Free Zone Focus: how should India renew its SEZ programme?

The redesign of India's special economic zone (SEZ) regime holds massive possibilities for the country. Free zones in the world create an average 1% of employment, so India, with a population of 1.3 billion people and an unemployment rate of 7.2% (double the rates of China, Mexico and the US), has enormous potential to create 13 million new direct jobs.

India has 234 active SEZs, which employ some 2.1 million people directly and made up about one-third of the country’s $320bn exports in 2018. As many as 84% of SEZ users – about 5000 companies – are involved in making hi-tech products, while others belong to sectors such as jewellery, textiles, food and logistics.

However, the future of India’s SEZ programme now hangs in the balance. The 10-year income tax exemption for SEZ developers ended in 2017 and the income tax exemption for new users based on revenues generated by exports will end on April 2020, because of what is called a ‘sunset clause’.

Additionally, on October 31, 2019 the World Trade Organisation (WTO) ruled against India in a dispute regarding prohibited subsidies, and asked it to withdraw the SEZ income tax exemptions – because they are contingent upon export performance, making them prohibited subsidies, according to WTO regulations. 

Indian policymakers thus have to redesign the SEZ programme and its incentives to make it compliant with international trade regulation, while also fulfilling its potential to increase competitiveness in key sectors and geographies, boost external trade and, ultimately, generate employment. New incentives should be designed that are based on the country's priority sectors, differentiated between regions and aimed at promoting technology-based industries. 

Free zones can also significantly reduce internal logistics costs in India, which today represent about 30% of a product’s value through the creation of dry ports, logistics centres and SEZ ports.

India has a population almost identical in size to China’s, but it exports 10 times less than its Asian neighbour. Even with a recent rise, its exports to the US are one-tenth of China’s, and similar to those of Vietnam, a country whose population is only 8% that of India’s. Therefore, it is essential to reposition India’s SEZ regime as a top political priority – and as the best instrument to boost exports, generate employment and economic enclaves. 

Martín Ibarra Pardo is the chairman of Araújo Ibarra & Asociados, a law firm based in Bogotá. He also serves as vice-president of the World Free Zones Organisation.