What is Economic Environment? LPG, SSI, SEZ policy all concept?

Ø What is Economic Environment?

The term economic environment refers to all the external economic factors that influence buying habits of consumers and businesses and therefore affect the performance of a company. These factors are often beyond a company’s control, and may be either large-scale (macro) or small-scale (micro).

Macro factors include:

Employment/unemployment

Income

Inflation

Interest rates

Tax rates

Currency exchange rate

Saving rates

Consumer confidence levels

Recessions

Micro factors include:

The size of the available market

Demand for the company’s products or services

Competition

Availability and quality of suppliers

The reliability of the company’s distribution chain (i.e., how it gets products to customers)

While companies often can’t control their economic environment, they can evaluate economic conditions before choosing to enter a particular market or industry or pursue other strategies.

The economic environment relates to all the economic determinants that influence commercial and consumer compliance. ‘The term economic environment indicates to all the external economic circumstances that affect purchasing practices of customers and markets and hence influence the production of the business.’

As a component of economic reformations, the Government of India declared a new industrial system in July 1991. The extensive characteristics of this system were as follows:

• The Government decreased the number of enterprises below mandatory licensing to six
• Many of the businesses held for the public sector under the initial policy, were justified. The purpose of the public sector was defined only to 4 industries of vital importance
• Disinvestment was conducted in case of many public sector industrial companies
• Policy towards foreign funds was expanded. The percentage of foreign equity partnership was extended and in many ventures, 100 percent Foreign Direct Investment (FDI) was allowed
• Automatic approval was now given for technology transactions with foreign firms
• Foreign Investment Promotion Board (FIPB) was established to support and channelise foreign financing in India

Liberalisation:

The economic reforms that were presented were directed at liberalising the Indian business and trade from all redundant restrictions and limitations. They indicated the end of the licence-permit-quota raj. The liberalisation of the Indian business has taken place with respect to:

• Eliminating licensing terms in most of the industries excluding a shortlist
• Freedom in determining the range of marketing activities i.e., no constraints on development or consolidation of business pursuits
• Dismissal of restraints on the transportation of commodities and services
• Freedom in deciding the cost prices of commodities and services

Privatisation:

The new set of economic changes intended at proffering a prominent position to the private sector in the nation-building rule and a diminished role to the public sector. This was a withdrawal of the growth policy attempted so far by Indian directors. To accomplish this, the administration redefined the role of the public sector in the New Industrial Policy of 1991, approved the policy of proposed disinvestments of the public sector and determined to the loss-making and weak industries to the Board of Industrial and Financial Reconstruction (BIFR).

Globalisation:

Globalisation implies the combination of the different economies of the world heading towards the development of a united (closely-knitted) global marketplace. Till 1991, the Government of India had followed a course of stringently controlling imports in price and quantity terms. These laws were with respect to:

• Licensing of imports
• Tariff limitations
• Quantitative constraints

The new economic reforms directed at business liberalisation were focused towards import liberalisation, export improvement through rationalisation of the tax structure and changes with respect to foreign exchange so that the nation does not remain separate from the rest of the world.

Ø Role of Entrepreneurship in economic development in a country

1. Wealth Creation and Sharing: By establishing the business entity, entrepreneurs invest their own resources and attract capital (in the form of debt, equity, etc.) from investors, lenders and the public. This mobilizes public wealth and allows people to benefit from the success of entrepreneurs and growing businesses. This kind of pooled capital that results in wealth creation and distribution is one of the basic imperatives and goals of economic development.

2. Create Jobs: Entrepreneurs are by nature and definition job creators, as opposed to job seekers. The simple translation is that when you become an entrepreneur, there is one less job seeker in the economy, and then you provide employment for multiple other job seekers. This kind of job creation by new and existing businesses is again is one of the basic goals of economic development. This is why the Govt. of India has launched initiatives such as StartupIndia to promote and support new startups, and also others like the Make in India initiative to attract foreign companies and their FDI into the Indian economy. All this in turn creates a lot of job opportunities, and is helping in augmenting our standards to a global level.

3. Balanced Regional Development: Entrepreneurs setting up new businesses and industrial units help with regional development by locating in less developed and backward areas. The growth of industries and business in these areas leads to infrastructure improvements like better roads and rail links, airports, stable electricity and water supply, schools, hospitals, shopping malls and other public and private services that would not otherwise be available.

Every new business that locates in a less developed area will create both direct and indirect jobs, helping lift regional economies in many different ways. The combined spending by all the new employees of the new businesses and the supporting jobs in other businesses adds to the local and regional economic output. Both central and state governments promote this kind of regional development by providing registered MSME businesses various benefits and concessions.

4. GDP and Per Capita Income: India’s MSME sector, comprised of 36 million units that provide employment for more than 80 million people, now accounts for over 37% of the country’s GDP. Each new addition to these 36 million units makes use of even more resources like land, labor and capital to develop products and services that add to the national income, national product and per capita income of the country. This growth in GDP and per capita income is again one of the essential goals of economic development.

5. Standard of Living: Increase in the standard of living of people in a community is yet another key goal of economic development. Entrepreneurs again play a key role in increasing the standard of living in a community. They do this not just by creating jobs, but also by developing and adopting innovations that lead to improvements in the quality of life of their employees, customers, and other stakeholders in the community. For example, automation that reduces production costs and enables faster production will make a business unit more productive, while also providing its customers with the same goods at lower prices.

6. Exports: Any growing business will eventually want to get started with exports to expand their business to foreign markets. This is an important ingredient of economic development since it provides access to bigger markets, and leads to currency inflows and access to the latest cutting-edge technologies and processes being used in more developed foreign markets. Another key benefit is that this expansion that leads to more stable business revenue during economic downturns in the local economy.  

7. Community Development: Economic development doesn’t always translate into community development. Community development requires infrastructure for education and training, healthcare, and other public services. For example, you need highly educated and skilled workers in a community to attract new businesses. If there are educational institutions, technical training schools and internship opportunities, that will help build the pool of educated and skilled workers.

A good example of how this kind of community development can be promoted is Azim Hashim Premji, Chairman of Wipro Limited, who donated Rs. 27,514 crores for promoting education through the Azim Premji Foundation. This foundation works with more than 350,000 schools in eight states across India.

