Introduction to Economic Zones

“Export else perish “ these are the words of first Prime Minister of India Pt. Jawaharlal Nehru.
India being a continent like country having 30 states, more than 1000 languages and world
second largest man power having diversified natural conditions right from Rain Forests of
Kerala, Ice Mountains of Himalaya, Runn of Kuch to productive land of Bramahaputra has great
potentials of world class export worthy products from various industries like Agriculture,
Engineering, Chemicals, Software’s, Gems and Jewellry, Pharmaceuticals, Bio technology and
many more.

During last fifty years, mostly ours exports have been less than our imports and the balance of
trade been unfavorable. In 1990-1991 India had faced real pressure on the balance of payment.
During this period, exports had stagnated and there was a crisis in foreign reserves which lead to
an emergency situation in India.

Liberalization policy was announced in June 1991. It is the precious gift of Dr Manmohan Singh
to the people of India at a time when the country was in the grip of unprecedented economic
crisis and political turmoil. One of the areas in which this policy focused on was on increasing
India’s export. And the trickle down effect of these reforms has lead to the advent of SEZ

In this age of Globalisation, there is a need for every nation in the world to perform well
economically. With the improvements in science and technology and the raising standards of
living worldwide, ensuring economic development assumes primary importance in the policies
of every nation.

While striving for economic development, every nation takes steps necessary for the
implementation of its ambitious plans. But more often than not, these plans cannot be affected
successfully throughout the nation. There are always shortcomings in these economic plans.
Every nation wants to give its industries ample facilities for efficient production of goods and
services and in order to make them globally competitive in terms of price and quality. Some of
these facilities can be used by all industries throughout the nation. But sometimes, some facilities
cannot be given on account of reasons like the geographical extent and the possibility of misuse.
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For Example: If a country wants to give subsidized power to a specific industry, it cannot do so
throughout the nation as keeping a check on whether the subsidized power is going to the right
people or not is a Herculean task.

Thus, in order to give the industry certain added advantages, the governments of various nations
come up with special schemes and subsidies mostly related to customs duties. These schemes
provide an upward thrust to the nation’s products in the global markets on account of lower
prices / better quality. Such schemes, if implemented directly, are not allowed by the WTO. This
has resulted in many nations coming up with such schemes in an indirect manner. One of the
most popular ones is to set up a special area demarked for the purpose of industrial growth.
Various facilities can be offered in this area without the fear of them being misused and also, no
resistance from WTO (or any other trading partner / nation) is encountered on account of the
scheme not being a national policy, but only limited to a small area demarked for the purpose.
This is where the concept of ‘Economic Zones’ comes in.

Types of Economic Zones

Depending on the facilities provided, the level of government control exercised, the type of
industries allowed in the zone, and the type of activities allowed in the zone, they are classified
into many types by different countries. A few common types are as follows:

• Foreign Trade Zone (FTZ) – These are designated sites where special customs procedures
are applicable. These procedures allow domestic activities involving foreign trade to take
place as if it were outside the nation’s borders, thus relieving them of the Customs of the
land. For Example: Miami Foreign Trade Zone, Florida (USA)
 • Export Processing Zone (EPZ) – These are the most common types of zones. And are
similar to the FTZs of USA in many respects. Established for the purpose of promoting
exports, these zones concentrate on providing the exporters with all facilities of
production in one place and also relax the customs procedures for the foreign trade
activities of the units in the zones. For Example: Noida Export Processing Zone (NEPZ),
Uttar Pradesh (India)

• Free Zone (FZ) – These are the zones in countries mainly like the UAE. Such zones give
total exemption from all taxes and duties levied on profits to the units existing in them,
besides other financial benefits and incentives. For Example: Dubai – Jebel Ali Free
Zone (JAFZ), Dubai (United Arab Emirates)

• Special Economic Zone (SEZ) – These are an extension of the EPZ scheme with added
benefits and fewer bureaucratic hassles. But these zones do not restrict themselves to
export promotion only. They provide all facilities and infrastructure necessary for the
development of the industries in the region. They are normally huge in size and hence are
suitable for mass-production of commodities, which can be sold domestically, as well as
internationally. For Example: Shenzhen Special Economic Zone (Shenzhen SEZ), China

The same zones are also referred to as Free Economic Zones (FEZ) in the Kyrgyz Republic and
as Free Trade Zones in many other Asian countries. Essentially, the core concept of all these
zones is the same; i.e. to treat the designated zone as a foreign territory for the purposes of
customs procedures and to also give them certain added incentives and infrastructure facilities,
which are not available to ordinary units operating within the country.

1.1 A permanent solution for corruption: Special Governance Zone (SGZ)

In the 9th International Anti-Corruption Conference in South Africa held from 10-15
December 1999, Shang Jin Wei, Advisor to the World Bank submitted an action plan for
the establishment of a new concept; the concept of SGZs (Special Governance Zones).

It advocates establishing a special governance zone (SGZ) within a country as an entry

point for an eventual nation-wide anti-corruption program. A SGZ is an enclave within
which comprehensive reforms can take place. It is geographically limited so that any
unpredictable negative consequences can be contained.

According to the plan, reform measures can easily be explored and fine-tuned within
small manageable zones before trying their implementation nationwide. Once
successful, its experience can serve as a model for the rest of the country. The World
Bank (and other international institutions) can play an important role especially at the
initial stage of the program.

The SGZ idea reflects a fundamental belief that the quality of public governance in
many developing and transition economies can be significantly improved and
corruption can be drastically reduced. The proposal is designed to achieve several
objectives: to start the reform program within an area small enough to contain
unpredictable consequences, to experiment and fine-tune various components of the
anti-corruption program in practice, and by the power of example, to build momentum
to implement a nation-wide governance-improving program.
There are a few basic principles for successfully operating a SGZ. First, whenever
possible, a fair market mechanism should be used to allocate resources, to produce
and/or procure public goods, to cut red tape, and to reduce the need for permits and
licenses. This would limit the opportunities for government officials to take bribes (and
to be offered bribes). The reward for civil servants to deliver quality service and not to
take bribes should be raised. At the same time, the penalty for civil servants for poor
performance and for taking bribes should also be raised and fairly applied.
 Genesis of Chinese Special Economic Zones

Chinese Economic Reforms

Historically, China has adopted an inward-looking strategy to its economic development.

Successive Chinese governments thought that the economy could grow purely through self-
reliance. However, there are always limitations to what a country can do by itself, for example
limitations in raw materials, natural resources, technology, etc. These can hold back the growth
of an economy and certainly China's economic growth lagged far behind much of the rest of the
world up to the 1970's.

By contrast, countries like the USA were achieving significant economic growth in this period
because they were practising foreign trade policies, which facilitated free trade. Any shortages in
the domestic economy, for example oil in the USA or Japan, wheat in the Soviet Union or cars in
India could be compensated for by imports. Foreign trade, then, could help to aid economic
growth.

The export trade is also vital. Not only can exports be a means of paying for imports, but they
also help to earn foreign exchange. Since 1979, the Chinese government has recognised the
importance of exports as a means of fostering economic growth. Economic policies and special
incentive programmes have been introduced to increase exports.

Establishment of SEZs
When it decided to reform the national economic setup in 1978, the Chinese government
embarked on a policy of opening to the outside world in a planned way and step-by-step. A
decision was made in 1978 to permit direct foreign investment in several small "special
economic zones" along the coast. Shenzhen, Zhuhai and Shantou in Guangdong Province and
Xiamen in Fujian Province, and the entire province of Hainan were, under this policy, the first
five Special Economic Zones to be established.
The aims of the establishment of the SEZs were to earn foreign exchange, to enhance
employment, to attract foreign investment and to accelerate the introduction of technology and
management expertise. The five SEZs established were Shenzhen, Zhuhai, Shantou in
Guangdong province, Xiamen in Fujian province and Hainan Island. In order to attract foreign
investors and develop foreign trade, the five SEZs offered similar packages of favourable
incentives to foreign firms. One of the most attractive points of these packages was that income
tax was fixed at the rate of 15 per cent, lower than that in other parts of China. Other advantages
given were tax exemptions, land use rights, and banking and finance privileges, which were
available to firms operating outside the SEZs.

Incentives
China lacked the legal infrastructure and knowledge of international practices to make this
prospect attractive for many foreign businesses, however. In later years steps were taken to
expand the number of areas that could accept foreign investment with a minimum of red tape,
and related efforts were made to develop the legal and other infrastructures necessary to make
this work well.

