Need to reposition SEZs for integrated national development

Source: The post “Need to reposition SEZs for integrated national development” has been created, based on “Reposition SEZs for integrated national development” published in “Business Line” on 11 October 2025. Need to reposition SEZs for integrated national development.

UPSC Syllabus: GS Paper 2 – Governance

Context: The Special Economic Zones Act, 2005 was enacted to promote exports, attract foreign investment, generate employment, and develop world-class infrastructure. Two decades later, despite several successes, SEZs have not fully realised their transformative potential. With India’s renewed focus on “Aatmanirbhar Bharat” and “Viksit Bharat @2047”, a strategic repositioning of SEZs is essential for integrated and inclusive national development.

Current Status of SEZs

1. SEZs replaced Export Processing Zones (EPZs) in 2000.
2. As of June 30, 2025, 370 SEZs have been notified, out of which 276 are functional, comprising 6,279 approved units.
3. Around 60% of exports originate from services sectors like IT/ITeS, while manufacturing SEZs remain underperforming.
4. Nearly 200,000 hectares of developed land and 100 million sq. ft. of built-up space remain partially utilised.
5. Hence, while SEZs have created pockets of excellence, the national spillover effects are limited.

Need for Repositioning

1. Underutilisation of Potential: A significant portion of the developed land within Special Economic Zones (SEZs) remains unutilised, indicating a gap between planned infrastructure and actual industrial activity.
2. Skewed Sectoral Growth: The overwhelming dominance of the services sector, as opposed to manufacturing, has reduced the employment intensity of SEZs and limited their contribution to large-scale job creation.
3. Global Supply Chain Realignment: In the post-pandemic world, there is a growing need for diversified and resilient production bases. India must reposition its SEZs to attract global investors seeking alternatives to concentrated manufacturing hubs.
4. Alignment with National Schemes: SEZs need to be strategically integrated with national flagship initiatives such as the Production Linked Incentive (PLI) Scheme, Industrial Corridor Projects, and the ‘Vocal for Local’ campaign to maximise synergies and policy coherence.
5. Export Competitiveness: Comprehensive reforms are essential to sustain and enhance India’s export competitiveness, especially in light of tightening global trade norms and the evolving framework of free trade agreements.

Key Policy Recalibrations Proposed

1. 1. Permit Sale to Domestic Tariff Area (DTA)

• Adopt the “Duty Foregone” principle, already used in EOU/MOOWR schemes.
• Enables SEZ products to enter the domestic market on a level playing field.

2. Allow Sub-Contracting for Domestic Production: Permit SEZ units to sub-contract production for DTA use, promoting value-chain integration.
3. Strengthen Single Window Mechanism: Empower BoA and UAC for time-bound approvals to reduce delays in clearances.
4. Enhance State-Level Participation: States should play an active role in UACs, grant exemptions, and facilitate labour and utility permissions locally.
5. Allow Dual-Use Land: Permit partial non-SEZ use (for DTA units and social infrastructure) to optimise utilisation of idle land.
6. Revive Offshore Banking Units (OBUs): Reinstate OBUs within SEZs to support trade finance and global competitiveness.
7. Align SEZs with PLI and Industrial Corridors: PLI incentives for SEZ-based units can encourage manufacturing synergies and deepen localisation.
8. Rationalise Net Foreign Exchange (NFE) Norm: Remove obsolete NFE earning obligations; focus instead on value addition and domestic linkages.
9. Infrastructure Integration: Develop multi-modal logistics and port connectivity to reduce transaction costs.
10. Promote Skill Development and MSME Linkages: Link SEZs with district-level skill ecosystems to generate inclusive employment.

Challenges in SEZ Functioning

1. Policy Uncertainty: Frequent amendments and unclear taxation regimes discourage long-term investments.
2. Sunset Clause Impact: Phasing out of tax benefits reduced investor enthusiasm.
3. Limited Domestic Integration: Rigid NFE norms prevent SEZ units from selling to domestic markets.
4. Infrastructure Bottlenecks: Many SEZs lack adequate last-mile connectivity to ports and industrial corridors.
5. Land Utilisation Issues: Large tracts remain unutilised due to poor planning and lack of flexibility in land use.
6. Lack of State Ownership: Over-centralisation limits State participation and responsiveness to local industrial needs.
7. Global Competitiveness: Emerging global trade blocs (ASEAN, Vietnam, Mexico) offer more attractive SEZ regimes.
8. Weak Manufacturing Base: Manufacturing SEZs lag behind service SEZs in export and employment potential.

Way Forward

1. Comprehensive SEZ (Amendment) Policy: Introduce a “Development of Enterprise and Services Hub (DESH)” framework to replace rigid SEZ boundaries and integrate with the domestic economy.
2. Domestic Value-Chain Integration: Create linkages between SEZs, MSMEs, and DTA industries to promote inclusive industrial ecosystems.
3. Incentive Rationalisation: Replace blanket exemptions with performance-linked benefits tied to exports, employment, and domestic value addition.
4. State Empowerment: Decentralise SEZ management and empower States to design region-specific incentives.
5. Infrastructure and Connectivity Upgradation: Link SEZs with Gati Shakti corridors, dedicated freight networks, and port-led logistics clusters.
6. Sustainability and Green SEZs: Promote renewable energy, zero-discharge, and circular economy practices to make SEZs environmentally compliant and globally competitive.
7. Integrated Governance Mechanism: Establish a National SEZ Council for coordination among Central, State, and local agencies to streamline clearances.
8. Export Diversification: Encourage high-value sectors like electronics, pharmaceuticals, and defence manufacturing within SEZs.

Conclusion: Two decades after the SEZ Act, India stands at a critical juncture. With pragmatic policy recalibrations — particularly in DTA integration, decentralisation, and alignment with national industrial schemes — SEZs can emerge as “Integrated National Development Zones.” Their revival will not only accelerate exports and employment but also strengthen India’s ambition of becoming a $5 trillion economy and achieving Viksit Bharat @2047.

Question: Despite two decades of operation, India’s SEZ policy has not fully realised its transformative potential. In the context of Aatmanirbhar Bharat and Viksit Bharat @2047, critically examine the need for repositioning SEZs as Integrated National Development Zones.