So, there is a very important role for entrepreneurs to spark economic development by starting new businesses, creating jobs, and contributing to improvement in various key goals such as GDP, exports, standard of living, skills development and community development.

Ø Industrialization and motivating forces for entrepreneurial growth; Entrepreneurial scene in India

The final communique of the 2014 G20 Leaders’ Summit called for enhanced economic growth that could be achieved by the “promotion of competition, entrepreneurship and innovation”. There was also a call for strategies to reduce unemployment, particularly amongst youth, through the “encouragement of entrepreneurship”.

This desire to stimulate economic and job growth via the application of entrepreneurship and innovation has been a common theme in government policy since at least the 1970s. The origins of this interest can be traced back to the report produced by Professor David Birch of MIT “The Job Generation Process” that was published in 1979.

A key finding from this work was that job creation in the United States was not coming from large companies, but small independently owned businesses. It recommended that government policy should target indirect rather than direct strategies with a greater focus on the role of small firms.

Fostering the growth of entrepreneurial ecosystems

Over the past 35 years the level of government interest in entrepreneurship and small business development as potential solutions to flagging economic growth and rising unemployment has increased. It helped to spawn a new field of academic study and research.

This trend was boosted by the success the iconic “technopreneurs”. Technology entrepreneurs such as Steve Jobs of Apple, Bill Gates of Microsoft, Jeff Bezos of Amazon, or Larry Page and Sergey Brin of Google have become the “poster children” of the entrepreneurship movement.

One of the best known centres of high-tech entrepreneurial activity has been California’s Silicon Valley. Although it is not the only place in which innovation and enterprise have flourished, it has served as a role model for many governments seeking to stimulate economic growth.

Today “science” or “technology” parks can be found scattered around the world. They usually follow a similar format, with universities and R&D centres co-located with the park, and venture financiers hovering nearby looking for deals. Most have been supported by government policy.

What governments want is to replicate Silicon Valley and the formation and growth of what have been described as “entrepreneurial ecosystems”. However, despite significant investments by governments into such initiatives, their overall success rate is mixed.

So what are “entrepreneurial ecosystems” and what role can government policy play in their formation and growth? This was a question addressed by the first White Paper in a series produced by the Small Enterprise Association of Australia and New Zealand(SEAANZ). The purpose of these papers is to help enhance understanding of what entrepreneurial ecosystems are, and to generate a more informed debate about their role in the stimulation economic growth and job creation.

What is an entrepreneurial ecosystem?

The concept of the “entrepreneurial ecosystem” can be traced back to the study of industry clustering and the development of National Innovation Systems that took place in the 1990s. However, the term was being used by management writers during the mid-2000s to describe the conditions that helped to bring people together and foster economic prosperity and wealth creation.

In 2010 Professor Daniel Isenberg from Babson College published an article in the Harvard Business Review that helped to boost the awareness of the concept. The diagram below shows the nine major elements that are considered important to the generation of an entrepreneurial ecosystem. The focus of this first SEAANZ White Paper is on the role of government policy. Future White Papers will deal with the other eight elements.

Isenberg outlined several “prescriptions” for the creation of an entrepreneurial ecosystem.

The first prescription was to stop emulating Silicon Valley. Despite its success the Valley was formed by a unique set of circumstances and any attempt to replicate it in other places were unlikely to succeed. This led to a second prescription, which was to build the ecosystem on local conditions. Grow existing industries and build on their foundations, skills and capabilities rather than attempting to launch high-tech industries from scratch.

The third prescription was the importance of engaging the private sector from the start. Here the role of government is indirect and one of a facilitator not a manager. In trying to shape the growth of such ecosystems attention should be given to the support of firms with high growth potential that can help to generate a “big win” early on. This is the opportunity for local success stories to become role models for others.

However, care must be taken by governments not to try to pick winners or over engineer the system. High growth firms by nature are inherently risky and highly innovative firms are typically unique. As such there is no magic formula for their success. Helping such firms to succeed is more about removing obstacles to their growth such as anti-competitive cultures, unfair taxation on small firms, unnecessary “red tape” or lack of access to markets, skilled employees or investment capital.

In seeking to help stimulate entrepreneurial high growth firms it is important, according to Isenberg, to avoid flooding the system with too much “easy money”. This can take the form of government grants and venture capital funds that are too easily obtained.

What is important is to grow firms with strong root systems that can sustain their own growth as much as possible before seeking additional funding. Such firms should be financially sound; profitable and well managed, or their likely success rates will be low.

The focus should be on encouraging sustainable, growth oriented and innovative firms not simply fostering more start-ups. Starting a new business is the easy part, successfully growing it is the challenge.

What can government do to stimulate entrepreneurial ecosystems?

The challenge for government policy is to develop policies that work, but avoid the temptation to try to effect change via direct intervention. A 2014 study of entrepreneurial ecosystems undertaken by Colin Mason from the University of Glasgow and Ross Brown from the University of St Andrews for the OECD, developed a set of general principles for government policy in the relation to these ecosystems.

They contrast “traditional” versus “growth-oriented” policy approaches to enterprise development. The first of these approaches tends to focus on trying to grow the total number of firms via business start-up programs, venture capital financing and investment in R&D or technology transfer.

This is a “pick the winner model” and can also include business or technology incubators, grants, tax incentives and support programs. Such programs are essentially transactional in nature. It is not that they are of no value, but they cannot guarantee success via such direct intervention.

A “growth oriented” approach is more relational in nature. This focuses on the entrepreneurial leadership of these growth firms. It seeks to understand their networks and how to foster the expansion of such networks at the local, national and international level.

The most important thing is the strategic intent of the team running the business. Firms seeking to grow need to be given help in linking up with customers, suppliers and other “actors” within the ecosystem who can provide resources.

Government ministers can play a critical role in fostering enterprise and innovation. Their role is to direct the government departments and agencies to focus on the problem and develop effective policies.

A minister who has a good understanding of what entrepreneurial ecosystems are, how they form and the role and limitations of government policy is well-placed to generate more effective outcomes.

