Impact of Fiscal Incentives on SEZs’ Performance in Gujarat
| Published date | 01 August 2015 |
| Date | 01 August 2015 |
| DOI | 10.1177/0015732515589442 |
| Author | Falguni H. Pandya,Yogesh C. Joshi |
| Subject Matter | Articles |
Impact of Fiscal Incentives
on SEZs’ Performance
in Gujarat
Falguni H. Pandya1
Yogesh C. Joshi2
Abstract
There is no clear-cut evidence whether fiscal incentives turn into desired growth
of the economy or just result in cost for the exchequer. Looking at the success
of China and other countries, India has tried to replicate the ‘zone’ concept
by enacting special economic zones (SEZs) policy in 2005. The present article
attempts to study different types of fiscal incentives given to the firms in SEZs
and their impact on the performance through survey-cum-interview method.
The research reveals that there is a need to modify the structure of present
incentives to tap its full benefit.
JEL: A11, H20, H30
Keywords
SEZs, fiscal incentives, impact of fiscal incentives
Introduction
Many countries all over the world have created fences in geographically delimited
‘enclaves’ within their sovereign territories in the form of zones. These zones or
these areas differ compared to other areas of the economy in terms of their special
provision under the government policy, rules and better business facility. Based
on specific purposes behind the formation of such territories or zones, they are
named as free trade zones (FTZ), export processing zone (EPZ), enterprise zone,
Foreign Trade Review
50(3) 190–218
©2015 Indian Institute of
Foreign Trade
SAGE Publications
sagepub.in/home.nav
DOI: 10.1177/0015732515589442
http://ftr.sagepub.com
Corresponding author:
Falguni H. Pandya, B. No. 45, “Guru Krupa”, Gayatri Nagar Society, Nr. G E B., Makatampur Road,
Bharuch 392 012, Gujarat, India.
Email: fhpandya@gmail.com
1 Assistant Professor, Centre for Management Studies, Dharmsinh Desai University, Nadiad, Gujarat,
India.
2 Professor, G. H. Patel Post Graduate Institute of Business Management (MBA Program), Vallabh
Vidyanagar, Dist. Anand, Gujarat, India.
Article
Pandya and Joshi 191
special economic zones (SEZ) and free economic zone (FEZ). The international
experience on zones indicates that they have been treated as ‘laboratories’ for
experimenting with radically different policies. The Chinese SEZs, such as,
Shenzhen, Zuhai, Shanton and Xiamen, are the best examples to test the market-
based policies in a socialist economy dominated by control. These zones convinced
China about harmlessness of foreign capital and gave them access to foreign
technology and investment. This experience encouraged Chinese authorities to
implement liberal foreign investment and foreign policies in the rest of the country
as well. Zones are a viable choice to implement such radical policies, as in
developing economies scarce public resources do not allow growth of such
capacities in every nook and corner of the country. In addition, tax exemption and
employer-friendly labour laws result in political and economic discontent.
By offering a friendly business climate and fiscal incentives, the government
expects private developers to come forward for building infrastructure. Ideally,
this is expected to take place not only within zones but also outside the zonal
boundaries as well. Chinese SEZs have proven to be the best example of this
virtuous growth. However, some costs associated with such zones are ‘losses’ for
the exchequer. As almost all zones offer tax incentives in one or the other form,
such exemptions are considered as revenue loss in the sense that they would have
accrued if the beneficiaries were located outside the zones and subject to normal
taxation rate. The issue becomes more debatable as in developing countries scarce
public resources are essential for social and human infrastructure. Implementing
such policies that involve revenue forgone is not easy to justify by the policymakers.
In such a case, the usual argument offered by policymakers is articulation of
benefits, which zones will lead in the long run in the form of additional investment,
infrastructure, exports, higher employment and incomes in the economy. Thus,
the argument is that the revenue foregone at present is simply a sacrifice for
obtaining higher gains in future.
Early EPZs that came up in India before the 1990s did not create any notable
impact and all seven EPZs were subsequently converted into SEZs. Earlier EPZs
could not bring the desired result due to various reasons, such as, high tariff and
controlled economy, improper location and poor business linkages. SEZs or export
processing Zones (EPZs) or industrial parks or any other form of the fenced area
where special fiscal and other incentives are provided has been embarked as a
vehicle for economic growth. In India, from 1965 EPZs, such as, Kandla (Gujarat),
Noida (Delhi) and Vishakhapatnam, did not yield the expected result till 2004.
Through the effect of some brainwave from countries, such as, China, UAE,
Taiwan, Philippines, Malaysia and UAE, the Indian government ventured for a
policy of SEZs in 2000 and in 2005 the SEZs Act was enacted.
Literature Review
Long before Silverman (1982) addressed the issue of the enactment of the zones
and predicted that even if such programmes are enacted, their success remains a
big question mark. While addressing the existing issues of SEZs, Yuan and Eden
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