Q. India’s SEZ framework has undergone a strategic shift from being purely export-oriented to accommodating domestic industrial needs. Discuss this transition in light of recent policy changes and their potential economic impact. (15 Marks, 250 Words)

Core Demand of the Question

  • Discuss how Trace the evolution of India’s SEZ framework from an export-oriented model to accomodating domestic industrial needs.
  • Examine the recent policy reforms that have facilitated this  transition in the SEZ regime.
  • Evaluate the potential economic implications of this shift for India.

Answer

The Special Economic Zones (SEZ) framework in India has evolved significantly since its inception, originally focusing on export-oriented manufacturing. Recently, it has strategically shifted to also accommodate domestic industrial needs, aiming to boost self-reliance and economic growth through targeted policy reforms and incentives.

Provisions of Special Economic Zones (SEZ) Act 2005

  • Definition and Objectives: Section 2 defines a Special Economic Zone (SEZ), while Section 5 outlines the main objectives including export promotion, foreign investment attraction, employment generation, and infrastructure development.
  • Single-Window Clearance Mechanism : Section 9 establishes the Board of Approval (BoA) for central-level decisions, and Section 15 provides for Approval Committees at zone level for operational clearances, ensuring fast-track approvals.
  • Fiscal Incentives and Tax Benefits: Section 26 grants customs, excise, and service tax exemptions, while Section 10AA of the IT Act offers income tax holidays to SEZ units for a defined period.
  • Governance and Administration: Section 31 provides for setting up of SEZ Authorities to manage each notified zone, while Section 11 empowers the Development Commissioner to oversee day-to-day operations and compliance.

Evolution of India’s SEZ Framework from Export Oriented to supporting Domestic Need

Aspect Export-Oriented SEZ Framework (Before) SEZ Framework Supporting Domestic Needs (Now)
Focus Primarily designed to boost exports by offering tax breaks and duty-free imports for goods destined mainly for foreign markets. Supports both exports and domestic manufacturing, especially in high-tech sectors like semiconductors and electronics.
Domestic Sales SEZ units were not allowed to sell in the Domestic Tariff Area (DTA), restricting domestic market access. Amendment to Rule 18 permits domestic sales by SEZ units after duty payment

Eg. Micron’s SEZ in Gujarat plans to supply chips to domestic industries.

Minimum Land Requirement Under Rule 5 , minimum land area was 50 hectares, limiting participation by smaller manufacturers. Reduced minimum land requirement to 10 hectares, enabling more flexible setups for domestic-focused firms.

Eg. Aequs Group’s SEZ in Hubballi, Karnataka approved on 11.55 hectares for electronics manufacturing.

Land Ownership Rules Required “encumbrance-free” land, barring mortgaged or leased land, slowing approvals and limiting flexibility. Relaxed land encumbrance rules allow use of mortgaged or leased land, accelerating SEZ development.
Investment Focus SEZs acted as “mini-economies” to attract FDI focused on export earnings, with infrastructure geared towards large export clusters. Emphasis on supporting self-reliance (Atmanirbhar Bharat), import substitution, and domestic industrial growth in critical sectors.
Infrastructure Incentives Tailored towards large export manufacturing clusters, often overlooking domestic industrial needs. Infrastructure incentives now accommodate high-tech domestic manufacturing, especially semiconductors and electronics.
Policy Alignment Aligned mainly with export promotion policies, with limited scope for domestic industry support. Aligned with Semicon India Programme (₹76,000 crore) and national initiatives supporting the local semiconductor ecosystem.

 

Potential Economic Implications of the Shift

  • Reduced Import Dependence: Boost in domestic manufacturing will reduce import dependence, strengthening supply chains.
    Eg. India imported electronics worth $30 billion in 2023-24.
  • Increased Foreign Direct Investment: Attraction of foreign direct investment (FDI) due to improved SEZ environment.
  • Job Creation in Skilled Sectors: Job creation in high-skilled sectors like semiconductor design and fabrication.
    Eg. India contributes 20% of global chip design talent; manufacturing expansion will boost employment.
  • Regional Development: Promotion of regional development with SEZs in Karnataka, Gujarat, and other states.
    Eg. Hubballi SEZ in Karnataka supports the local economy with ₹100 crore investment.
  • Technology Transfer and Innovation: Enhanced technology transfer and innovation from global players establishing facilities in India.
  • Surge in Electronics Production: Reforms have significantly improved India’s electronics manufacturing capacity.
    Eg. As per MeitY projections, India’s electronics output is expected to reach $282–500 billion by 2030.
  • Export Growth Momentum: Enhanced SEZ productivity is reflected in rising export volumes.
    Eg. SEZ exports increased from $133 billion in FY 2021–22 to $163.7 billion in FY 2023–24, according to Ministry of Commerce data.
  • MSME & PLI-Driven Growth: The synergy of SEZ flexibility and PLI incentives has stimulated industrial growth and employment.
    Eg. DPIIT data shows ₹5.3 lakh crore in exports and 11 lakh jobs generated through PLI schemes..

India’s strategic shift in the SEZ framework signals a new era of balanced growth, fostering both export competitiveness and domestic industrial strength. With continued reforms and investments, India is poised to become a global hub for advanced manufacturing, driving innovation, job creation, and economic resilience in the coming decade.

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UDAAN PRELIMS WALLAH
Comprehensive coverage with a concise format
Integration of PYQ within the booklet
Designed as per recent trends of Prelims questions
हिंदी में भी उपलब्ध

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