Key recommendations for government policy

In summary, key recommendations for government policy in the fostering of entrepreneurial ecosystems are:

1.    Make the formation of entrepreneurial activity a government priority – The formulation of effective policy for entrepreneurial ecosystems requires the active involvement of Government Ministers working with senior public servants who act as ‘institutional entrepreneurs’ to shape and empower policies and programs.

2.    Ensure that government policy is broadly focused – Policy should be developed that is holistic and encompasses all components of the ecosystem rather than seeking to ‘cherry pick’ areas of special interest.

3.    Allow for natural growth not top-down solutions – Build from existing industries that have formed naturally within the region or country rather than seeking to generate new industries from green field sites.

4.    Ensure all industry sectors are considered not just high-tech – Encourage growth across all industry sectors including low, mid and high-tech firms.

5.    Provide leadership but delegate responsibility and ownership – Adopt a ‘top-down’ and ‘bottom-up’ approach devolving responsibility to local and regional authorities.

6.    Develop policy that addresses the needs of both the business and its management team – Recognise that small business policy is ‘transactional’ while entrepreneurship policy is ‘relational’ in nature.

Ø Genesis and evolution of Government of India’s SSI policy

ü  Government Policies for Development and Promotion of Small-Scale Industries in India

Some of the Government Policies for development and promotion of Small-Scale Industries in India are: 1. Industrial Policy Resolution (IPR) 1948, 2. Industrial Policy Resolution (IPR) 1956, 3. Industrial Policy Resolution (IPR) 1977, 4. Industrial Policy Resolution (IPR) 1980 and 5. Industrial Policy Resolution (IPR) 1990.

Since Independence, India has several Industrial Policies to her credit. So much so that Lawrence A. Veit tempted to say that “if India has as much industry as it has industrial policy, it would be a far well-to-do nation.” With this background in view, in what follows is a review of India’s Industrial Policies for the development and promotion of small-scale enterprises in the country.

1. Industrial Policy Resolution (IPR) 1948:

The IPR, 1948 for the first time, accepted the importance of small-scale industries in the overall industrial development of the country. It was well realized that small-scale industries are particularly suited for the utilization of local resources and for creation of employment opportunities.

However, they have to face acute problems of raw materials, capital, skilled labour, marketing, etc. since a long period of time. Therefore, emphasis was laid in the IPR, 1948 that these problems of small-scale enterprises should be solved by the Central Government with the cooperation of the State Governments. In nutshell, the main thrust of IPR 1948, as far as small-scale enterprises were concerned, was ‘protection.’

 

2. Industrial Policy Resolution (IPR) 1956:

The main contribution of the IPR 1948 was that it set in the nature and pattern of industrial development in the country. The post-IPR 1948 period was marked by significant developments taken place in the country. For example, planning has proceeded on an organised manner and the First Five Year Plan 1951-56 had been completed. Industries (Development and Regulation) Act, 1951 was also introduced to regulate and control industries in the country.

The parliament had also accepted ‘the socialist pattern of society’ as the basic aim of social and economic policy during this period. It was this background that the declaration of a new industrial policy resolution seemed essential. This came in the form of IPR 1956.

The IPR 1956 provided that along with continuing policy support to the small sector, it also aimed at to ensure that decentralised sector acquires sufficient vitality to self-supporting and its development is integrated with that of large- scale industry in the country. To mention, some 128 items were reserved for exclusive production in the small-scale sector.

Besides, the Small-Scale Industries Board (SSIB) constituted a working group in 1959 to examine and formulate a development plan for small-scale industries during the, Third Five Year Plan, 1961-66. In the Third Five Year Plan period, specific developmental projects like ‘Rural Industries Projects’ and ‘Industrial Estates Projects’ were started to strengthen the small-scale sector in the country. Thus, to the earlier emphasis of ‘protection’ was added ‘development.’ The IPR 1956 for small-scale industries aimed at “Protection plus Development.” In a way, the IPR 1956 initiated the modem SSI in India.

 

3. Industrial Policy Resolution (IPR) 1977:

During the two decades after the IPR 1956, the economy witnessed lopsided industrial development skewed in favour of large and medium sector, on the one hand, and increase in unemployment, on the other. This situation led to a renewed emphasis on industrial policy. This gave emergence to IPR 1977.

The Policy Statement categorically mentioned:

“The emphasis on industrial policy so far has been mainly on large industries, neglecting cottage industries completely, relegating small industries to a minor role. The main thrust of the new industrial policy will be on effective promotion of cottage and small-scale industries widely dispersed in rural areas and small towns. It is the policy of the Government that whatever can be produced by small and cottage industries must only be so produced.”

The IPR 1977 accordingly classified small sector into three broad categories:

1. Cottage and Household Industries which provide self-employment on a large scale.

2. Tiny sector incorporating investment in industrial units in plant and machinery up to Rs. 1 lakh and situated in towns with a population of less than 50,000 according to 1971 Census.

3. Small-scale industries comprising of industrial units with an investment of upto Rs. 10 lakhs and in case of ancillary units with an investment up to Rs. 15 lakhs.

The measures suggested for the promotion of small-scale and cottage industries included:

(i) Reservation of 504 items for exclusive production in small-scale sector.

(ii) Proposal to set up in each district an agency called ‘District Industry Centre’ (DIC) to serve as a focal point of development for small-scale and cottage industries. The scheme of DIC was introduced in May 1978. The main objective of setting up DICs was to promote under a single roof all the services and support required by small and village entrepreneurs.

What follows from above is that to the earlier thrust of protection (IPR 1948) and development (IPR 1956), the IPR 1977 added ‘promotion’. As per this resolution, the small sector was, thus, to be ‘protected, developed, and promoted.’

 

4. Industrial Policy Resolution (IPR) 1980:

The Government of India adopted a new Industrial Policy Resolution (IPR) on July 23, 1980. The main objective of IPR 1980 was defined as facilitating an increase in industrial production through optimum utilization of installed capacity and expansion of industries.

As to the small sector, the resolution envisaged:

(i) Increase in investment ceilings from Rs. 1 lakh to Rs. 2 lakhs in case of tiny units, from Rs. 10 lakhs to Rs. 20 lakhs in case of small-scale units and from Rs. 15 lakhs to Rs. 25 lakhs in case of ancillaries.