Many other non-financial advantages were provided inside the SEZs. Firms were provided
relatively free-market environments with minimal government intervention. This means that
private and joint-venture enterprises were free to hire their own workers. They were also free to
set wages to reflect market conditions. Bonuses could be awarded to workers for outstanding
performance.

The common threads of these reforms are the search for efficiency and an assumption that
management of the economy by large governmental bureaucracies is unlikely to produce this
result.

Performance
Primarily geared to exporting processed goods, the five special economic zones are foreign-
oriented areas, which integrate science and industry with trade, and benefit from preferential
policies and special managerial systems. They have summed up their rich experiences in
absorbing foreign investment and developing foreign trade for China to open up to the
international market. In recent years, the special economic zones have led the country in
establishing new systems, upgrading industries and opening wider to the outside world, serving
as national models. In 1999, Shenzhen’s new-and high-tech industry became one with best
prospects, and the output value of new-and high-teach products reached 81.98 billion Yuan,
making up 40.5 percent of the city’s total industrial output value and coming out in front in the
country.

China has so far created 124 export-processing zones. Some 18 million were employed in firms
with foreign investment alone, and many millions more in Chinese-owned zone enterprises.
Shenzhen has become a window of the country to the outside world and a platform for reform
measures, along with Xiamen, Zhuhai and Shantou.
2.1 China's '99 Kunming World Horticultural expo was
opened on April 30. This picture shows a scene built by
Shandong Province.
Open Coastal Cities
In the period between 1984-85, China
further opened 14 coastal cities and
three coastal regions to foreign
investment. All of these places provide
tax treatment and other advantages for
the foreign investor. Laws on
contracts, patents, and other matters of
concern to foreign businesses were also passed in an effort to attract international capital to
aid China’s development. The largely bureaucratic nature of China’s economy, however, poses
inherent problems for foreign firms that want to operate in the Chinese environment, and thus the
policies to attract foreign capital have had to evolve continually in the direction of presenting
more incentives for the foreigner to invest in China.
Since 1992, the State Council has opened a number of border cities, and in addition, opened all
the capital cities of inland provinces and autonomous regions. In addition, 15 free trade zones, 32
state-level economic and technological development zones, and 53 new- and high-tech industrial
development zones have been established in large and medium-sized cities. As a result, a multi-
level, multi-channel, omni-directional and diversified pattern of opening, integrating coastal
areas with riverine, border and inland areas has been formed in China. As these open areas adopt
different preferential policies, they play the dual roles of ‘Windows’ (in developing the foreign-
oriented economy, generating foreign exchanges through exporting products and importing
advanced technologies) and of ‘Radiators’ (in accelerating inland economic development).

All these efforts of the Chinese government were fruitful and resulted in the success of the
concept of Special Economic Zones (SEZs). The most prominent amongst the Chinese SEZs is
the Shenzhen SEZ. The growth of SEZs in China has been explained with the example of
Shenzhen SEZ in the following Chapter.

2.3 China's Special Economic Zones gear up for WTO, future

In recent years, the Chinese SEZs have been focusing on improving the
overall economic quality and on developing high-tech industries and other economies
with special features. Compared with other parts of China, the SEZs still hold an edge
in utilizing domestic and overseas resources and markets and in adapting themselves
to international common practices to boost economic development. Experts say that
improving overall economic performance is a necessary choice for the SEZs, as China
will face fiercer competition after its entry into the World Trade Organization. It is the
only way for them to realize modernization.
To hit the goal, analysts say, the SEZs should give national treatment to overseas
investors for more funding while making efforts to open up overseas markets for their
own companies products. By changing the past practice of offering preferential policies
to overseas investors in certain fields, the SEZs have lifted all restrictions for them.
According to officials, the expansion of reform in the SEZs will focus on systematic
innovations, including adjustments in the ownership structure, and transformation of
functions of government departments in accordance with international common
practices.
 ‘Window to the World’ – Shenzhen SEZ

S h e n z h e n – T h e V i l l a g e

O n l y t w e n t y y e a r s
a g o , S h e n z h e n w a s a
s m a l l f i s h i n g v i l l a g e
l o c a t e d i n C h i n a ' s
s o u t h e r n p r o v i n c e o f
G u a n g d o n g . T o d a y ,
a f t e r t w o d e c a d e s o f
r a p i d e c o n o m i c
e x p a n s i o n , t h e c i t y
e n j o y s t h e h i g h e s t
i n c o m e p e r - c a p i t a
a m o n g t h e 3 5 m a j o r
C h i n e s e c i t i e s a t U S $
2 2 5 p e r m o n t h . A t
c l o s e t o U S $ 3 , 0 0 0
p e r y e a r t h e i n c o m e
p e r c a p i t a i s
a p p r o x i m a t e l y f o u r
t i m e s t h e n a t i o n a l
a v e r a g e . T h i s c o a s t a l
c i t y , w h i c h s h a r e s a
b o r d e r w i t h H o n g
K o n g , h a s b e c o m e o n e
o f C h i n a ' s m o s t
p r o s p e r o u s c i t i e s
a v e r a g i n g a n e c o n o m i c
g r o w t h r a t e o f 3 4
p e r c e n t b e t w e e n 1 9 8 0
a n d 1 9 9 8 . N o w t h a t
C h i n a i s b e i n g
a c c e p t e d i n t o t h e
W o r l d T r a d e
O r g a n i z a t i o n ,
S h e n z h e n m a y b e t h e
q u i n t e s s e n t i a l m o d e l
f o r t h e c e n t r a l
g o v e r n m e n t t o f o l l o w
w h e n t a k i n g i t s
n a t i o n , g r i p p e d i n
a u t h o r i t a r i a n r u l e ,
a n d p r e p a r i n g i t t o
o p e r a t e i n a n
i n c r e a s i n g l y o p e n
m a r k e t e n v i r o n m e n t .

F o r m a t i o n o f t h e S E Z

T h e c i t y o f S h e n z h e n
w a s f o u n d e d i n 1 9 7 9
a n d a y e a r l a t e r w a s
e s t a b l i s h e d a s
C h i n a ' s f i r s t s p e c i a l
e c o n o m i c z o n e ( S E Z )
b y C h i n e s e l e a d e r
D e n g X i a o p i n g . T h e
s p e c i a l e c o n o m i c
z o n e s w e r e
i m p l e m e n t e d b y t h e
C o m m u n i s t g o v e r n m e n t
a s a v i r t u a l
l a b o r a t o r y f o r
e x p e r i m e n t a t i o n w i t h
a f r e e m a r k e t
e c o n o m y . T h e S E Z s
o p e r a t e u n d e r a n
e n t i r e l y d i f f e r e n t
e c o n o m i c p r e m i s e t h a n
t h a t o f t h e m a i n l a n d ,
s p e c i f i c a l l y , w i t h a n
e m p h a s i s o n e x p o r t i n g
a n d c r e a t i n g a n
a t t r a c t i v e
e n v i r o n m e n t f o r
f o r e i g n d i r e c t
i n v e s t m e n t t h r o u g h
f a v o r a b l e t a x
i n c e n t i v e s .
I n f l u e n c e o f H o n g K o n g

