The Budget 2022-23 has picked up a recommendation from the Baba Kalyani Committee report, submitted in November 2018, to look into the travails of Special Economic Zones (SEZs). This pertains to converting them into industrial parks; or to be precise, a ‘framework shift from export growth to broad-based employment and economic growth’. The Budget says that the SEZ Act will be replaced by a new legislation that will enable “large existing and new industrial enclaves to optimally utilise available infrastructure and enhance competitiveness of exports”. It also says that customs administration in SEZs will be “fully IT-driven”. The reasons for expanding the scope of SEZs into more generic industrial zones are not far to seek. Their performance as export drivers has been underwhelming for over 15 years. Of the 425 SEZs approved under the SEZ Act, 2005, 376 are notified and just 265 are operational. Of late, the downturn has been pronounced. This is borne out by the significant share of sales to local markets or domestic tariff area firms, despite the customs duty outgo for the latter. This goes against the raison d’etre of SEZs. DTA sales have amounted to 27 per cent of total production at ₹2.59-lakh crore in the first nine months of 2021-22, coinciding with India’s export revival. They were 18 per cent of total production in 2020-21, and 12 per cent in 2019-20. It appears that SEZs have ceased to be attractive after the tax holiday for units and developers was wound down between 2017 and 2020. There is a sense that SEZ units are rushing for the exit. Meanwhile, the proliferation of FTAs between 2005-15 robbed SEZs of their sheen, as importers outside SEZs benefited from zero-rated imports without being subject to DTA-related restrictions.

SEZ exports did not rise at a faster rate than overall exports even in better times, as a 2019 UNCTAD report suggests. Their share is slated to fall below the trend level of 25 per cent of overall exports. If SEZs are not working out as export hubs, it stands to reason that their infrastructure be thrown open to industries in general, as mooted by the Budget. The rigid definition of SEZs on the basis of activity has been relaxed, in keeping with the Kalyani panel’s recommendations. This should be followed up by allowing job work in the DTA space. Finance Secretary TV Somanathan noted in a post-Budget interaction with this newspaper that SEZ and DTA IT players can even be allowed to use the same physical space, as their operations can be electronically overseen. This adaptation of SEZ to the digital age is a welcome move.

An infra cluster approach makes sense, rather than one based on export subsidies which will be open to WTO challenge. The Gati Shakti programme could synergise multi-modal logistics. Rather than focus on creating new SEZs, the existing ones should first be fully utilised, including those which lie fallow after land acquisition. The Centre should carry out a review of SEZ performance and assets before moving forward.