(ii) Introduction of the concept of nucleus plants to replace the earlier scheme of the District Industry Centres in each industrially backward district to promote the maximum small-scale industries there.

(iii) Promotion of village and rural industries to generate economic viability in the villages well compatible with the environment.

Thus, the IPR 1980 reimphasised the spirit of the IPR 1956. The small-scale sector still remained the best sector for generating wage and self-employment based opportunities in the country.

 

5. Industrial Policy Resolution (IPR) 1990:

The IPR 1990 was announced during June 1990. As to the small-scale sector, the resolution continued to give increasing importance to small-scale enterprises to serve the objective of employment generation.

The important elements included in the resolution to boost the development of small-scale sector were as follows:

(i) The investment ceiling in plant and machinery for small-scale industries (fixed in 1985) was raised from Rs. 35 lakhs to Rs. 60 lakhs and correspondingly, for ancillary units from Rs. 45 lakhs to Rs. 75 lakhs.

(ii) Investment ceiling for tiny units had been increased from Rs. 2 lakhs to Rs. 5 lakhs provided the unit is located in an area having a population of 50,000 as per 1981 Census.

(iii) As many as 836 items were reserved for exclusive manufacture in small- scale sector.

(iv) A new scheme of Central Investment Subsidy exclusively for small-scale sector in rural and backward areas capable of generating more employment at lower cost of capital had been mooted and implemented.

(iv) With a view, to improve the competitiveness of the products manufactured in the small-scale sector; programmes of technology up gradation will be implemented under the umbrella of an apex Technology Development Centre in Small Industries Development Organisation (SIDO).

(v) To ensure both adequate and timely flow of credit facilities for the small- scale industries, a new apex bank known as ‘Small Industries Development Bank of India (SIDBI)’ was established in 1990.

(vi) Greater emphasis on training of women and youth under Entrepreneurship Development Programme (EDP) and to establish a special cell in SIDO for this purpose.

(vii) Implementation of delicencing of all new units with investment of Rs. 25 crores in fixed assets in non-backward areas and Rs. 75 crores in centrally notified backward areas. Similarly, delicensing shall be implemented in the case of 100% Export Oriented Units (EOU) set up in Export Processing Zones (EPZ) up to an investment ceiling of Rs. 75 lakhs.

 

Other industrial policies: Industrial Policy Resolution of 1991: In the year of 1991, the Government lunched "Structural Adjustment Programme" which has resulted in radical change in the policies governing the different facets of Indian economy. In order to impart more vitality and growth to small scale sector, the Government of India declared a separate policy statement for small, tiny and village enterprises. The basic drive of this resolution was to make simpler regulations and procedures by delicensing, deregulating, and decontrolling.

Important features of this policy are as under:
I. SSIs were exempted from licensing for all articles of manufacture.
II. The investment limit for tiny enterprises was raised to Rs.5 lakh irrespective of location.
III. Equity participation by other industrial undertakings was permitted up to a limit of 24 percent of shareholding in SSIs.
IV. Factoring services were to launch to solve the problem of delayed payments to SSIs.
V. Priority was accorded to small and tiny units in allocation of indigenous and raw materials.
VI. Market promotion of products was highlighted through co-operatives, public institutions and other marketing agencies and corporations.
Basically, the Industrial Policy Resolution of 1991 delineated developmental, deregulatory and de-bureaucratic measures and underscored the need to shift from subsidized and cheap credit to a system which would ensure acceptable flow of credit on timely and normative basis to the small scale industrial sector.

Contemporary policy measures for small scale and cottage Industries:
1. Comprehensive Policy Package for small scale and tiny sector, 2000: This policy was declared by the Government of India for the development and promotion of small scale and tiny sector which has major objective to increase the competitiveness of the sector.
The main focus of the policy package was:
I. The exemption for excise duty limit raised from Rs.50 lakh to Rs.1 crore.
II. The limit of investment was increased in industry related service and business enterprises from Rs.5 lakh to Rs.10 lakh.
III. The coverage of ongoing Integrated Infrastructure Development (IID) was enhanced to cover all areas in the country with 50 percent reservation for rural areas and 50 percent earmarking of plots for tiny sector.
IV. The family income eligibility limit of Rs.24000 was enhanced to Rs.40000 per annum under the Prime Minister Rozgar Yojana (PMRY).
V. The scheme of granting Rs.75000 to each small scale enterprise for obtaining ISO 9000 certification was continued till the end of 10th plan.

2. Industrial Policy Packages for small scale industries, 2001-02: This policy underlines the following measures:
I. The investment limit was enhanced from Rs.1 crore to Rs.5 crore for units in hosiery and hand tool sub sectors.
II. The corpus fund set up under the Credit Guarantee Fund Scheme was increased from Rs.125 crore to Rs.200 crore.
III. Credit Guarantee cover was provided against an aggregate credit of Rs.23 crore till December 2001.
IV. Fourteen items were de-reserved in June 2001 related to leather goods, shoes and toys.
V. Market Development Assistant Scheme was launched exclusively for SSI sector.
VI. Four UNIDO assisted projects were commissioned during the year under the Cluster Development Programme.

3. Policy Package for small and medium enterprises, 2005-06:
In 2005-06, the Government declared a policy package for small and medium enterprises. The main attributes of this policy package were:
I. The Ministry of Small Scale Industries has identified 180 items for de-reservation.
II. Small and Medium Enterprises were recognized in the services sector, and were treated at par with SSIs in the manufacturing sector.
III. Insurance cover was extended to approximately 30,000 borrowers, identified as chief promoters in the small scale sector.
VI. Emphasis was placed on Cluster Development model not only to promote manufacturing but also to renew industrial towns and build new industrial townships. The model is currently being implemented, in nine sectors including khadi and village industries, handlooms, handicrafts, textiles, agricultural products and medicinal plants.

