Special Economic Zones

The Government of India introduced the policy to set up Special Economic Zones in April 2000 “… with a view to provide an internationally competitive and hassle free environment for exports.” Freeing capital from the regulations of the state is the primary objective of this endeavour. The legislation could only be enacted in 2006 amidst widespread protests from various left-democratic organisations.

From Productive Manufacturing to Tax-free Real Estate Development

The Export Processing Zones (EPZs) were set up in the mid-1960s as a component of industrial policy with the objective of boosting export of manufactured products. The basic objective of EPZs was to enhance foreign exchange earnings and develop export-oriented industries. There was a minimum export performance requirement and a net foreign exchange earning as percentage of exports requirement (NFEP) with a very high threshold for the EPZs. Further, in EPZs sales were subject to achievement of NFEP. With the decision to convert EPZs to SEZs the Government removed the mandatory requirements for minimum exports as well as delinked NFEP requirement from domestic sales.

Both these concessions to SEZs indicates a shift in focus from promotion of manufacturing industries and earning of foreign exchange to pacifying owners of capital, both foreign and domestic, to make large scale investments in India irrespective of its productivity. Investment in an economy does not necessarily contribute to the expansion of production capacity. It may be spent on the purchase of existing assets or be in residential construction or retail outlets etc. which usually involves lower risk but also are less productive than investment in new plants. The SEZ Act makes room for this kind of low risk investment. The government has allowed up to 75% of the area of SEZs to be used for non-export purposes such as housing, schools, entertainment and banks. Non-productive investments that had no room in the EPZs are being given a clear go ahead via the SEZ route.

The shift from EPZs to SEZs also involves huge tax exemptions to the latter. According to an internal assessment of the Union Finance Ministry in 2005,the Government will have to forgo about Rs. 90,000 crores in direct and indirect taxes over the next four years on account of the SEZs, which if annualised would amount to a revenue loss of around 6 % of tax revenue and concomitant decline in the tax-GDP ratio. Thus, the primary attraction of an SEZ has become the tax benefits that are on offer. One can draw a direct correlation to industrial closures in traditional industrial areas and a sudden burst of investment in the SEZs. There is sufficient incentive for existing domestic capital to relocate to the SEZs and for new domestic and foreign firms to set up units in them. Also, given the nature of the tax exemptions, the owners of units in SEZs can utilise all the tax and other benefits for 5 years, then close shop, and start the unit in some other zone or even within the zone with a new name, thereby promoting unstable industrialisation. Such an industrialisation also has no development agenda for either the area where it is located or for the workers working in these units.

The issue of tax relief is not restricted to exemptions granted to the SEZs but it also has serious revenue expenditure consequences. The relocation of industries to SEZs would mean that the once tax paying owners of capital would now be exempt from taxes and hence their contribution to the revenue of the economy would disappear for a span of at least 5 years. Consequently, the revenue earning of the country would decline and hence the capacity of the Government to spend on social sectors would decline. Further, this would also mean a substantial loss in state revenue in the form of property tax and taxes on conspicuous consumption.

In the leap from EPZs to SEZs, the government has also systematically withdrawn from its monitoring role. It now only retains control over the statutory functions in the SEZs. Except in the 7 Central Government controlled SEZs, the operation and maintenance function in the rest have been privatised. Monitoring of performance of SEZ units is to be done by a Committee headed by Development Commissioner and consisting of Customs Department representatives. All imports are allowed on self-certification unlike in EPZs. Provision for routine examination by Customs of export and import cargo in SEZ has been ruled out. 100% FDI investment through automatic route has been made available to manufacturing SEZ units. All functions of the Labour Commissioner have also been vested with the Development Commissioner. Thus autonomous areas of control are being created with a parallel regulatory framework.


Is it just about Land?


One of the primary incentives that SEZs promise is the creation of a zone where labour is free and cheap. Though legally all labour laws of the land apply to SEZs, the SEZ Act, 2005 gives the power to declare any unit in an SEZ as a Public Utility Service to the Development Commissioner. All the powers of the Labour Commissioner are delegated to the Development Commissioner of the particular SEZ and a single point mechanism is provided to give all clearances and permissions pertaining to industrial safety and other regulations. These SEZs are invariably located in areas where there is a large supply of unorganised labour force. This large availability of an unorganised workforce is condition enough for the price of labour to be extremely low with the possibility of further lowering given the serious employment crisis in the rural areas.