W h e n t h e S E Z w a s
f i r s t e s t a b l i s h e d , t h e
m a j o r i t y o f t h e n e w
b u s i n e s s e s t h a t
s e t t l e d i n S h e n z h e n
w e r e H o n g K o n g - b a s e d
e n t e r p r i s e s d r a w n t o
t h e z o n e t o t a k e
a d v a n t a g e o f , a m o n g
m a n y o t h e r t h i n g s ,
t h e a b u n d a n c e o f
c h e a p l a b o r a n d t h e
c u s t o m s - f r e e
i n d u s t r i a l
e n v i r o n m e n t . S i n c e
t h i s t i m e , t h e
e c o n o m i c b o r d e r
b e t w e e n S h e n z h e n a n d
H o n g K o n g h a s g r o w n
i n c r e a s i n g l y v a g u e .
H o n g K o n g d o l l a r s
f l o w f r e e l y i n
S h e n z h e n a n d m a n y
r e s i d e n t s o f H o n g
K o n g i n v e s t i n t h e
S h e n z h e n s t o c k
e x c h a n g e .
T h e c u l t u r a l b o r d e r
h a s e r o d e d o v e r t h e
y e a r s a s w e l l . W i t h
t h e p r o x i m i t y t h a t
S h e n z h e n e n j o y s t o
H o n g K o n g , t h e
p o p u l a t i o n i s a b l e t o
p i c k - u p H o n g K o n g
b a s e d r a d i o a n d
t e l e v i s i o n s i g n a l s .
T h o s e i n S h e n z h e n w h o
s p e a k C a n t o n e s e c a n
r e c e i v e n e w s a n d o t h e r
c o n t e n t t h a t i s
r e s t r i c t e d o n t h e
m a i n l a n d . R e s i d e n t s o f
S h e n z h e n a r e
t h e r e f o r e , a b l e t o
p e r c e i v e w o r l d e v e n t s
f r o m a m o r e o b j e c t i v e
p o i n t o f v i e w t h a n t h e
o n e p r e s e n t e d b y t h e
c o m m u n i s t
g o v e r n m e n t ' s n e w s
o u t l e t s . C u r r e n t l y ,
t h e r e a r e a d o z e n o r
m o r e c r o s s i n g v e n u e s
b e t w e e n H o n g K o n g a n d
S h e n z h e n e i t h e r b y
l a n d o r b y s e a .
A c c o r d i n g t o t h e
S h e n z h e n M u n i c i p a l
F o r e i g n I n v e s t m e n t
B u r e a u , a t t h e e n d o f
1 9 9 8 H o n g K o n g w a s
e n g a g e d i n 1 , 0 7 8
p r o j e c t s i n S h e n z h e n
a c c o u n t i n g f o r o v e r 7 8
p e r c e n t o f t h e t o t a l
p r o j e c t s u n d e r t a k e n .
R e m a r k a b l y , T a i w a n w a s
t h e s e c o n d l e a d i n g
p r o j e c t f o r u m w i t h 1 1 9
o r 8 . 5 p e r c e n t o f t h e
t o t a l p r o j e c t s .

T r o u b l e d T i m e s

E v e n w i t h i t s
u n p r e c e d e n t e d t r a c k
r e c o r d f o r g r o w t h ,
t h i n g s h a v e a t t i m e s
b e e n l e s s t h a n
p e r f e c t f o r S h e n z h e n .
I n 1 9 8 0 , S h e n z h e n ' s
a p p e a l a s a S E Z m a d e
i t a n a t t r a c t i v e a r e a
f o r e n t r e p r e n e u r s a n d
f o r t u n e h u n t e r s , b u t
b y 1 9 9 2 , s e v e n t e e n
h u n d r e d s p e c i a l
e c o n o m i c z o n e s h a d
b e e n e s t a b l i s h e d .
O v e r t i m e S h e n z h e n
w a s n o t a s u n i q u e a s
i t h a d o n c e b e e n .
F o r t u n a t e l y , i n t h a t
s a m e y e a r S h e n z h e n
w a s t h e f i r s t C h i n e s e
c i t y t o b e g i v e n
l e g i s l a t i v e a u t h o r i t y
i n t h e w a y o f a
M u n i c i p a l P e o p l e ' s
C o n g r e s s . T o a s m a l l
d e g r e e t h i s g a v e t h e
c i t y a l e v e l o f
c o n t r o l o v e r l o c a l
p o l i c y w h i c h w a s n o t
s e e n a n y w h e r e e l s e .

A d d i t i o n a l l y , t h e f e w
y e a r s l e a d i n g u p t o
t h e r e t u r n o f H o n g
K o n g t o C h i n a c a n b e
d e s c r i b e d a s a t i m e
o f o v e r e x u b e r a n t
e x p e c t a t i o n . T h e
e x t r a o r d i n a r i l y h o t
S h e n z h e n s t o c k m a r k e t
i n 1 9 9 6 g o e s a l o n g
w a y i n i l l u s t r a t i n g
t h i s p o i n t . T h e p e o p l e
o f S h e n z h e n w e r e
u n d e r t h e i m p r e s s i o n
t h a t w h e n H o n g K o n g
r e j o i n e d C h i n a i n t h e
m i d d l e o f 1 9 9 7 , H o n g
K o n g r e s i d e n t s w o u l d
s p i l l i n t o t h e c i t y
b u y i n g u p p r o p e r t y a s
w e l l a s g o o d s a n d
s e r v i c e s f r o m
c o m p a n i e s l i s t e d o n
t h e S h e n z h e n s t o c k
e x c h a n g e . I n v e s t o r s ,
i n c l u d i n g s m a l l
i n d i v i d u a l i n v e s t o r s
w h o l a i d o u t t h e i r
m o d e s t s a v i n g s , b e g a n
p o u r i n g m o n e y i n t o
t h e s t o c k e x c h a n g e .
W h e n t h e t i m e f i n a l l y
c a m e f o r H o n g K o n g t o
r e u n i t e w i t h t h e
m a i n l a n d , t h e
c o n c l u s i o n w a s
a n t i c l i m a c t i c . M a n y o f
t h e a n t i c i p a t e d
b e n e f i t s s i m p l y d i d
n o t o c c u r , a n d w h i l e
s o m e e x p e r i e n c e d
a s s e t a p p r e c i a t i o n
o t h e r s l o s t t h e i r
e n t i r e s a v i n g s .

G o i n g H i - T e c h
T e c h n o l o g i c a l l y ,
S h e n z h e n d i d n o t
m a t u r e a s f a s t a s s o m e
h a d
o r i g i n a l l y

2.2 An exhibition being held in

Shenzhen SEZ to showcase new
technologies
a n t i c i p a t e d . R e c e n t l y ,
t h a t t r e n d h a s c h a n g e d .
T h e g o a l o f m a k i n g
S h e n z h e n o n e o f
C h i n a ' s m o s t p r e v a l e n t
h i g h - t e c h c e n t e r s i s
d e f i n i t e l y b e i n g
r e a l i z e d . T h e
c o m b i n a t i o n o f
f a v o r a b l e e c o n o m i c
p o l i c y , c o u p l e d w i t h a
h i g h l y e d u c a t e d w o r k
f o r c e , e x p l a i n s t h e
p r o g r e s s b e i n g m a d e i n
S h e n z h e n ' s h i g h
t e c h n o l o g y i n d u s t r i e s .
I n 1 9 9 8 n e a r l y a t h i r d
o f a l l C h i n e s e
i n d i v i d u a l s h o l d i n g a
d o c t o r a t e d e g r e e
r e s i d e d i n S h e n z h e n .
A d d i t i o n a l l y , 1 0
p e r c e n t o f a l l
r e s i d e n t s a r e e s t i m a t e d
t o b e c o l l e g e g r a d u a t e s
w h i l e l e s s t h a n h a l f o f
o n e p e r c e n t o f t h e
n a t i o n a l p o p u l a t i o n h a s
o b t a i n e d a c o l l e g e
d e g r e e . I n 1 9 9 8
S h e n z h e n w a s
r e s p o n s i b l e f o r
a p p r o x i m a t e l y h a l f o f
C h i n a ' s i n f o r m a t i o n
t e c h n o l o g y o u t p u t , a n d
t h e I n t e r n e t i n d u s t r y
i s n o w b e g i n n i n g t o
g a i n i n t e r n a t i o n a l
e x p o s u r e . O v e r s e a s
i n v e s t o r s , s u c h a s I D G
a n d P a c i f i c V e n t u r e
C a p i t a l C o . , a r e
s t a r t i n g t o c h a n n e l
m o n e y i n t o t h e
S h e n z h e n I n t e r n e t
i n d u s t r y .

A c c o r d i n g t o a r e l e a s e
f r o m t h e X i n h u a N e w s
A g e n c y i n m i d - M a r c h o f
t h i s y e a r , S h e n z h e n
h a s 1 8 0 , 0 0 0 I n t e r n e t
u s e r s i n t h e c i t y a n d
o v e r 4 0 c o m p a n i e s
o f f e r i n g I n t e r n e t
r e l a t e d s e r v i c e s .
F u r t h e r m o r e , a n
e s t i m a t e d 7 0 p e r c e n t
o f t h e s e I n t e r n e t
u s e r s a r e s a i d t o b e
u s i n g e - c o m m e r c e t o
b u y g o o d s .
A d d i t i o n a l l y , a n
i m p r e s s i v e l i s t o f
m u l t i n a t i o n a l I T
c o r p o r a t i o n s t h a t a r e
i n c r e a s i n g l y b e i n g
d r a w n t o S h e n z h e n
i n c l u d i n g M i c r o s o f t ,
I B M , L u c e n t
T e c h n o l o g i e s , C o m p a q
a n d I n t e l t o n a m e a
f e w .