4. Enactment of Micro, Small and Medium Enterprises Development Act, 2006:
In May' 2006, the President has modified the Government of India (Allocation of Business) Rules, 1961; Ministry of Agro and Rural Industries and Ministry of Small Scale Industries have been merged into a single Ministry, namely, "Ministry of Micro, Small and Medium Enterprises. As a result, the Micro, Small and Medium enterprises Development (MSMED) Act was endorsed, which offers the first ever legal framework for recognition of the concept 'enterprises' against 'industries' and integrating the three tiers of these enterprises viz. micro, small and medium and clearly fixed the investment limits for both manufacturing and service enterprises. It also provides for a statutory consultative tool at the national level with wide representation of all sections of stakeholders, particularly the three classes of enterprises.

5. North east industrial and investment promotion policy (NEIIPP), 2007: Due to backwardness of the North Eastern region, the Government of India broadcasted a new industrial policy for the NER including Sikkim. The policy termed as 'North East Industrial and Investment Promotion Policy (NEIIPP), 2007'. Its major objective is to encourage investment in the industrial sector by announcing fiscal and other incentives for the purpose of overall economic growth of this region. The policy with its package of incentives is intended to encourage development of industries so that the region overcomes its continuous backwardness. To summarize, Small scale and cottage industrial sector has developed rapidly in several developing and industrialised economies of the world. In India, they have emerged as a dynamic sector of Indian economy through their important contribution to GDP, industrial production and export. The advancement of small scale industries has been one of the major objectives of economic planning in India. The policies have undergone change from time to time. The six Industrial Policy Resolutions and eleven Five Year Plans sustained a continuous flow of incentives, both protective and promotional in nature, as an element of development strategy to meet socioeconomic objectives such as employment generation, removal of poverty and regional disparities, and optimum utilization of local resources.

Ø Definition of SEZs

Wei Ge has defined special economic zones as “characterized in general terms as a geographic area within the territory of a country where economic activities of certain kinds are promoted by a set of policy instruments that are not generally applicable to the rest of the countries.”^[iv]

Now the term Special Economy Zones (“SEZ”) covers a broad range of zones, such as free trade zones, export-processing zones, industrial parks, economic and technology development zones, high-tech zones, science and innovation parks, free ports, enterprise zones, and others.

The following are the main characteristics of Special Economic Zones (SEZ):

·        Geographically demarked area with physical security.

·        Administrated by single body/authority.

·        Enjoying financial and procedural benefits

·        Streamlined procedures

·        Having separate custom area

·        Governed by more liberal economic laws.

In recent times, buildings are being assigned as free zones, like those in Dubai.

India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965. With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000.

This policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at the Centre and the State level, with the minimum possible regulations. SEZs in India functioned from 1.11.2000 to 09.02.2006 under the provisions of the Foreign Trade Policy and fiscal incentives were made effective through the provisions of relevant statutes.

To instill confidence in investors and signal the Government's commitment to a stable SEZ policy regime and with a view to impart stability to the SEZ regime thereby generating greater economic activity and employment through the establishment of SEZs, a comprehensive draft SEZ Bill prepared after extensive discussions with the stakeholders. A number of meetings were held in various parts of the country both by the Minister for Commerce and Industry as well as senior officials for this purpose. The Special Economic Zones Act, 2005, was passed by Parliament in May, 2005 which received Presidential assent on the 23rd of June, 2005. The draft SEZ Rules were widely discussed and put on the website of the Department of Commerce offering suggestions/comments. Around 800 suggestions were received on the draft rules. After extensive consultations, the SEZ Act, 2005, supported by SEZ Rules, came into effect on 10th February, 2006, providing for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments. The main objectives of the SEZ Act are:

• generation of additional economic activity
• promotion of exports of goods and services
• promotion of investment from domestic and foreign sources
• creation of employment opportunities
• development of infrastructure facilities

It is expected that this will trigger a large flow of foreign and domestic investment in SEZs, in infrastructure and productive capacity, leading to generation of additional economic activity and creation of employment opportunities.

The SEZ Act 2005 envisages key role for the State Governments in Export Promotion and creation of related infrastructure. A Single Window SEZ approval mechanism has been provided through a 19 member inter-ministerial SEZ Board of Approval (BoA). The applications duly recommended by the respective State Governments/UT Administration are considered by this BoA periodically. All decisions of the Board of approvals are with consensus.

The SEZ Rules provide for different minimum land requirement for different class of SEZs. Every SEZ is divided into a processing area where alone the SEZ units would come up and the non-processing area where the supporting infrastructure is to be created.

The SEZ Rules provide for:

• " Simplified procedures for development, operation, and maintenance of the Special Economic Zones and for setting up units and conducting business in SEZs;
• Single window clearance for setting up of an SEZ;
• Single window clearance for setting up a unit in a Special Economic Zone;
• Single Window clearance on matters relating to Central as well as State Governments;
• Simplified compliance procedures and documentation with an emphasis on self certification

Approval mechanism and Administrative set up of SEZs

Approval mechanism
The developer submits the proposal for establishment of SEZ to the concerned State Government. The State Government has to forward the proposal with its recommendation within 45 days from the date of receipt of such proposal to the Board of Approval. The applicant also has the option to submit the proposal directly to the Board of Approval.

The Board of Approval has been constituted by the Central Government in exercise of the powers conferred under the SEZ Act. All the decisions are taken in the Board of Approval by consensus. The Board of Approval has 19 Members. Its constitution is as follows:

S.No.	Department	Members
-1	Secretary, Department of Commerce	Chairman
-2	Member, CBEC	Member
-3	Member, IT, CBDT	Member
-4	Joint Secretary (Banking Division), Department of Economic Affairs, Ministry of Finance
-5	Joint Secretary (SEZ), Department of Commerce	Member
-6	Joint Secretary, DIPP	Member
-7	Joint Secretary, Ministry of Science and Technology	Member
-8	Joint Secretary, Ministry of Small Scale Industries and Agro and Rural Industries	Member
-9	Joint Secretary, Ministry of Home Affairs	Member
-10	Joint Secretary, Ministry of Defence	Member
-11	Joint Secretary, Ministry of Environment and Forests	Member
-12	Joint Secretary, Ministry of Law and Justice	Member
-13	Joint Secretary, Ministry of Overseas Indian Affairs	Member
-14	Joint Secretary, Ministry of Urban Development	Member
-15	A nominee of the State Government concerned	Member
-16	Director General of Foreign Trade or his nominee	Member
-17	Development Commissioner concerned	Member
-18	A professor in the Indian Institute of Management or the Indian Institute of Foreign Trade	Member
-19	Director or Deputy Sectary, Ministry of Commerce and Industry, Department of Commerce	Member Secretary

 

Administrative set up

The functioning of the SEZs is governed by a three-tier administrative set up. The Board of Approval is the apex body and is headed by the Secretary, Department of Commerce. The Approval Committee at the Zone level deals with approval of units in the SEZs and other related issues. Each Zone is headed by a Development Commissioner, who is ex-officio chairperson of the Approval Committee.

