentives and exerted heavy
pressure for Shenzhen to reform and develops. These privileges enabled investors to enjoy
the lowest corporate income tax rates and tariffs on imports and exports, as well as a freer
play of markets in SEZs. SEZs become the premier place in China for attracting FDI.

Local Initiatives in Shenzhen SEZ
SEZs also undertook initiatives to prepare the zones for operation and for investors. In
Shenzhen, Liang confronted a severe shortage in qualified talent and office floor space. This
was not surprising as the city was largely rural when an area inside the city was designated as
the first SEZ in China. To overcome the problem, Liang promised spacious apartments,
generous wages, and easy urban residency to attract talent. He sent head hunters around the

47

nation to recruit qualified professionals and workers. From 1979 to 1983, the number of
engineers grew from two to 732. Meanwhile, the average age of cadres declined from 43 to
37, and the share of college-educated cadres rose from 8 percent to 21 percent.

Building office space was another top priority for the city. Active recruitment allowed the
number of construction workers to grow from several hundreds to 100,000. Some forty-five
Nationally-known construction firms set up branches in the city. The city also arranged for
20,000 soldiers from the PLA Construction Corps to be demobilized and employed as
construction workers in the city. These measures helped satisfy the thirst for floor space in
the city.

In addition, Shenzhen was short of funds necessary for building streets and urban
infrastructure. The city solved the problem by borrowing bank loans, investing in urban
infrastructure such as roads, power, water, telephone, and sewage in new districts, and
charging rental on land use. It also reinvested earnings and loans in new urban developmental
projects. Within four years, the city accomplished urban development worth 100 million
Yuan with only 18 million Yuan of loans. It built two industrial districts as well as fifty-five
streets of a total length of 100 kilometres.

More importantly, Shenzhen became the experimental zone with the earliest and boldest
economic reforms in the nation. The city carried out the nation’s first price reform in 1981. It
implemented the first labour contract system among all enterprises and public and social
institutions in 1982. In 1983 the Shenzhen SEZ introduced social labour insurance for
employees in labour contracts as well as a wage reform. In 1984, the wage reform also
covered employees of governmental agencies and public institutions. In 1982, the first
foreign bank in China was set up in Shenzhen; in 1985 China’s first foreign exchange
redistribution centre opened there.

Liang also tried to help foreign firms in Shenzhen SEZ reap high profits, thereby attracting
more foreign enterprises to the SEZ. For this aim, the governmental agency reduced taxes and
land use fees, lowered wage standards, and streamlined administrative approval procedures
for foreign enterprises. In the same year a survey of 148 China-foreign joint ventures and
foreign owned enterprises found that 80 percent of them made a profit and that their profit
rate exceeded 20 percent. Liang also tried to expand the level of technology and the scale of
48

production of foreign enterprises. In the first couple of years of the SEZ, the city had only
been able to attract small and medium size foreign businesses, mainly in processing,
assembly, and compensatory trade. A few years later, the city started to attract technology-
and knowledge-intensive foreign businesses. Shenzhen’s investment environment impressed
a manager of a large Hong Kong power station company in 1982 as well as a Japanese
delegation sent by the Japanese prime minister in 1984. As the favourable impression of the
SEZ became known, investors from fifty countries and areas other than Hong Kong also
arrived in Shenzhen.

Success of Shenzhen and Other SEZs

Favourable institutional setups, bold and sound local initiatives, and steadfast support from
local and national leaders thus helped contribute to a rapid improvement in the economic
conditions of SEZs, especially in Shenzhen. The investment in infrastructure in the city grew
from 50 million Yuan in 1979 to 2,760 million Yuan in 1985. Meanwhile, the actual foreign
investment in the city grew from $15 million to $180 million, with over 60 percent of the
total from the SEZ. Shenzhen’s achievement in the early years stands up well against other
export-processing zones (EPZs) in the region. Taiwan’s zones, which were regarded as
among the most successful in the world, rarely saw its foreign investment double on a year-
to-year basis. In contrast, actual foreign investment in Shenzhen grew by eleven fold in five
years. In the first five years, the Bataan DPZ in the Philippines attracted $128.8 million in
foreign investment and the Masan EPZ in South Korea $88.5 million. In its first four years
and by 1982, Shenzhen attracted $234 million.

Driven by miraculously fast expansion of investment, the economy of Shenzhen grew
rapidly. Between 1979 and 1985 the gross value of industrial and agricultural output
(GVIAO) of the city grew fifteen fold from 175 million Yuan to 2,862 million Yuan, and that
of the SEZ by forty-six fold from 50 million Yuan to 2,368 million Yuan. In this period the
SEZ increased its share in the city’s GVIAO from 29 percent to 83 percent. Thus the SEZ had
become the predominant growth engine of Shenzhen’s economy. The rapid development of
Shenzhen continued in the following decades. Each year between 1980 and 2004, the gross
domestic product (GDP) of the city grew by 28 percent and per capita GDP by 14 percent.
This growth, the highest among the Chinese metropolises, was driven by three engines—
investment, as fixed assets grew at 35 percent a year; domestic consumption, as retail sales

49

grew by 30 percent a year; and exports, which grew 38 percent a year. By 2004, the city’s
GDP reached Y342 billion, and its GDP per capita of Y 59,271 was the highest in China. Its
exports amounted to $77.8 billion, the highest among the nation’s cities; and its actual FDI
amounted to $2.4 billion, among the top tiers in the Chinese cities.

Guangdong Province, with three of the four earliest SEZs, was a key base for China’s
opening. In 1985, exports of its three SEZs totalled $970 million, an impressive record given
the negligible amounts prior to the setup of the SEZs. The amount grew to $32.9 billion in
1998. Their share in Guangdong’s total exports increased from 19.4 percent in 1985 to 44
percent in 1997. Exports of Shenzhen grew from $500 million in 1985 to $26.4 billion in
1998, increasing its share in the three SEZs from 51.5 percent to 80.2 percent. Since 1992,
Shenzhen has become the city with the largest exports in China. Actual utilized foreign
investment of the three SEZs totalled $170 million in 1983. It grew to $28.4 billion in 1998.
In this period exports and foreign investment of the three SEZs in Guangdong grew by about
33 fold and 166 fold, respectively.

Among the first four SEZs, Shenzhen has been the most successful. The reasons are as
follows. First, Shenzhen’s location and external trading environment is the most
advantageous. It is located close to Hong Kong and is connected to Hong Kong by rail. Hong
Kong government and business also support close economic linkage with Guangdong. Even
though Xiamen is the closest to Taiwan among all Chinese cities, the Taiwan government
restricts economic integration with the mainland. Second, Shenzhen has the largest area
among the four SEZs—2.5 times as large as the second-largest SEZ (Xiamen), and over 20
times as large as the smallest SEZ (Zhuhai). Third, as described, leaders of Shenzhen made
the best efforts to improve the investment environment and attract FDI.

Over the years, the sectoral composition, technical content, and ownership of foreign
investment in Shenzhen have also changed. In 1981, pledged foreign investment was
predominantly in real estate (40.8 percent of the total), tourism (29.2 percent), and
secondarily industry (16.9 percent). In the following years, investment into manufacturing
soared. By the end of 1991, 80 percent of the cumulative sum of foreign investment contracts
went into manufacturing. In 1996, 86.6 percent of the foreign investment contracts remained
in the secondary sector, and only 12.4 percent went into the tertiary sector. By 2001, the

50

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