F u t u r e G r o w t h

T o b e l i e v e t h a t
S h e n z h e n c a n m a i n t a i n
t h i s l e v e l o f
s u s t a i n e d g r o w t h
f o r e v e r w o u l d b e
i r r a t i o n a l . A s t h e
c o s t o f l a b o u r g r o w s
h i g h e r a n d o t h e r
a r e a s o f C h i n a b e g i n
t o a d o p t m o r e m a r k e t -
o r i e n t e d p o l i c i e s ,
b u s i n e s s e s w i l l
u l t i m a t e l y b e g i n
m i g r a t i n g t o o t h e r
p a r t s o f t h i s v a s t
n a t i o n . T h i s
a s s u m p t i o n i s
s u p p o r t e d b y t h e
s h e a r s i z e o f C h i n a
a n d t h e m a g n i t u d e o f
n a t u r a l , a s , w e l l a s
h u m a n r e s o u r c e s t h a t
h a v e r e m a i n e d
u n t a p p e d f o r s o m a n y
y e a r s . T h e o n l y
q u e s t i o n r e m a i n i n g i s
a t w h a t s p e e d w i l l t h e
c e n t r a l g o v e r n m e n t
a l l o w t h i s t o o c c u r .

T h e w e a l t h w i l l
i n e v i t a b l y b e g i n t o
s p r e a d , b u t t h a t d o e s
n o t m e a n S h e n z h e n w i l l
f a d e i n t o C h i n a ' s
b a c k g r o u n d . T h e w e a l t h
g e n e r a t e d i n t h i s c i t y
o v e r t h e l a s t t w e n t y
y e a r s h a s g i v e n r i s e
t o a b u r g e o n i n g
s e r v i c e s e c t o r a n d i s
h o m e t o o n e o f C h i n a ' s
t w o s t o c k m a r k e t s . T h e
c i t y h a s b e c o m e a
r e g i o n a l f i n a n c i a l
c e n t e r . A t t h e e n d o f
1 9 9 9 t h e r e w e r e 1 0 0
f i n a n c i a l i n s t i t u t i o n s
o p e r a t i n g i n S h e n z h e n
e m p l o y i n g a n e s t i m a t e d
3 0 , 0 0 0 p r o f e s s i o n a l s .
A c c o r d i n g t o t h e
S h e n z h e n M u n i c i p a l
F o r e i g n I n v e s t m e n t
B u r e a u , a t t h e e n d o f
1 9 9 9 t h e r e w e r e 7 3 6
p r o j e c t s i n v o l v i n g
f o r e i g n d i r e c t
i n v e s t m e n t i n e x c e s s
o f U S $ 1 0 m i l l i o n p e r
p r o j e c t , 1 0 9 p r o j e c t s
i n v o l v i n g a m o u n t s i n
e x c e s s o f U S $ 3 0
m i l l i o n p e r p r o j e c t
a n d 1 8 p r o j e c t s
c u r r e n t l y u n d e r w a y
i n v o l v i n g o v e r U S $ 1 0 0
m i l l i o n p e r p r o j e c t .

T r a n s p o r t a t i o n I s s u e s
A m a j o r d i l e m m a t h a t
C h i n a , a s w e l l a s i t s
t r a d i n g p a r t n e r s f a c e ,
i s h o w t o e f f e c t i v e l y
a c c e s s a n d d e l i v e r
g o o d s a n d s e r v i c e s t o
a l a r g e p e r c e n t a g e o f
t h e p o p u l a t i o n t h a t i s
g e o g r a p h i c a l l y
i s o l a t e d f r o m t h e
m a j o r e c o n o m i c h u b s i n
C h i n a . S h e n z h e n i s
v e r y i m p o r t a n t i n t h i s
r e s p e c t . O v e r t h e
y e a r s , t h e c i t y h a s
d e v e l o p e d a n a d v a n c e d
i n f r a s t r u c t u r e t h a t i s
n o w w e l l p o i s e d t o
a s s i s t i n a l l e v i a t i n g
t h e b u r d e n t h a t t h i s
p r o b l e m p r e s e n t s . T h e
c i t y p o s s e s s e s 8
h a r b o r s a n d 1 2 c a r g o
d o c k s a n d i s h o m e t o
t h e H u a n g t i a n
I n t e r n a t i o n a l A i r p o r t ,
w h i c h i s t h e f o u r t h
l a r g e s t a i r p o r t i n
C h i n a . A d d i t i o n a l l y ,
b o t h t h e B e i j i n g -
C a n t o n R a i l w a y a n d t h e
B e i j i n g K o w l o o n
R a i l w a y c o n v e r g e i n
S h e n z h e n . T a k e t h e
f a c t t h a t S h e n z h e n
a l r e a d y h a s t h e
i n f r a s t r u c t u r e i n
p l a c e t o b e c o n s i d e r e d
a r e g i o n a l
d i s t r i b u t i o n c e n t e r ,
a n d i t s c o n t i n u o u s
a d v a n c e m e n t i n b o t h
t h e f i n a n c i a l a n d
t e c h n o l o g y s e c t o r s ,
o n e c a n s e e t h a t a s
C h i n a e n t e r s t h e W T O
a n d t h e g l o b a l
e c o n o m y , i t w i l l l o o k
t o S h e n z h e n a s a r o a d
m a p f o r t h e f u t u r e .

Achievements
Already, 48 of the world's 500 top enterprises have taken root in Shenzhen. Coupled
with the rapid development of its export-oriented economy, the city achieved an
export volume worth US$26.4 billion in 1998, amounting to one-seventh of China's
total, topping the list of China's big and medium -sized cities for six consecutive
years. Output value of the city's high and new technology products was worth 65.52
billion Yuan (US$7.89 billion) in 1998, making up 35.4 per cent of the city's total
industrial output.

The International Architecture Association awarded Shenzhen this year, marking the
first urban planning award in China and Asia. Shenzhen's educational, scientific and
cultural undertakings have also achieved one success after another.

Computer hardware, software and phone-related products made up 70 per cent of the
city's total high-tech exports. Asian markets receive 60 per cent of these goods. North
America gets 26 per cent and Europe gets about 10 per cent. And 31 per cent of
Shenzhen's high-tech exports were from State-owned enterprises. Wholly foreign-
funded enterprises shipped out 30 per cent, and joint ventures made 28 per cent of
the exports.

Shenzhen has become one of the world's most important manufacturing bases for high
and new technology, namely electronics. City's encouragement of local enterprises to
update technology and protect their intellectual property rights has sharpened
Shenzhen's competitive edge.
Future of Shenzhen – Next 5 Years

The guideline and goal for the next 5 years is to follow Deng Xiaoping's theory on building
socialism society of Chinese characteristics; take "hold on to the opportunity, deepen the
economic reform, open up further, promote development, and keep stability of the society" as the
guideline. Focus on establishing market economy and mechanism, optimize economic structure,
made the city functional better, build new and high technology industrial development zone,
regional information center, trading center, distribution center, and turn Shenzhen into a modern,
international city.

In more detail, Shenzhen is going to:

1. Expedite the major projects of infrastructure construction. Infrastructure construction is

what a city based upon to exist and develop. In the coming five years, in order to improve
Shenzhen's investment environment, five networks are to be built: public transit network,
water supply network, flood preventive network, power supply network,
telecommunication network.

2. Widen the range of structural adjustment of industry; enhance the quality of economic
growth and economic efficiency. Increase the input and establish production base to
support leading industries. Encourage the merge of production and capital. Adjust
organizational structure; strengthen equity management, quality assurance, and financial
management. Put emphasis on making use of up to date technology. Introduce new
agricultural technology, increase value add and economic efficiency on agricultural
products.

3. Develop the service industry vigorously, perfecting the functionality as an international

city. Developed service industry symbolizes a modern international city. We are to speed
up the development of the service industry, and turn Shenzhen into a financial center,
information center, trading center and distribution center.
Construction of the Regional Financial Centre
Invite more global banks and financial institutions to open office in Shenzhen; Develop offshore
business of domestic banks; broaden the coverage and internationalization of our security
industry, increase the radiation power of Shenzhen's financial institutions.