Once an SEZ has been approved by the Board of Approval and Central Government has notified the area of the SEZ, units are allowed to be set up in the SEZ. All the proposals for setting up of units in the SEZ are approved at the Zone level by the Approval Committee consisting of Development Commissioner, Customs Authorities and representatives of State Government. All post approval clearances including grant of importer-exporter code number, change in the name of the company or implementing agency, broad banding diversification, etc. are given at the Zone level by the Development Commissioner. The performance of the SEZ units are periodically monitored by the Approval Committee and units are liable for penal action under the provision of Foreign Trade (Development and Regulation) Act, in case of violation of the conditions of the approval.

 

Objectives of SEZs

SEZs are normally established with the aim of achieving one or more of the following objectives:

1.    To enhance foreign investment, especially to attract foreign direct investment (FDI), thereby increasing GDP.

2.    Increase shares in Global Export (international Business).

3.    As experimental laboratories for the application of new policies and approaches- China’s large-scale SEZs are classic examples.

4.    Generation of additional economic activity, or in support of wider economic reform strategy, which reduces anti-export bias while keeping protective barriers intact. The SEZs of China, The Republic of Korea, Mauritius, Taiwan, and China, follow this pattern.

5.    Creation of employment opportunities and to serve as “pressure valves” to alleviate large-scale unemployment. SEZ programs of Tunisia and the Dominican Republic are frequently cited as examples of programs that have remained enclaves and have not catalyzed dramatic structural economic change, but remained robust, job-creating programs.

6.    In support of a wider economic reform strategy. In this view, SEZs are a simple tool permitting a country to develop and diversify exports. Zones reduce anti-export bias while keeping protective barriers intact. The SEZs of China, The Republic of Korea, Mauritius, Taiwan, and China, follow this pattern.

7.    Development of infrastructure facilities.

8.    Exposure to technology and global market.

According Douglas Zhihua Zeng, SEZs confer two main types of benefits, which in part explain their popularity- “static” economic benefits such as employment generation, export growth, government revenues, and foreign exchange earnings; and the more “dynamic” economic benefits such as skills upgrading, technology transfer and innovation, economic diversification, productivity enhancement of local firms, etc.^[v]

Benefits and Incentives

In order to encourage participation in Special Economic Zones, companies have been provided with certain benefits and incentives, including the following:

·        Tax benefits (Tax holidays, income tax exemptions etc.)

·        Liberal Labour Regulations.

·        Exemption from excise and customs duty on procurement of capital assets, consumable stores, raw-materials from domestic market.

·        Exemption from sales tax, import duty, income tax, minimum alternative tax and dividend distribution tax.

·        Streamlined procedures (online/single window).

·        Liberal approach in foreign direct investments.

·        Increased capital account convertibility.

·        Relaxed export regulation.

·        Profits could be repatriated fully.

·        Reimbursement of central sales tax paid on domestic purchases.

·        Non-applicability of related environmental laws.

Role of SEZs in International Business

One of the main objective of SEZ is to enhance exports, i.e. to have a prominent role in international business. A main factor in determining the success of SEZ is growth in the exports made by them. The purpose behind their establishment is to provide an internationally competitive environment to increase export, by making available goods and services free of tax and duties supported by convergent infrastructure.

In order to stimulate the exports, normally, related enactments were provisioned with the following:

·        Long-term and stable policy framework with minimum regulatory regime.

·        Expeditious and single window approval mechanism.

·        Import and export movements of goods are based on self-declaration.

·        No routine examination is made unless specific order from concerned authority.

·        Packages of incentives to attract foreign and domestic investments for

·        promoting exports-led-growth.

·        Exemption from custom duty on goods imported into the SEZ by the developers to carry out their authorized operations.

·        Exemption from customs duty on goods exported from the SEZ by the developer or SEZ units.

·        Free Trade and Warehousing Zones, to create trade related infrastructure to facilitate import and export of goods and services and to create world-class infrastructure for warehousing with all amenities.

·        Freedom to carry out trade transaction in free currency.

·        “Deemed Export” Facilities in the SEZ.

SEZs & International Business: From an Indian Perspective

The establishment of SEZ in India was envisaged as an important strategic tool to expedite the growth of international trade. This manifests itself in the form of increased exports as a unit set-up to produce goods and services. Hence, the increased level of export has been critical to the success of SEZs.

With the leverage of economic liberalization and introduction of SEZs on a wide scale, India has witnessed unprecedented growth in its exports.

Although the period of 1999-2000 witnessed a big change in the government policies towards exports due to economic liberalization, its growth remained almost static during this period. Detailed export data from the period 2001 to 2016 is shown below:

Year	Total
2015-16	171,637,804.58
2014-15	189,634,841.76
2013-14	190,501,108.86
2012-13	163,431,828.96
2011-12	146,595,939.96
2010-11	113,696,426.38
2009-10	84,553,364.38
2008-09	84,075,505.87
2007-08	65,586,352.18
2006-07	57,177,928.52
2005-06	45,641,786.15
2004-05	37,533,952.62
2003-04	29,336,674.75
2002-03	25,513,727.66
2001-02	20,901,797.34
2000-01	20,357,101.09

 

The overall growth rate of export during the period 1966-2002 is estimated at 42.4 percent. After the SEZ Act came into place in 2005, a tremendous growth in exports has been observed. Moreover, SEZ in India has also made a remarkable progress in terms of export promotion between the periods 2005-06 and 2010-11. During 2001-2010, it has shown a 121% growth over the previous year. The same is still continuing as shown in the above table.

