Special Economic Zones (SEZ) are developed to

Correct — D, (d) Promote investment from domestic and foreign sources.

The objectives of the Special Economic Zones Act, 2005 are set out by the Department of Commerce in five clauses: generation of additional economic activity; promotion of exports of goods and services; promotion of investment from domestic and foreign sources; creation of employment opportunities; and development of infrastructure facilities. The keyed option reproduces the third of them word for word.

Attracting investment is also the reason the policy exists in the form it does. India had run export processing zones since Asia’s first was set up at Kandla in 1965, and the Special Economic Zones policy announced in April 2000 was framed to overcome what those zones had suffered from — a multiplicity of controls and clearances, the absence of world-class infrastructure and an unstable fiscal regime — with the express aim of attracting larger foreign investments. Zones functioned under the Foreign Trade Policy from November 2000, and the Act, passed by Parliament in May 2005 and assented to on 23 June 2005, came into force with its Rules on 10 February 2006. It gave the scheme a statutory footing, a single-window clearance through an inter-ministerial Board of Approval, and a stable package of fiscal concessions.

That is the sense in which a Special Economic Zone is ‘developed to’ do something: a developer, public or private, builds the zone, and units set up inside it. Both the developer and the units are investors, and the whole apparatus of concessions and simplified procedure exists to bring them in — from within India as much as from abroad, which is why the clause names domestic and foreign sources together.

Why the others are wrong

• (a)Generate additional economic activity throughout the country — The Commission’s key does not take this option, and it should be read carefully rather than dismissed, because ‘generation of additional economic activity’ is itself the first of the five stated objectives of the Special Economic Zones Act. What the option adds is the phrase ‘throughout the country’, and that is not what the scheme claims. A Special Economic Zone is a specifically delineated area, notified as such, within which a distinct set of customs and fiscal rules applies; the additional activity the Act speaks of is generated in and around those zones, not spread across the national territory by the Act itself. Read as a description of what a zone is developed to do, the keyed option is the more exact of the two, because promotion of investment from domestic and foreign sources is reproduced without qualification. The wider lesson is that in an item of this kind the qualifier attached to an otherwise correct phrase is often the whole question.
• (b)Beautify suburban areas — ‘Beautify suburban areas’ has no place among the objectives of the scheme and would not be a reason to grant fiscal concessions to a developer. The option seems to come from the observation that zones are usually built on the edges of cities, where large contiguous sites can be assembled, and that they are laid out to a plan with roads, power and water. But orderly development is a means here, not an end: the Act speaks of the development of infrastructure facilities because a zone cannot attract units without them. It is worth being clear about the difference, since the same confusion appears in questions about industrial corridors, smart cities and township policy — the physical result of a scheme is not the same thing as its stated purpose, and examiners test the stated purpose.
• (c)Upgrade the facilities in the countryside — ‘Upgrade the facilities in the countryside’ transfers the scheme to rural development, which is a different arm of policy with its own ministries and programmes. Special Economic Zones are instruments of trade and industrial policy, administered by the Department of Commerce, and their statutory objectives concern economic activity, exports, investment, employment and infrastructure — the infrastructure meaning that of the zone itself. A zone may of course be located in a rural district and may improve roads and power supply in its neighbourhood, but that is an effect and not the object. The option is a reminder to identify the administering department before answering a question about a scheme’s purpose: Commerce points to trade and investment, Rural Development to village infrastructure and employment, and the two rarely borrow each other’s objectives.

A Special Economic Zone is an area notified under the Special Economic Zones Act, 2005 in which a separate régime of duties, taxes and procedures applies, so that goods and services can be produced for export without the delays and levies of the general customs territory.

The policy history matters for an examination. Asia’s first export processing zone was set up at Kandla in 1965. The zones that followed were hampered by multiple clearances, poor infrastructure and an unstable fiscal regime, and the Special Economic Zones policy of April 2000 was announced to remedy that; from 1 November 2000 zones ran under the Foreign Trade Policy, with fiscal benefits given through various statutes. Investors wanted something more durable, so the Act was passed in May 2005 and, with its Rules, took effect on 10 February 2006.

The Act’s five stated objectives are the generation of additional economic activity, the promotion of exports of goods and services, the promotion of investment from domestic and foreign sources, the creation of employment opportunities, and the development of infrastructure facilities. Its administrative innovation is single-window clearance: proposals recommended by the State Government go to an inter-ministerial Board of Approval, which decides by consensus.

The standing criticisms are worth knowing too, since they appear in essay and interview questions: the revenue foregone through tax concessions, the acquisition of land for private developers, and the number of approved zones that were never notified or never began operations.

Key facts

• The Department of Commerce states the main objectives of the SEZ Act as: generation of additional economic activity; promotion of exports of goods and services; promotion of investment from domestic and foreign sources; creation of employment opportunities; and development of infrastructure facilities.
• Asia’s first export processing zone was set up at Kandla in 1965.
• The Special Economic Zones policy was announced in April 2000, and zones functioned under the Foreign Trade Policy from 1 November 2000 until the Act took over.
• The Special Economic Zones Act, 2005 was passed by Parliament in May 2005 and received the President’s assent on 23 June 2005; the Act and Rules came into effect on 10 February 2006.
• The Act provides single-window clearance, with proposals recommended by State Governments considered by an inter-ministerial Board of Approval that decides by consensus.
• A Special Economic Zone is a specifically delineated notified area, so the activity it generates is concentrated in and around the zone rather than spread across the country.

Common traps

• Choosing an option that echoes an official objective but adds a qualifier the Act does not contain.
• Confusing the physical appearance of a planned zone with the purpose for which zones are established.
• Transferring the scheme to rural development because zones are often built outside cities.
• Answering from a general impression of what a Special Economic Zone does instead of from its stated objectives.

• practice — not a real PYQ

  The Special Economic Zones Act, 2005 came into force, along with the SEZ Rules, on

  • (a)1 November 2000
  • (b)23 June 2005
  • (c)10 February 2006
  • (d)1 April 2006

  Answer(c) 10 February 2006 — the Act was passed in May 2005 and assented to on 23 June 2005, but it took effect with its Rules only in February 2006. Option (a) is the date from which zones functioned under the Foreign Trade Policy, and option (b) is the date of the President’s assent.

• practice — not a real PYQ

  Asia’s first export processing zone was set up at

  • (a)Kandla
  • (b)Santa Cruz
  • (c)Falta
  • (d)Noida

  Answer(a) Kandla — it was established in 1965, before the zones at Santa Cruz, Falta and Noida, all of which came later in the export processing zone programme.