Construction of Regional Information Centre

As a hub of domestic and international market, Shenzhen boasts the unique advantage
in developing information industry. We are going to strengthen the corporation with
world's leading information service organizations, exploit information sources in
conjunction with these organizations to form a wide connecting, highly efficient
information network.

2.3 China's Special Economic Zones gear up for WTO, future

In recent years, the Chinese SEZs have been focusing on improving the overall economic quality
and on developing high-tech industries and other economies with special features. Compared
with other parts of China, the SEZs still hold an edge in utilizing domestic and overseas
resources and markets and in adapting themselves to international common practices to boost
economic development. Experts say that improving overall economic performance is a
necessary choice for the SEZs, as China will face fiercer competition after its entry into the World
Trade Organization. It is the only way for them to realize modernization.
To hit the goal, analysts say, the SEZs should give national treatment to overseas investors for
more funding while making efforts to open up overseas markets for their own companies
products. By changing the past practice of offering preferential policies to overseas investors in
certain fields, the SEZs have lifted all restrictions for them. According to officials, the expansion
of reform in the SEZs will focus on systematic innovations, including adjustments in the
ownership structure, and transformation of functions of government departments in
accordance with international common practices.
 Impact of SEZs on Chinese Economy
The favourable impact of the SEZs on the economy of China is fivefold:
• They attract foreign investment
• They help the growth of the export industry
• They earn foreign exchange
• They provide employment opportunities
• They help the indigenous economy improve its level of technology
These points are discussed below in detail:
1. Foreign Investment – The preferential treaties of the SEZ's have attracted foreign
investors to invest a huge amount of money in China. For instance, Hainan and Xiamen have
attracted investments mostly from Taiwan. By June 1987, a total foreign investment of $2.12
billion had been made in the five zones, amounting to one quarter of the total foreign investment
in China during this period. The most marked success was registered in Shenzhen. By the end of
1986, it accounted for $1.4 billion through more than 4000 economic cooperation agreements.
One significant factor is that the investment has not been confined to the export industry, but has
permeated other sectors such as infrastructure construction, commerce, tourism and real estate.
2. Growth of Exports – As all five SEZs are coastal cities, they are convenient for ocean
transport routes and help to promote the export industry. Preferential policies have encouraged
foreigners to set up export- oriented factories in the territories. From 1985 to 1987, an annual
average real growth rate of 83% was recorded for exports from the five zones. Shenzhen's
exports, for example, grew at an average rate of 70% during this period. At the same time the
proportion of the SEZs' industrial products that went to export had risen to 53% by 1987.
3. Foreign Exchange – The establishment of the SEZs has opened a way for China to
increase its trade with foreign countries. They not only enhance trading activities such as foreign
investment and tourism but also help China to earn foreign exchange through these activities.
 4. Employment Opportunities – Since the beginning of the open-door policy, small-scale
private businesses have been allowed to coexist with state enterprises. This has increased
employment opportunities for local people and raised the level of economic activity. Also, many
state workers sense that going into business on their own may provide greater income potential.
They generally adopt an attitude commonly known in China as "I Bu Zho Er Bu Shu", which,
loosely translated, means ‘refusing to work and refusing to relax’. Many prefer to work for joint-
venture firms for higher wages. So the average income in SEZs now ranks as the highest in
China.
5. Improvement in Technology – In theory advanced technology and know-how will also
flow into the country as a result of foreign investment. In turn, with increasing exports the force
of international competition may bring greater pressure on Chinese firms to adopt more efficient
work practices. It is perhaps questionable how much benefit the wider Chinese economy has
reaped from these investments. The technology, patents and know-how remain firmly the
property of, and are controlled by the parent companies. It may however be the case that in the
long run the work culture and practices adopted by foreign companies could have some wash-
back effect over wider economic practices in the country.

In conclusion, the establishment of the SEZs has helped to increase the export trade, which in
turn has helped to improve the Chinese economy. Preferential treaties have been offered in the
five SEZs to attract foreign investment. A large amount of foreign investment has occurred not
only in the export trade, but also in infrastructure construction, commerce and tourism. Foreign
companies have been encouraged to set up factories in the territories and the export industry has
grown. Jobs opportunities have been provided for locals as factories need labour and the average
income of the people has increased. In addition, advanced foreign technology has been brought
in with the inflow of foreign investment. All these factors have contributed to the growth of the
Chinese economy. It remains to be seen if these quantitative advances, in which the SEZs have
played an important role, are matched by commensurate advances in the quality of life for the
majority of Chinese people.

3.1 Not all roses - Unwanted byproducts of SEZ developments

About 27 million people, 90 per cent of whom are women, work in export processing
zones worldwide, often earning low wages in poor working conditions, the International
Labour Organisation (ILO) said. The United Nations agency also said that the industrial
zones, which import and process materials before exporting them again, were huge
employment generators but often lacked meaningful links with the domestic economies
around them

Vietnamese example

The rapid socio-economic development in southern Vietnam’s Dong Nai Province

recently has been attributed to its successful Industrial Zones (IZs), which have
resulted in impressive job generation and export figures. More than 80,000 jobs have
been generated by the IZs over the past five years and more than US$2.7 billion in
export revenues has been earned by enterprises operating within them. Total revenues
for the IZs during that period topped $4.7 billion, contributing $176 million to the State
budget, nearly $1 billion in export receipts Throughout the country most of the
projects in the IZs focus on sectors that is expected to provide quick returns on capital
such as motorbike and electronics assembly and other industrial consumer goods.
Little attention has been paid by investors, to key industrial sectors such
as engineering, electronics and chemical production and food processing. Furthermore,
nearly 80 percent of foreign-invested projects use obsolete machinery and equipment,
resulting in products of low competitiveness aimed at domestic consumers, Another
problem was that the occupancy rate of the IZs remains low with only some 41 percent
of the total land area let to investors at present.
Current Scenario

WHILE celebrating the 20th anniversary of China's four earliest Special Economic Zones (SEZs)
on August 26, the cities of Shenzhen, Xiamen, Zhuhai and Shantou, and Hainan Province
mapped out development blueprints for the new century. Analysts believe that by setting the
goals for modernization, the SEZs are still leading other parts of the country in development as
they were 20 years ago.

Two decades ago, local authorities in Shenzhen, encouraged and supported by senior Chinese
leaders including Deng Xiaoping, were determined to blaze a trail for China's reform and
opening-up drive. Shenzhen has then become a window of the country to the outside world and a
platform for reform measures, along with Xiamen, Zhuhai and Shantou.

To ensure successful reform and opening up in the SEZs, China introduced a wide range of
special preferential policies. As the opening-up drive swept other parts of the country, the
preferential policies were applied to more regions. The saying that special economic zones are no
longer special prevails in the country. However, the SEZs have not lost their vitality. And
observers say that the SEZs still shoulder a historical mission today.

In recent years, the SEZs have been focusing on improving the overall economic quality and on
developing high-tech industries and other economies with special features. Compared with other
parts of China, the SEZs still hold an edge in utilizing domestic and overseas resources and
markets and in adapting themselves to international practices to boost economic development.

While fully expanding economic co-operation with multinationals, Shenzhen is tightening ties
with Hong Kong, and Xiamen and Hainan with Taiwan. In Shantou, efforts have been made to
attract overseas Chinese, one of the major channels of overseas investment to the Chinese
mainland.

Experts say that improving overall economic performance is a necessary choice for the SEZs, as
China will face fiercer competition after its entry into the World Trade Organization. It is the
only way for them to realize modernization. To hit the goal, analysts say, the SEZs should give
national treatment to overseas investors for more funding while making efforts to open up
overseas markets for their own companies' products.

By changing the past practice of offering preferential policies to overseas investors in certain
fields, the SEZs have lifted all restrictions for them. According to officials, the expansion of
reform in the SEZs will focus on systematic innovations, including adjustments in the ownership
structure, and transformation of functions of government departments in accordance with
international practices.

The government should also simplify procedures to make it easier to get businesses up and
running and give a bigger role to the market, while improving services, experts say. At the same
time, efforts must be made to improve the social security system and the financing system, and
have intermediary organs operating according to standards.