Despite all this growth, as per the Report of the Comptroller and Auditor General of India Report[vi], the actual exports are far behind in comparison to the projection of companies:

Projection (RS. Cr)	Actual (RS. Cr)	%	No. of Developers	No. States
3,95,547.43 cr	1,00,579.70	-74.5%	84	9

 

Conclusion

With operational success, the role of the special economic zones has expanded from trade to investment technology, Research and Development, service, and training. Free zones have become the center of activity in modern economy. SEZs have played a significant role in economic enrichment of developing countries, by improving international business. However, due to the economic slowdown prevailing globally, the export businesses especially are at stake. Some of the countries are facing turmoil and set back due to unstable SEZ business.

Few definitions regarding SEZs

1. Special Economic Zone – Meaning

A special economic zone (SEZ) is a dedicated zone wherein businesses enjoy simpler tax and easier legal compliances. SEZs are located within a country’s national borders. However, they are treated as a foreign territory for tax purposes. This is why the supply from and to special economic zones have a little different treatment than the regular supplies. In simple words, even when SEZs are located in the same country, they are considered to be located in a foreign territory. SEZs are not considered as a part of India. Based of this it can be clearly said that under GST, any supply to or by a Special Economic Zone developer or Special Economic Zone unit is considered to be an Inter state supply and Integrated Goods and Service tax (IGST) will be applicable .

2. Meaning of Export/ Import

SEZ’s are considered to be located in a foreign territory and thus the transactions with SEZ’s can be classified as Exports and Imports. Here, Export means:

• Taking goods or services out of India from a special economic zone by any mode of transport or
• Supply of goods or services from one unit/developer in the SEZ to another unit in the same SEZ or another SEZ.

Import means:

• Bringing goods or services into a special economic zone from a place located outside India, by any mode of transport or
• Receiving goods or services from one unit/developer in the SEZ by another unit/developer located in the same SEZ or another SEZ.

3. GST and SEZ

Being in a SEZ can be advantageous to a certain extent when it comes to taxes. Any supply of goods or services or both to a Special Economic Zone developer/unit will be considered to be a zero-rated supply. That means these supplies attract Zero tax rate under GST. In other words, supplies into SEZ are exempt from GST and are considered as exports. Therefore, the suppliers supplying goods to SEZs can:

• Supply under bond or LUT without payment of IGST and claim credit of ITC; or
• Supply on payment of IGST and claim refund of taxes paid.

When a SEZ supplies goods or services or both to any one, it will be considered to be a regular inter-state supply and will attract IGST. The exception to this is, when a SEZ supplies goods or services or both to a Domestic Tariff Area (DTA), this will be considered as an export to DTA (Which is exempt for the SEZ) and customs duties and other Import duties will be payable by the person receiving these supplies in DTA.

4. E-Way Bill and SEZ

Under GST, transporters should carry an E-Way Bill when moving goods from one place to another if the value of these goods are more than Rs. 50,000. SEZ supplies are treated how the other inter-state supplies are treated. The SEZ units or developers will have to follow the same EWB procedures as the others in the same industry follow. In case of supplies from SEZ to a DTA or any other place, the registered person who facilitates the movement of goods shall be responsible for the generation of e-Way bill. Let’s understand this with an Example:

• XYZ is and unit in an SEZ located in Karnataka
• A is the recipient of goods manufactured by the SEZ and is located in Bangalore.
• The value of the goods being transported this time is Rs. 75000.

 

Ø Role of Industrial Estates in Providing Support to Small Scale Industries in India

One of the major handicaps faced by small-scale industries in India has been either lack, or insufficient infrastructure facilities. In order to provide small-scale units the proximity of other industrial units, the idea of establishing industrial estates was first adopted in India by the Small-Scale Industries Board (SSIB) at its meeting held in January 1955.

As a result, the first industrial estate in India was set up at Rajkot in Gujarat in September 1955. Since then, there is no looking back. By now, the number of industrial estates in the country had gone up to more than 650 making it the largest programmes of its kind in the world.

The objectives tagged to the programme included to give boost to the growth of small-scale industries in the country, to disperse industry outside metropolitan towns, to relocate existing units operating in congested areas, to provide sub­contracting opportunities to small industry and to improve operational efficiency of small units through common facilities. However, research studies report findings contrary to it. The units working outside industrial estates have performed better than units working inside the industrial estates.

The reasons held responsible for poor performance of industrial units working inside the industrial estates were but not confined to the following only:

a. Lack of essential infrastructure facilities such as roads, power and water.

b. Lack of common facilities such as tool room, heat treatment, or testing.

c. Lack of realistic survey prior to the establishment of the estate.

d. Lack of a clear idea about the relevance of products to the area.

e. Lack of local involvement and active participation in the programme.

Added to these problems was that the most of the estates were “general purpose estates” in diverse product groups having no organic relationship between them. As such, the possibility of establishing common production facilities was highly limited. Hence, in order to forge organic relationship between them, the Industrial Estates Programme was modified on two counts.

Firstly, the estates were set up on a functional basis in specific product areas like electronics, leather and rubber or as ancillary to present unit-such as HMT (Bangalore), BHEL (Bhopal) or ECIL (Hyderabad) etc.

Secondly, in the matter of funding, the estates became either co-operatives or the Government merely developed land and the entrepreneur has to build his shed according to an approved type design. Now, how to make this noble programme more effective to boost the growth of small-scale industry in the country? An industrial estate alone cannot create industry. It is not a magic wand.

The following factors, according to survey conducted by UNIDO (1978) are essential to make the industrial estate programme effective in India:

a. Existence of a large number of small firms or artisan shops in appropriate industrial sectors;

b. Entrepreneurs willing and able to take advantage of the facilities offered by the industrial estates;

c. A nucleus of skilled workers;

d. Government agencies with the skill and funds to plan and administer the programme;

e. Financial institutions willing to give credit to the units; and

f. Availability of adequate infrastructure in terms of water, electricity, and transport.

Ø Science & Technology Entrepreneurship Park (STEP)

The Science Parks and similar initiatives help in creating an atmosphere for innovation and entrepreneurship; for active interaction between academic institutions and industries for sharing ideas, knowledge, experience and facilities for the development of new technologies and their rapid transfer to the end user.

