As India’s SEZ model falters, China’s success shows what went wrong

In the five fiscals of FY21-FY25, 466 special economic zones (SEZs) run by the Union government were shut down, constituting close to 10 per cent of the 5,281 SEZs operating in seven such zones across the country.

This information was provided by the Commerce & Industry Ministry in the Lok Sabha on December 8 — without a word on why such a largescale shut downs occurred.

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The ministry may argue that the Member of Parliament who raised the query didn’t specifically ask for the reasons, but that is only a technically correct answer. The ministry has done no assessment and would be unable to provide an answer if asked, as will be clear soon.

Limited outcomes

Meanwhile, here is what the ministry’s answer revealed in the form of two graphs.

The first graph maps the total number of units in the seven centrally run SEZ zones and the zone-wise shutdowns in the past five fiscals.

It is easy to understand the stress caused by the untimely and unusually severe national lockdown in FY21, but that doesn’t explain what happened in subsequent years when the Centre was liberal with its incentives and credit facilities.

The second graph shows their performance, but without a yardstick to measure whether their performance in investment, exports and employment is good, bad or indifferent.

India framed its SEZ Policy in 2000 and brought the SEZ Act in 2005. The idea was to boost exports, investment and employment for higher economic growth. It was inspired by the highly successful SEZs of China two decades earlier.

The SEZs enjoy a large-number of fiscal, administrative and other incentives. The key ones are: cheap or almost free land, duty-free import/domestic procurement of goods for development, operation and maintenance of SEZ units; 100 per cent income tax exemption for the first 5 years, 50 per cent for the next 5 years and so on; exemption from Minimum Alternate Tax (MAT); zero GST tax; single-window clearances, etc.

SEZs or land grabbing?

Apart from the seven SEZ zones run by the Centre, states have their own 17 zones and many other SEZs are run by the private sector.

The Commerce Ministry’s data shows, as on June 30, 2025, a total of 353 SEZs were notified across the country, but not how many are operational. It doesn’t provide a consolidated data on the land acquired, purchased or allotted for these SEZs either.

In its reply to the Lok Sabha on July 25, 2018, the ministry said that 52 per cent of notified land for 373 SEZs (237.9 sq km) was vacant and 40.2 per cent of notified SEZs were non-operational.

The ministry, in its reply to the Lok Sabha on April 10, 2017, said that 61.2 per cent of notified land (270.3 sq km of 441.8 sq km) was vacant and 39.8 per cent was non-operational. Today, the numbers would be much higher.

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For example, the FY25 annual report of Adani Ports and Logistics declares a land bank of “18,250+ hectares” (182.5 sq km). This includes 125+ sq km at Mundra (“India’s largest SEZ”), 200+ sq km at Dhamra, 275+ sq km at Krishnapatnam and 100+ sq km at Gangavaram. But this is only part of the story. The other is the massive land grab in the name of SEZs.

Land misuse

A Comptroller and Auditor General of India (CAG) report for 2012 and 2013 — tabled in 2014 — said “land appeared to be the most crucial and attractive component of the scheme” and that “land acquired was not servicing the objectives of the SEZ Act”. That was the last known comprehensive study of SEZs.

SEZs became, in part, a flourishing real estate business more than actual manufacturing, investment, job creation or exports.

The CAG had then flagged that vast stretches of land were acquired (under the emergency provision of colonial 1894 land acquisition law for “public purpose”), allotted and purchased “in the name of SEZ” but “only a fraction” was “notified for SEZ”, later de-notified and diverted for commercial purposes.

In short, SEZs became, in part, a flourishing real estate business more than actual manufacturing, investment, job creation or exports.

It also assessed the SEZs against their objective parameters (exports, investment, employment and economic growth) and found the data didn’t show “any significant impact”. Rather, those impacts were “modest” and largely contributed by a few regions from the infrastructurally developed states of Andhra Pradesh, Telangana, Maharashtra, Karnataka, Tamil Nadu, Haryana and Gujarat.

Inflated SEZ numbers

Many of those SEZ units were actually located in the EPZs (Export Processing Zones) between 1965 and 2005 and were shifted to the SEZs after 2005. As against manufacturing, it was the services sector IT/ITes units that propped up SEZ performance — which, in turn, had been shifted from the Software Technology Parks of India (STPI) set up in the 1990s (45 per cent during the previous five years of 2012-13).