The forthcoming 50 years will be an important historical period in China's drive to realize
modernization and make the Chinese nation's long-cherished dream of building a powerful China
come true. Experts are confident that Shenzhen, Zhuhai, Shantou, Xiamen, and Hainan will set
the pace in China's drive toward modernization.
 Beginning of Economic Zones in India

The policies of Liberalisation, privatization and globalisation (LPG) that were introduced in
1991 removed the highly complex system of controls prevailing in post-independent India. Now,
in the new market scenario, it became very important to become competitive in terms of price,
but also quality, time, service, etc. India has always paid more attention to its exports, because
they earn revenue. To increase them, the idea of Export Promotion Zones (EPZ) was conceived.
These were areas where import substitution was not followed and all inputs for any
manufacturing process were allowed to be imported freely. Such zones were established to
promote trade and to develop a specific industry by providing it with the entire infrastructure it
needs.

Evolving Concept
This initial concept was called EPZ (Export Processing Zone) and was introduced first in
Kandla, Gujarat. The Indian manufacturer was nowhere in terms of international standards of
either quality or price. So, to make him globally competitive, the government had to provide
some incentives to him. Most of these incentives could be used by almost every producer
everywhere. But, there were special incentives which, when given, could result in a very low
cost of production for the manufacturer and there was a risk then that the goods could then end
up being sold in the domestic market instead of being exported. So, the government established
special zones where people could come in, establish their factories, procure (buy domestically or
import) whatever they would require for production, produce locally and then export these
goods. For such a situation, there needed to be precise control over every importer and all his
actions, which could lead to any harm to national interest. To prevent all this, EPZs were
established, which were land-locked areas, under constant surveillance by the customs
authorities and security personnel of the zone. These zones would regulate all the material
coming into and going out of the zone and thus, keep a check on the manufacturers’ actions.

EPZs worldwide
Thus, EPZs were set up with the aim of boosting export-oriented investment and for eliminating
the constraints imposed by India’s trade and industrial policies. As a concept, EPZ dates back to
1962. Some of the first EPZs were founded in Puerto Rico in 1962, Mexico (1964), Kandla
(1965), Taiwan (1966), South Korea (1971), Philippines and Malaysia (1972). The EPZ set up in
Mauritius is not based on geographical and locational advantages but is more a functional
concept.

Most of these countries have had a good and fulfilling experience by setting up EPZs. EPZs have
helped promote an export-oriented industrialization strategy with increasing value-additions in
domestic production. Studies have shown that countries where EPZs function have had excellent
performances on the trade front.

Of the 850 EPZs worldwide, a large number of them operate in developing countries. The world
over, it has been observed that processing exports have outperformed others. In fact, most Asian
and Latin American countries have excelled in trade only due to the processing trade.

The Government of India had established seven EPZs over a period of time. These were:
1. Kandla Free Trade Zone (KAFTZ), Kandla, Gujarat – 1965;
2. Santa Cruz Electronic Export Processing Zone (SEEPZ), S. Cruz, Maharashtra – 1974;
3. Cochin Export Processing Zone (CEPZ), Cochin, Kerala;
4. Falta Export Processing Zone (FEPZ), Falta, West Bengal – 1984;
5. Madras Export Processing Zone (MEPZ), Madras, Tamil Nadu;
6. Noida Export Processing Zone (NEPZ), Noida, Uttar Pradesh – 1985;
7. Visakhapatnam Export Processing Zone (VEPZ), Visakhapatnam, Andhra Pradesh.
Kandla was the only Free Trade Zone in India and was the first zone to be established in India.

While the Santa Cruz Electronics Export Processing Zone (SEEPZ) was meant exclusively for
the exports of electronics and gems and jewellery, all other zones were multi-product zones.
100% foreign equity was welcome in EOUs and EPZs.
 Shortcomings & Problems of EPZs

According to an Audit Report conducted on EPZs and FTZs in 1999, SEEPZ earned only US$
1.25 bn. net foreign exchange in the past 8 years.

The reasons for this were attributed to the following causes:

• Failure to elicit full commitment from people as they stay far away from their place of
work.

• Insufficient comprehensive and well-knitted internal and backup infrastructure.

• High dependence on outside infrastructure created and maintained by different agencies

lacking co-ordination. The result: under achievement of actual potential.

• Limited possibility of improving connecting infrastructure to enhance the performance of

existing EPZ/FTZ.

For example:
On 12th March 1994, a memorandum was submitted to Shri Zafar Saifullah, Cabinet Secretary,
Government of India regarding the problems of EPZs and EOUs. The Development
Commissioner, SEEPZ, Santacruz Electronics Export Manufacturers’ Association (SEEMA), and
the SEEPZ Gems & Jewellery Manufacturers’ Association, SEEPZ submitted this memorandum
in association with the Federation of Indian Export Processing Zones Industries Association.

5.1 The above graph shows that the EPZs never really contributed a
substantial amount in the national exports. Also, the share of EPZ unit
exports in total exports was more or less at the same ratio over the 3 years
from 96-97 to 98-99.
The main problems highlighted in this report were:

• Inconsistencies in government regulations – The Import Trade Control and Exchange

Control Regulations have changed over time to benefit EPZ units, but the customs
regulations were still governed by the notification issued at the time of formation of
the zones. This resulted in a situation wherein certain activities permitted by the
EXIM policy could not be undertaken, as the same were not permitted by the customs
regulations.

• Customs working & procedures – The units in the zone were allowed to work 7 days
a week to maximize exports, but the Customs department worked only 5 days a week,
resulting in the units having to wait for 2 days to get clearance for their activities.
Also, there was still a lot of red-tapism left while dealing with issues like returning of
export goods, return of rejected components, de-bonding of capital equipment, waste
disposal

• Modes of transportation – Courier was not recognised as an approved mode of

transportation and hence any goods received by courier had to be notified and duty
had to be paid on them.

Also, there were problems with the formation of Trade Unions, multiplicity of bonds, fax copies
not accepted by customs, hassles in sub-contracting, DTA sales regulations, etc. These, and many
other such trivial matters were barriers in the proper working of the units in the zones. Over a
period of time, some of these hassles were done away with. But there was never a situation when
the units in the zones were really satisfied with the procedures.

The experience of Export Processing Zones (EPZs), which were duty-free enclaves, has not been
up to expectations. Even with flexibility to sell 50 per cent of exports in DTA at concessional
rates of duties, most EPZ units have failed. The eight EPZs together contributed barely 3.7 per
cent of the country’s total exports.

In fact, other than Santacruz Electronic EPZ, the other seven EPZs together contributed to only
about 1.41 per cent of the country’s exports. There is a very strong view in the revenue
department that the dismal performance of the EPZ units does not justify the revenue sacrifice or
revenue leakage inherent in the schemes. In their eyes, the EPZs have failed.

These shortcomings were responsible for the recent makeover of these EPZs into SEZs. The
transition process is covered in the next Chapter.

5.2 Customs probe Bharat Shah's export units for diamond smuggling

In January 2001, SEEPZ customs conducted a stock taking of two units from Jan 31,
2000. B V Star and B V Jewels (both owned by Bharat Shah) were probed for
suspected diamond smuggling. The following was found:
• Diamonds worth 26.29 cr (73730 cts) of B V Jewels were found short,
allegedly were smuggled out of SEEPZ. Customs duty demanded, therefore, is
Rs 12.54 cr
• B V Jewels had also suppressed the facts of disposal of capital goods
worth Rs 58.34 lakh to one SB &T International Ltd, SEEPZ, without permission
of customs. The customs duty foregone was Rs 39.31 lakh. That is how the
total duty demanded is Rs 12.94 cr
• Suresh Mehta, a partner in both companies, had shown possession of 23
diamonds of 27.42 cts, valued at Rs 39.63 lakh, for which he could not show
legal import documents.
• B V Jewels exported diamonds worth Rs 27 cr studded in jewellery,
between 1998 and Feb 2000, but could not show how they had procured these.
• Further, another unaccounted lot of diamonds of B V Jewels weighing
10631.39 cts and valued at Rs 4.03 cr, were found without corresponding
documents to show legal possession.
• In the case of B V Star, which had no production since 1997, customs duty
of Rs 2.57 cr is demanded because of shortage of 8604.5 gms of gold and
844.16 cts of diamonds revealed in the stock taking.
 Change to SEZs

EXIM Policy changes

Realising the failures and shortcomings of the EPZ Scheme in India, the Commerce Ministry
decided to improve the existing situation. The changes and fine-tuning done in the existing EPZs
was to no avail and was not yielding the required results. An Indian delegation headed by the
then Director-General of Foreign Trade, Mr. N.L. Lakhanpal visited UAE and saw the Jebel Ali
Free Zone (JAFZ), Dubai and Fujairah Free Zone (FFZ) there. This was the birth of the idea of
having similar zones in India.