The condition of work in an SEZ is spelt out by both the nature of investment in the SEZs as well as the provision that restricts the right of workers to unite and exercise their right to strike. The nature of tax incentive gives the owners of capital sufficient reason to move their units of operation from one area to another either within the zone or outside after exhausting their tax exemptions. This sets the tone for hiring workers on contracts. Further, given the reserve of workers in any rural areas it is always possible to hire a new set of workers who are ready to work for less than the existing workforce. For any one with a motive for maximisation of profit, the conditions are ideal for hiring workers on contract and Indian capitalists investing in these SEZs are not losing this opportunity.


More and more SEZs are being set up in remote backward and adivasi areas. The reason for this is obviously the availability of very cheap and unorganised workforce in abundance. Thus it is not only the lure of cheap land that takes owners of capital to relocate in backward and adivasi areas. Going by recent reports, many owners of land, even in these backward areas, are making considerable gains by selling their lands to the SEZ developers. There is a convergence of interest of the rural landed elite and the imperialist forces in displacing the rural workers and adivasis from their traditional livelihoods and areas of control and furthering both their rent-seeking and/or profit-seeking interests. This has lead to speculative land dealings in suburbs of large cities, and other greenfield sites for industrial developments, to the detriment of interest of rural workers and adivasis. Violence and political patronage are often the tools for large scale land alienation in these areas.


Instances of acquisition of land from adivasis and in coastal areas, thereby taking away community rights of people over lands where they have resided traditionally and which is also their source of livelihood, are also cropping up. There is a complete disregard by the state as well as by the agents of capital for the right of nations and peoples to define their own idea of development while creating these industrial zones in areas traditionally occupied by already severely marginalised people.


SEZs are permitted to have non-polluting industries in the Coastal Regulation Zone area. By allowing SEZs in the CRZ area the Government is violating the CRZ notification (1991) that aims to control the indiscriminate exploitation of the coastal area and therefore bars industrial activity within 500 metres from the sea line. The Notification permits human habitation within the 500-metre zone, with specific conditions in the various CRZ areas.  With the SEZ Act, the right of coastal communities to beach space and their access to sea has come under attack.


This kind of acquisition of land is necessarily creating conditions for forced migration of communities and working people. On the one hand communities are being displaced from their traditional livelihoods and on the other, these industrial zones are not creating enough employment to absorb the entire community they are displacing. Consequently, migration becomes the only option for survival.

Finally, SEZ units also enjoy an exemption from environmental impact analysis under the provision of the Environment (Protection) Act. Although the Development Commissioner has powers for a random check, the units within the SEZ are free to follow their own methods to maintain environmental standards. This not only is liable to create health hazards for workers who work in these units but also exposes those residing in the adjoining areas to serious health hazards and often losses due to pollution.

NTUI’s position on SEZs


The global capital institutions are putting together a system that provides international capital access to the world market and the mobility to invest. Through the SEZs, the large corporations are in the process of creating autonomous areas of control with a parallel regulatory framework.


This pressure from the restructured production process and international competition affect different sections of the global working class to different degrees. The managers of capital are translating this increased competition into management strategies for lowering wage cost per unit. It begins by undermining the bargaining power of unions if they are at all allowed to exist. This is furthered through the reinterpretation of law in a manner that is derogatory and restrictive in its reading of the powers and rights of workers and unions as provided by law. NTUI strongly opposes all Government legislations that serve to restrict the individual and collective rights of workers.


The NTUI therefore strongly opposes the creation of SEZs, and affirms to struggle relentlessly to oppose this onslaught of capital.


NTUI is not opposed to industrialisation nor are we opposed to creation of industrial zones for increasing the manufacturing capacity of the economy. Just and equitable industrialisation leads to economic development. We also believe such industrialisation fulfils the dual purpose of increasing employment opportunities and contributing to the tax revenue of a nation that is essential for its development. The SEZs fail on both these counts. Also, the tax exemptions and the provision that all units can be declared Public Utilities that are being provided to all units in SEZs is leading to relocation of industries from traditional industrial areas to these zones thereby resulting in loss in good jobs and creation of bad jobs in these zones. Further, the SEZs promote private profit motives of corporates and have no provision for development of the people of the area or the workers employed in these zones.


NTUI supports the creation of industrial zones in less developed areas with an aim at industrialisation that not only creates new employment opportunities but also makes provisions for housing, schools, medical facilities for the workers employed in these zones. Promotion of decent labour standards by these units should be made a pre-condition to initial tax exemptions given to these units. It should be an integral part of any legislation that promotes the process of industrialisation. Further, the policy for industrialisation should also incorporate a policy of compensation and rehabilitation for all those who are dependent on the land that is acquired for the industrialisation such that they can lead a decent life.



11 October 2006