The Science & Technology Entrepreneurs Park (STEP) programme was initiated to provide a re-orientation in the approach to innovation and entrepreneurship involving education, training, research, finance, management and the government. A STEP creates the necessary climate for innovation, information exchange, sharing of experience and facilities and opening new avenues for students, teachers, researchers and industrial managers to grow in a trans-disciplinary culture, each understanding and depending on the other's inputs for starting a successful economic venture. STEPs are hardware intensive with emphasis on common facilities, services and relevant equipments.

The major objectives of STEP are to forge linkages among academic and R&D institutions on one hand and the industry on the other and also promote innovative enterprise through S&T persons.

Objectives

• To forge a close linkage between universities, academic and R&D institutions on one hand and industry on the other.
• To promote entrepreneurship among Science and Technology persons, many of whom were otherwise seeking jobs soon after their graduation.
• To provide R&D support to the small-scale industry mostly through interaction with research institutions.
• To promote innovation based enterprises.

Facilities and Services Provided by STEPs

• It offers facilities such as nursery sheds, testing and calibration facilities, precision tool room/central workshop, prototype development, business facilitation, computing, data bank, library and documentation, communication , seminar hall/conference room , common facilities such as phone, telex, fax, photocopying. It offers services like testing and calibration, consultancy.
• Training, technical support services, business facilitation services, database and documentation services, quality assurance services and common utility services .

The department has so far catalysed 15 STEPs in different parts of the country, which have promoted nearly 788 units generating annual turnover of around Rs. 130 crores and employment for 5000 persons. More than 100 new products and technologies have been developed by the STEPs / STEP promoted entrepreneurs. In addition, over 11000 persons have been trained through various skill development programmes conducted by STEPs.

STEPs are autonomous bodies registered as societies under the Societies Registration Act. 

Role of Host Institution

In order to achieve synergetic benefits and also to harness the knowledge and expertise available in academic and R&D institutions of excellence, every STEP needs to be promoted around a host institution which could launch, sustain and help the STEP grow. Therefore, the host institution has to play an important and crucial role in promotion and growth of a STEP. 

The host institution should aim at optimum usage of its facility by STEP. For this purpose, a periodic assessment of the priorities must be undertaken based on which re-allocation of resources might become necessary. During the stages of planning and implementation of the STEP project, the host institution must not lose sight of its slated goals and objectives with respect to academic excellence. 

STEP Model

Though a workable 'STEP-Model' has been evolved by an Expert Committee chaired by the late Prof. Y. Nayudamma, however, each STEP would have to carve out a niche for itself with regard to the types of products to be developed based on the availability of facilities and expertise in the host institution and also the industrial climate of the region. 

Each project envisages active involvement and participation of  agencies such as the host institution, ultimate user of the  facilities, financial institutions, government agencies and STEP management. 

Ø SEZ’S IN FOSTERING ENTREPRENEURSHIP DEVELOPMENT

Special Economic Zones (SEZs) derive their value from a combination of three key drivers: an encouraging regulatory environment that provides the necessary support the industry needs to take root in a new market; an operating environment that ensures both physical infrastructure (hard) and policies (soft) are in place to support businesses and their employees; and the more rudimentary element of incentives, financial and non-financial, that provide impetus for investment in a location that might other-wise be less appealing.

The UAE was a pioneer in harnessing the value of SEZs to attract foreign investment, driving growth in a more diverse range of economic activity with the launch of free zones in 1985. These free zones took advantage of mostly financial and non-financial incentives – which were unique in the region at the time.

However, as the initial growth and investor attraction plateaus out, the focus is increasingly sharpening on deeper value chain integration, where the lion’s share of GVA (gross value added) growth exists. Jebel Ali is a powerful example, with the development of Dubai South, integrating Jebel Ali Sea Port with the new Al Maktoum International Airport, and the provision of production/processing infrastructure to capture a far greater share of GVA than simple logistics alone offers.

With the development of such propositions, however, comes the need for a much deeper understanding of the comparative advantages needed for a sector (or even sub-sector) to ensure sustainable success of not just the one industry – but the economic outcomes for the host economy.

In line with much of the “new economy”, the traditional hard infrastructure components of SEZ propositions are reducing in relevance; the knowledge economy does not need an abundance of oil or iron ore on its doorstep, or industrialized trade routes through which to ship heavy goods.

As such, soft infrastructure is more important than ever: suitability of the regulatory regime; robust legal infrastructure to support IP rights and overcome business failures; the overall ease of doing business; the strength and consistency of institutions; and a compelling lifestyle proposition, coupled with intelligent incentives packages, are critical to a new SEZ proposition.

In our experience, a crucial aspect closely scrutinized by any potential investor in an SEZ is the governance model. Often, the primary catalysts for the creation of an SEZ are the institutional shortcomings in the host base economy, hence the governance of that zone must offer transparency, efficiency, consistency and security to succeed.

One of the most cited examples of a successful governance model is the Dubai International Financial Centre (DIFC). A material ingredient to its success can be attributed to its governance model (most famously the independent judicial system based on English law) to provide a compelling business environment for such economic activity.

Also, moving away from pure investor attraction or a real estate play, the new generation of SEZs should be measured on their contribution to the host nation’s economic objectives: increased (and diversified) GDP, better quality employment opportunities for citizen populations, and growth in export trade.

The new generation of special economic zones should be measured on their contribution to economic objectives.

Removing barriers

Ultimately, SEZs should be a catalyst or transitional tool towards the integration of economic activity within the base economy itself. In many cases, SEZs act as a “safe” pilot or proof of concept for institutional reform that can then be adopted in the host economy, removing the need for such zones and absorbing the full economic value of their activities.

The GCC is well placed to reach the aspirational goal of removing the boundaries between host economy and SEZ – as the soft infrastructure is now increasingly being adopted by the government into the base economy – as witnessed by the new investor visas and ownership laws.

The goal for Gulf countries, then, would be to attract the most innovative investors from across the globe and create advanced economic activity locally through an innovative framework of incentives, regulation and governance.