Toying with the idea of Free Trade Zones / Free Zones

After the delegation came back, it submitted a report on the findings of the visit. The report
recommended that the Development Commissioners of each zone (in India) should be vested
with all the authority regarding their respective zones, thus making them the ultimate local
authority on all issues, as is the case in UAE. Also, like their UAE counterparts, the Indian DCs
should be required to prepare a Business Guide. The report also stated that the Free Zones in
UAE accounted for all duty-free raw material, ensuring it was used for export. Even in the case
of DTA, they would ensure that it was after payment of full customs duty on the value of the
finished goods. The commerce ministry then decided to convert all existing EPZs into FTZs with
SEEPZ, Noida and Kandla being converted that year, and the rest to follow.

Reducing role of Customs

According to the proposed policy, the role of customs was to reduce and the new zones would be
exempt from all customs department rules and regulations from July 1, 1999. After the proposed
conversion of the units to FTZs, the role of the customs department officials was to be confined
to working outside the units, giving them total operational flexibility, as proposed in the revised
export and import policy (1997-2002). The FTZs would have been outside the customs ambit
with checks only at the entry and exit points by customs officers.
Under the new scheme, FTZs would be permitted to sell 50 per cent of their production in the
DTA, subject to payment full customs duties. This means the remaining half alone needed to be
exported. But, according to ministry officials, for their own survival, the units would have to find
markets for their entire production, as DTA sale will prove rather prohibitive.

The Indian labour laws ere to apply to FTZs though the commerce ministry's ultimate objective
is to make these inapplicable. The practice the world over is to exempt FTZs from the purview of
labour laws.

Arrival of SEZs
The plans for the FTZs got shelved eventually. Mr. Murasoli Maran, the Minister for Commerce
& Industry, suggested the setting up of Special Economic Zones in India, similar to the ones in
China. This decision to set up SEZs was the highlight of the EXIM Policy.

The decision was commendable, but it did not take into account several things. The initial
proposed SEZ Scheme was not a major improvement over the existing EPZ Scheme at that time.
Basically, almost all the features of the original SEZ Scheme already existed in the form of
incentives available to EPZ units. The major advantage for SEZ units was that they had to
now achieve only positive net foreign exchange earning as a percentage of exports (NFEP),
where as EOU/EPZ units with investment of less than Rs 5 crore in plant and machinery
had to achieve minimum stipulated NFEP.

Inadequate extra facilities over EPZs

The relaxation for SEZ units was significant but not sufficient enough to sway the decision of the
entrepreneurs in favour of setting up units in SEZ. The major advantage for EOU/EPZ units was
that they could sell upto 50 per cent of their exports in the DTA at half the rates of customs
duties, whereas SEZ manufactures could sell in DTA only on payment of full duties. DTA sale
was a very important option for EOU/EPZ/SEZ units, as the international markets are not always
booming or lucrative.
Trading units in SEZ/EPZ were not allowed to sell in DTA. Ideally, so long as the trading unit
paid full import duties on DTA sales, there should have been no restrictions.

Unmet expectations
The commerce minister had announced that the EPZ at SEEPZ, Kandla, Cochin and
Viskhapatnam would be converted to SEZ. The transitional arrangements for existing EPZ units
who did not want to opt for SEZ scheme was that they had to convert into EOU or de-bond. In
either case, they had to move out of EPZ, which was difficult for existing units.

The industry felt that the government needed to make SEZs an attractive destination for
entrepreneurs. The most oft-repeated request was that the government should treat SEZ as
foreign territory for all purposes. There was also a feeling that the supplies from DTA to SEZ
must be treated as physical exports and that all the customs notifications should apply to sales
from SEZ to DTA as they apply to physical imports.

Amendments
The existing EPZs were converted to SEZs and activated on 1 st November 2000. Also, proposals
for the establishment of new SEZs were cleared. This was followed by some notifications being
issued which made the necessary changes in the SEZ Scheme. The most prominent among them
was the declaration of SEZs as foreign territory. The Finance Ministry declared the area under
the SEZs as `foreign territory' for the purpose of duties and taxes. This means that goods
supplied to the SEZ from the Domestic Tariff Area (DTA) will be treated as `deemed' exports and
goods brought from the SEZ to the DTA will be treated as `imported' goods. Thus, was evolved,
the present concept of SEZs in India.
Present SEZ Concept

The facilities available to SEZ units are as follows:

Customs related:
• No license required for import.
• Exemption from custom duty on import of capital goods, raw materials, consumables etc.
• Exemption from Central Excise Duty on procurement of capital goods, raw materials etc.
from the domestic market.
• Exemption from Custom/Excise duty on import/domestic procurement of goods for
setting up of units in the Zone
• Supplies from DTA to SEZ will be treated as deemed exports.
• Reimbursement of Central Sale Tax (CST) on inter-State purchases.
• Reimbursement of duty paid on Furnace oil as per Drawback rate notified by DGFT.
• SEZ units have to be a net foreign exchange earner. No pre-determined foreign exchange
earning or minimum performance requirement.
• Access to domestic market.
• Simplified Custom procedure.
• Trading activity for exports permitted.
• Fast track clearance of imports and exports.
• Job working/sub-contracting facilities for exports, including for jewellery units.
• Facility to subcontract part of production abroad
• In-house Custom clearance.
• Ready infrastructure.
• Duty free goods to be utilized within the approval period of 5 years.
• Performance of units to be monitored by a committee consisting of Development
Commissioner and Customs.
 • No separate documentation required under Customs and EXIM Policy.
• Export defective goods etc. without GR waiver

Investment related:
• 100% FDI permissible for units in SEZs in manufacturing sector barring few sectors.
• No Cap on foreign investment for SSI reserved items.
• Exemption from industrial licensing requirement for items reserved for SSI sector.
Foreign exchange related:
• Profits allowed to be repatriated freely without any dividend-balancing requirement.
• 100% of foreign exchange earnings can be retained in EEFC account.
• External commercial borrowing shall be subject to usual procedure.
• Facility to realize and repatriate Export proceeds within 12 months.
Tax related:
• Attractive tax holiday upto 2010 as per Section 10A of the Income Tax Act.
Labour Laws:
The labour laws of the land will apply to all units inside the Zone. However, the respective State
Governments may declare units within the SEZ as public utilities and may delegate the powers
of the Labour Commissioner to the Development Commissioner of the SEZ.

Role of State Governments

State Governments will have a very important role to play in the establishment of SEZ.
Representative of the State Government, who is a member of the Inter-Ministerial Committee on
private SEZ, is consulted while considering the proposal. Before recommending any proposals to
the Ministry of Commerce & Industry (Department of Commerce), the States must satisfy
themselves that they are in a position to supply basic inputs like water, electricity, etc.

Terms and Conditions for establishment

• Only units approved under SEZ scheme would be permitted to be located in SEZ.
 • The SEZ units shall abide by local laws, rules, regulations or bye-laws in regard to area
planning, sewerage disposal, pollution control and the like. They shall also comply with
industrial and labour laws as may be locally applicable.
• The SEZ should have an area preferably of 1000 hectares.
• Such SEZ shall make security arrangement to fulfill all the requirements of the laws,
rules and procedure applicable to such SEZ.
• Wherever the SEZs are landlocked, an Inland Container Depot (ICD) will be an integral
part of SEZs.
The main differences between the EPZ and SEZ Schemes are:

• No minimum Export Performance (EP) or Net Foreign Exchange earnings as Percentage

of exports (NFEP) is needed in an SEZ, as for EPZ units.

• Monitoring of performance of SEZ units by a Committee headed by Development

Commissioner and consisting of Customs.

• Duty to be recovered in case of failure to achieve positive NFEP under Custom Act in
proportion to shortfall unlike in EPZ.

• Unlimited DTA sales on full duty. For EPZ, only 50% of exports

• No linkage with positive NFEP for domestic sale for SEZ units. In EPZ sales are subject
to achievement of NFEP.

• Duty free material to be utilized over five years unlike in EPZ where it is one year.

