Special Economic Zones (SEZ) in India

India is reforming its SEZ framework to boost utilisation and competitiveness, with new norms allowing limited domestic sales and “Reverse Job Work” for DTA firms. This policy shift aims to enhance flexibility, integration, and export dynamism within the SEZ ecosystem.
Reverse Job Work: A policy that allows manufacturing units within an SEZ to perform job work (manufacturing services) for companies in the Domestic Tariff Area (DTA).

SEZs in India: Current Status

Exports: SEZ exports reached $172 billion in FY25, contributing ≈30 % of India’s total exports.
Coverage: About 276 operational SEZs; domestic sales currently capped at 2 % of total output.
Declining Utilisation: Gems & jewellery units dropped from ≈500 (2018) to ≈360 (2022).
FDI Weakness: FDI inflows to SEZs remain under 3% of India’s total.
R&D Deficit: Only 4 of 14 SEZ units surveyed invested in R&D, signalling low innovation capacity.

Consequences of Outdated SEZ Norms in India

Export Losses: U.S. tariffs and policy rigidity have cut SEZ export growth to < 4 % YoY (FY24-25).
Idle Capacity: Nearly 25–30 % of SEZ production capacity is underutilised during seasonal demand dips.
Competitiveness Decline: Vietnam’s zones attract 3× more FDI due to liberal domestic-linkage rules.
Fiscal Loss: Over 35 SEZ units have applied for de-notification since 2023, leading to an estimated ₹2,800 crore annual shortfall in customs duties and income-tax revenue (MoC&I 2025).
Employment Risk: The gems and jewellery SEZ sector employs around 1.05 lakh artisans, and declining U.S. orders have caused job losses exceeding 12,000 positions in FY 2024-25 (GJEPC 2025).

Challenges Faced by SEZs in India

Limited Market Access: SEZ units cannot sell freely in the Domestic Tariff Area (DTA), restricting capacity use during export slowdowns.
High External Dependence: Nearly 40 % of SEZ exports cater to the U.S. market; new tariff barriers of 10–25 % on gems, jewellery, and textiles have eroded profit margins (DGFT 2025).
Withdrawal of Incentives: Post-2019 removal of Section 10AA tax holidays and imposition of MAT @ 15 % + DDT @ 20 % led to a 25 % fall in new SEZ registrations (CAG 2024).
Skill & R&D Gap: Only 28 % of SEZ firms have access to technology-training modules (ICRIER 2024).
Low FDI & Brand Linkages: SEZs attracted barely 3 % of total FDI inflows (2023-24) versus Vietnam’s 11 %, reflecting weak global promotion (DPIIT 2024).
Negative Trade Balance Risk: Imports of raw materials like gold and diamonds rose 12 % YoY, while exports stagnated at 3 %, causing deficit trade positions in select SEZs (ICRIER 2024).

Current Affairs

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Way Forward

Reverse Job-Work Policy: Permit SEZs to undertake domestic subcontracting under fair-duty adjustment like China’s dual-use SEZ model.
Duty-Neutral Framework: Create an equal tax structure for inputs used by both SEZ and DTA units, as in Malaysia’s Free-Trade Zone policy.
R&D and Skill Incentives: Launch SEZ Innovation & Skill Mission offering tax rebates for technology upgradation and design training.
Digital Integration: Link SEZ operations with the National Single-Window System for faster approvals.
Strengthen FDI Environment: Conclude investment-protection pacts and branding campaigns similar to Vietnam’s Industrial Parks Strategy 2022.
Sustainable Incentives: Replace blanket tax holidays with performance-based incentives tied to exports, jobs, and domestic-value addition.

Revamping SEZs through reverse job work, innovation, and liberalised linkages can turn them into global growth engines, driving Atmanirbhar Bharat. As PM Modi said, “Reform, perform, and transform, this must be India’s growth mantra.

Reference: Indian Express | PMFIAS: Special Economic Zones (Amendment) Rules, 2025

PMF IAS Pathfinder for Mains – Question 408

Q. What are the main reasons behind the uneven growth of SEZs in India? Highlight the gaps in policy implementation and propose steps to revitalise SEZs in the current global economic context. (250 Words) (15 Marks)

Approach

Introduction: Write a brief introduction about SEZ and mention the current facts.
Body: Write the reason behind the uneven growth in SEZs, also highlight the gaps in policy implementation and propose steps to revitalise SEZs.
Conclusion: Emphasis on export-led growth through SEZs also mentions the future course of action.