Other key findings were:

a) Shortfall in actual employment (against the projected) averaged 92.73 per cent, with Gujarat topping with 96.54 per cent.

b) Shortfall in investment (against the projected) averaged 58.8 per cent. Andhra Pradesh and Maharashtra topped the list; multi-product manufacturing investment had a 67 percent shortfall in investment; investment was primarily driven by the IT/ITes sector.

c) Shortfall in exports (against the projected) averaged 74.6 per cent; the maximum was from multi-product manufacturing SEZs (23.9 per cent).

d) Shortfall in forex (against the projected) averaged 79.5 per cent; Uttar Pradesh topped the list at 108.8 per cent (net outgo of forex).

e) Excess claims of deductions, non-submission of audited reports, incorrect and non-payment of taxes, lack of monitoring etc., marred the performance.

A model that hasn’t delivered

A CAG report of 2019 had looked into the Santacruz SEZ to discover many “irregularities” in awarding major works in a SEZ (“weak administrative, financial and internal controls over”).

A 2022 study by the Bengaluru-based Institute for Social and Economic Change said amendments in policies and compliances had “failed” to address key challenges in doing business within SEZs, specifically new generation SEZs. All its data were from the CAG’s 2014 report mentioned earlier.

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In 2019, the Centre amended the SEZ Act of 2005 to allow “trusts or any entity” to set up shop in SEZs — public charitable trusts, private trusts run by big and small corporate houses, business trusts like real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), private companies with their own PF trusts and port trusts run by the government.

The impact of the amendment is not known because there has been no known assessment after the 2014 CAG report.

This is as good an indication as any that SEZs haven’t achieved anything substantial to showcase — despite cheap land and a long list of fiscal, administrative and other incentives from both the central and state government.

But that need not have been the case.

China's SEZ benchmark

A 2015 study by the World Bank said SEZs were very successful in China, Singapore, Malaysia, South Korea, Jordan, Mauritius but not in the Sub-Saharan Africa (SSA). It didn’t consider Indian SEZs worthwhile to mention, despite a decade of its SEZ-run.

China started SEZs in 1980, which ushered in “far-reaching economic transformations”. The study says, these SEZs accounted for about 22 per cent of GDP, 46 per cent of FDI and 60 per cent of exports, generating 30 million jobs by 2010 — nearly 10 times the jobs Indian SEZs created by FY25.

They also played a key role in bringing new technologies and modern management practices, the report noted.

The World Bank report said China started small (two SEZs to begin with) and when those were successful, it ramped up SEZs, adopting “gradualism with a pragmatic and experimental approach”.

Reform and innovation

This was accompanied by a “reform-oriented mindset”, “strong commitment and active facilitation of the state”, “opening-up to FDIs”, “sound infrastructure”, “effective marketing and investment promotion” and “continuous technology learning and upgrading” etc.

It also listed what didn’t work for China: the “mushroom approach” at the local levels and high-level “overlaps of various zones” with vicious competition at the later stage; “environmental degradation” and “limited urban-industry integration” with some exceptions.

India copied the Chinese model but adopted the wrong approach — what the World Bank called the “mushroom approach”.

A 2021 joint study by Chinese universities showed that their SEZs promoted innovation in terms of application, grant and citation numbers of patents by 15-25, 8-22 and 15-25 per cent, respectively.

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This study found high-tech SEZs promoted innovation better than the economic and technological SEZs; national SEZs did better than provincial SEZs and concluded: “The SEZs not only promote innovation in existing technical fields, but also continuously expand new research fields. The SEZs promote innovation by providing tax credits, technological subsidies and attracting more enterprises.”

'Mushroom approach'

India copied the Chinese model but adopted the wrong approach — what the World Bank called the “mushroom approach”.

After adopting the SEZ Policy in 2000 and SEZ Act in 2005 , India forgot to do its other homework and began populating these SEZs by shifting manufacturing units from the EPZs (Export Processing Zones), set up during 1965-2005, and services units of IT/ITes from the STPI (Software Technology Parks of India), set up in 1990s.

To give a push to SEZs, land was forcibly acquired and allotted and private businesses were allowed to buy lands left, right and centre throughout the country and generous subsidies, tax cuts were given. As the CAG report of 2014 said, it became more of a real estate business for private businesses.

Beyond incentives

The 2022 study mentioned earlier asked the government “to attend more to the institutions and infrastructure side of it than focusing on incentives”; to focus on “sector-specific requirements rather than on a one-size-fits-all approach” and on “systematic coordination and cooperation” (horizontal and vertical) across different ministries and agencies/actors.

It is clear neither the Centre nor the state governments did their homework before rolling out SEZs. And having done that, they didn't review them or go for course corrections. On their part, Indian private businesses are neither known for innovation nor for technological breakthroughs.

In such conditions, expecting SEZs to deliver is nothing more than wishful thinking.