Context: Recent Commerce Ministry data reveal that 466 Special Economic Zone (SEZ) units have shut down over the last five years across seven SEZs, signalling structural stress in India’s flagship export-promotion framework. Closures accelerated after the COVID-19 shock, peaking in FY25 (100 units) and FY22 (113 units).
About Special Economic Zones (SEZs):
India announced its SEZ policy in 2000 under the Foreign Trade Policy, later institutionalised through the SEZ Act, 2005 and SEZ Rules (2006). SEZs were envisaged as duty-free enclaves to promote exports, attract domestic and foreign investment, generate employment, and create world-class infrastructure. Section 18 of the Act also allows International Financial Services Centres (IFSCs) within SEZs, a provision operationalised through GIFT City.
Current Status of the SEZ Sector:
Despite rising exports and investments, the sector shows signs of stagnation. Employment declined marginally from 31.94 lakh to 31.77 lakh (FY25), while exports doubled from ₹7.59 lakh crore (FY21) to ₹14.63 lakh crore (FY25) and investments rose from ₹6.17 lakh crore to ₹7.82 lakh crore. However, sectoral stress is evident: gems and jewellery units fell from ~500 (pre-2019) to ~360 by FY22, reflecting vulnerability to global demand shocks and policy rigidities.
Consequences of the SEZ Slowdown:
- Export Headwinds: U.S. tariffs and compliance rigidity have slowed SEZ export growth to below 4% YoY (FY24–25).
- Idle Capacity: 25–30% capacity underutilisation during seasonal demand dips undermines efficiency.
- Competitiveness Loss: Competing economies like Vietnam attract three times more FDI due to flexible domestic-linkage rules.
- Fiscal Impact: Over 35 units sought de-notification since 2023, implying an estimated ₹2,800 crore annual revenue shortfall (customs and income tax).
- Employment Risks: The gems and jewellery SEZs employ about 1.05 lakh artisans; declining U.S. orders led to 12,000+ job losses in FY25.
Way Forward
India must recalibrate SEZs to a post-pandemic, geopolitically fragmented trade environment.
- Policy Flexibility: Allow controlled domestic subcontracting (job-work) with fair duty adjustment, akin to China’s dual-use SEZ model.
- Global Branding: Reposition Indian SEZs via coordinated outreach with Invest India.
- Investment Protection: Negotiate modern Bilateral Investment Treaties (BITs) aligned with global best practices.
- Innovation Push: Launch an SEZ Innovation & Skill Mission offering tax incentives for R&D, design, and upskilling.
- Digital Integration: Seamlessly link SEZs with the National Single-Window System to cut approval delays.
Conclusion:
The SEZ slowdown reflects not failure, but policy inertia amid changing global trade dynamics. Targeted reforms can restore SEZs as engines of export competitiveness, jobs, and investment.