• Subcontracting facility available to SEZ jewellery units, which is not available to EPZ
units.

• All imports on self-certification, unlike in EPZ, where attestation of Development

Commissioner is required for import of Capital Goods.

• No routine examinations by Customs of export and import cargo in SEZ.

• 100% FDI through Automatic Route available to manufacturing SEZ units. In EPZ, FIPB
approval required.

• Procedural simplification for operations like record keeping, inter-unit transfer,

subcontracting, disposal of obsolete material, waste and scrap.
 • Other facilities like tax holiday, retention of 70% of export earnings in EEFC Account,
etc. are common for both EPZ and SEZ.

Salient features and schemes of an SEZ in India

• Units set up in SEZs which will operate under a single purpose bond, can import or
procure goods from the DTA duty-free for manufacture of goods and services, trading,
production, processing, assembling etc and exports thereof.

• Goods can be sold in the DTA only if the unit achieves the Net Foreign exchange Earning
as a Percentage of exports (NFEP) annually and cumulatively as specified in the EXIM
Policy. A trading unit has to achieve a turnover of $1 million in five years. Penal action
can be taken on default.

• DTA sales are, however, banned for goods that have been imported both as scrap as well
as for repair. Trading units in the SEZs also cannot sell goods in the DTA.

• SEZ units can import and export through port, airport, land customs station, ICD, CFS,
courier mode and post parcel. Software development units can import and export through
data communication and telecommunication links.

• The norms for procurement of goods from domestic sources by SEZ units will be the
same as those laid down for the EPZ units. In respect of imported and domestically
procured cargo, goods will be assessed on the basis of documents provided by the units
and there will be no physical examination. However, customs authorities may examine
such cargo when there is specific information regarding clandestine removal.

• Exports will be permitted on the basis of self-certification by the units and there will be
no routine examination of the consignment by the SEZ custom authorities. At the
 gateway port, the SEZ cargo will be subject to the examination procedure as per
instructions in force.

• SEZ units will have to maintain financial year-wise accounts of all forex inflow by way
of exports and other receipts; all forex outflow on account of payment of dividend,
royalty, fees etc and sale in the DTA. Units can also undertake job work for the DTA
without payment of duty. Provisions have also been made for temporary removal of
goods into the DTA and to other SEZ, STP, and EOU zones. Inter-unit transfer of goods
amongst SEZs will not be subject to customs scrutiny. Duty remission will be available
on destruction of goods within the SEZs. Units have also been permitted to dispose
obsolete goods on payment of the applicable customs duties.

• In case of imports, the Bill of Entry with specially stamped endorsement as "SEZ Cargo"
is filed with the Assistant Commissioner/Deputy Commissioner of Customs in the SEZ
for assessment. For procurement of goods from domestic sources by SEZ units, CT-3
certificates are issued to the units and against such CT-3; the goods including capital
goods are procured from DTA without payment of duty. In both cases, i.e. both in respect
of imported and domestically procured cargo, the goods are assessed on the basis of
documents furnished by the units. Goods are not examined physically and ‘out-of-charge’
is given after verifying the marks and numbers on the packages only.

• When the import consignments are required to be transshipped to a SEZ located at a

station away from the place of import, the same is allowed under normal transit
procedure. The unit files the Bill of Entry with the Assistant Commissioner/ Deputy
Commissioner of Customs in-charge of the SEZ on the basis of the transit document.

• In case of exports, the Shipping Bill along with relevant documents is filed with the
Customs authorities in the Zone. As in the case of imports, the SEZ export cargo is not
examined in routine and export is allowed on the basis of self-certification by the units.
The units, after self-examination of the consignments, are required to submit the shipping
bills to the Assistant Commissioner/Deputy Commissioner of Customs for "let export"
 order. After obtaining the "let export" endorsement on the shipping bill, the consignment
is taken to the gateway port for export. At the gateway port also, the SEZ export
consignment is not examined in routine. However, whether at the Zone or at gateway port
or during transit of such cargo, the Customs authorities can examine the consignments
when there is a specific information/intelligence. For this purpose, the orders of the
Assistant Commissioner/Deputy Commissioner of Customs are required to be obtained.

• Sub-contracting: The SEZ units are allowed to sub-contract part of the production
process abroad. Approval for sub-contracting abroad is accorded by the Board of
Approval. The goods sent for job-work abroad are to be returned to the unit for final
processing/manufacturing before exports. The unit is required to execute a suitable bond
for sub-contracting goods abroad and is required to account for the goods including
waste/rejects in the manner as prescribed by the Commissioner of Customs/ Central
Excise in this behalf.
The SEZ units are also allowed to undertake job-work for export on behalf of DTA units.
This is subject to the condition that the finished goods are exported directly from SEZ
units and export documents are made in the name of the DTA unit. On export of such
goods manufactured by SEZ unit on behalf of the DTA unit, the DTA unit is entitled to
refund of duty paid on the inputs by way of brand rate of duty drawback.
The SEZ units are allowed to remove the moulds, jigs, tool, fixtures, tackles, instruments,
hangers, patterns and drawings without payment of duty to the premises of the sub-
contractors subject to the condition that such goods are brought back to the unit on
completion of the job work within the period specified in this behalf.

• Gem and Jewellery units in SEZ:

Generally speaking, sub-contracting is not allowed to gem and jewellery units. However,
the gem and jewellery units in SEZ are allowed to take out gold/silver/platinum for sub-
contracting subject to the condition that goods, finished or semi-finished, including
studded jewellery, containing quantity and purity equal to the gold/silver/platinum so
taken out are brought back to the Zone within 30 days. It is to be noted that diamonds,
precious or semi-precious stones are not allowed to be taken out for sub-contracting. The
gem and jewellery units are also allowed to receive plain gold/silver/platinum jewellery
from DTA in exchange of gold/silver/platinum of equal quantity and purity. These units
are, however, not eligible for any wastage or manufacturing loss against the jewellery
received from DTA after processing or against exchange of gold/silver/platinum. The
DTA units undertaking job work or supplying jewellery against exchange of
gold/silver/platinum are not entitled to deemed export benefits. The gem and jewellery
units are also allowed to sub-contract part of the production or production process
through other units in the same SEZ subject to records being maintained by both the
supplying and the receiving units.

Further, the gem and jewellery units in SEZ are allowed certain other facilities as
mentioned below:

(i) Taking out the items of gem and jewellery into DTA temporarily without payment of
duty for the purpose of display and return thereafter;

(ii) Personal carriage of gold/silver/platinum jewellery or precious or semi-precious

stones or beads and articles as samples up to US$ 1,00,000 for export promotion tours
and temporary display or sale abroad subject to the condition that the exporter would
bring back the jewellery or the goods or its sale proceeds within 45 days from the date of
departure through normal banking channel;

(iii) Export of jewellery including branded jewellery for display and sale in the permitted
shops setup abroad, or in the showroom of their distributors or agents provided that items
not sold abroad within 180 days, shall be re-imported within next 45 days;

(iv) Removal of parts & tools of machine temporarily without payment of duty for the
purpose of repair and return thereof.

(v) Taking out gem and jewellery manufactured in the SEZ to the retail outlets or
showrooms set up in the departure lounge at international airports for sale to a tourist, as
defined in the Baggage Rules, 1998, leaving India.

(vi) Sale of gem and jewellery manufactured in the SEZ to a foreign-bound passenger and
transferring the same to the retail outlets or showrooms set up in the departure lounge or
Customs warehouse at international airports for being handed over to the said passenger
for the purpose of export.
 (vii) Removal of moulds, tools, patterns, and drawings into the DTA for job work without
payment of duty and to be returned to the unit thereafter.

For availing of the above mentioned facilities, prior permission of Assistant

Commissioner / Deputy Commissioner is required.

In case of gem & jewellery units, scrap, dust or sweepings generated in the unit is

allowed to be forwarded to the Government Mint or Private Mint for conversion into

standard gold bars and return thereof to the Zone subject to the observance of procedure

laid down by the Commissioner of Customs. The said dust, scrap or sweepings are also

allowed clearance into DTA on payment of applicable customs duty on the gold content

in the said scrap, dust or sweepings. Samples of the sweepings/dust are taken at the time

of clearance and sent to mint for assaying. The assessment is finalized when the reports

are received from the mint.

• Inter-Unit Transfer:

Inter unit transfer of goods amongst

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