ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Import Dependency of Special Economic Zones

Critics of the government's special economic zone policy fear that the incentives offered to SEZ units may lead to an increased demand for imports without an equivalent increase in exports. This article analyses the trends in the import intensity of exports of seven conventional SEZs from 1986-87 to 2007-08. Changes in the sectoral composition of exports are mainly responsible for the increased import intensity of SEZ exports, particularly after the new policy was announced in 2000-01. The government thus needs to follow a cautious approach in promoting SEZs under different sectors and redefine the current fiscal incentives to prevent reallocation of investment from domestic trade areas to the SEZs.

I thank R S Deshpande for his comments and suggestions.

Some of the salient features of the recent trade policy of the Indian government under the banner of special economic zones (SEZs) are liberalised imports, gradual withdrawal of a number of taxes (both direct and indirect) and/or exemption from major taxes, and decentralisation of their administrative structure. These are specifically intended to accelerate the pace at which these enclaves are expected to operate and to improve their performance standards, as the lack of supporting mechanism to shape supply-side factors in tune with international standards was considered responsible for the poor performance of these enclaves under the export processing zones (EPZs) regime.

Although the SEZ policy of the government in the present context has been advanced as an engine of growth, apprehensions abound with regard to their performance standards; specifically, the associated fear of liberalisation in the form of higher import content without an equivalent increase in exports. Besides, sceptics argue that trade liberalisation strengthened through the SEZ policy in India, along with a bunch of incentives, may lead to a rise in the demand for imports without an equivalent increase in exports, thereby threatening the trade balance of the country. However, there is hardly any empirical evidence to either substantiate or reject this hypothesis.1 In this context, an analysis of the trend in the import intensity of these special enclaves can be helpful in examining the effectiveness of the SEZ policy over the EPZs regime.

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