Why India’s SEZs Became “Islands” And the Companies That Could Gain if SEZ 2.0 Works
SEZs increased exports but failed to connect with India’s wider economy; stronger integration could boost manufacturing, supply chains, and listed companies.
In 1965, India created Asia’s first export processing zone in Kandla. The idea was simple: build a special zone with easy rules, good infrastructure, and tax benefits so global companies could manufacture and export from India.
Decades later, the SEZ Act of 2005 expanded this idea. Hundreds of zones were created. Exports from SEZs grew rapidly and crossed 25% of India’s total exports by 2018. On paper, the policy looked successful.
But the real goal of SEZs was bigger. These zones were supposed to create supply chains, manufacturing ecosystems, and large employment. That did not fully happen.
Many SEZs became isolated “export islands”. Companies inside the zones exported goods, but they rarely built strong connections with Indian suppliers outside the zones. Strict rules like the Net Foreign Exchange requirement forced companies to export rather than sell locally.
Another challenge was sector mismatch. The policy framework suited IT parks more than manufacturing clusters. As a result, IT services dominated SEZ exports while labor-intensive manufacturing lagged behind.
Policy uncertainty also hurt investor confidence. Tax exemptions were introduced and later withdrawn, making long-term planning difficult for companies investing billions.
Today, the government is discussing SEZ 2.0. If the new framework integrates SEZs with domestic supply chains and improves manufacturing infrastructure, the impact could be significant.
• Larsen & Toubro
• Siemens India
• Bharat Electronics