Context: Why have special economic zones rules been relaxed?

Source: The Hindu

In an effort to lessen our reliance on imports, the Indian government has been implementing a number of initiatives to increase the country’s manufacturing of electronics and semiconductors. Among the earlier initiatives is the Semicon India program, which was started in 2022 and cost Rs. 76,000 crores. To further promote the domestic production of semiconductors and electronics, the government has now taken a step further and loosened important regulations pertaining to Special Economic Zones.

With artificial intelligence and machine learning merely the most recent in a long line of growing automation and digitization, semiconductors are at the core of a civilization that is becoming more and more electronic. All of these functions are made possible by semiconductors, which are tiny chips that process enormous volumes of data in devices like computers, smartphones, tablets, smart TVs, and smart speakers.

About 35% of all semiconductors produced worldwide in 2021 came from China, according to the Semiconductor Industry Association.

A number of changes to the Special Economic Zones (SEZ) Rules, 2006, were announced by the Ministry of Commerce and Industry. Rule 5, which addressed the SEZ’s size, was one of these modifications. In the past, a SEZ created specifically for the production of semiconductors or other electronic components required a minimum of 50 hectares of continuous land. Now, this has been drastically lowered to 10 hectares. Because of its smaller size, businesses will be able to invest less while still taking advantage of SEZ advantages including infrastructure support, duty-free imports, and tax incentives.

Allowing SEZ units that manufacture semiconductors and electronics components to supply domestically after paying the relevant levies is another modification. SEZs are often only focused on exports. In addition to protecting the SEZs from the continuous uncertainty surrounding international trade, permitting local sales guarantees a consistent supply for the domestic market.

Model Question:

Discuss the role of Special Economic Zones (SEZs) in promoting the semiconductor industry in India. Examine the challenges faced and suggest policy measures for improving their effectiveness in this context.

Model Answer:

Special Economic Zones (SEZs) are geographically designated areas with liberal economic policies aimed at attracting investment and boosting exports. In the context of semiconductors—considered the backbone of modern digital infrastructure—SEZs can play a pivotal role in accelerating India’s ambitions of becoming a global semiconductor manufacturing hub.

Role of SEZs in Promoting Semiconductors:

1. Infrastructure Support: SEZs provide high-quality infrastructure, uninterrupted power, and connectivity—key prerequisites for semiconductor fabs and chip assembly units.
2. Fiscal Incentives: Tax exemptions, duty-free imports, and simplified procedures make SEZs attractive for capital-intensive semiconductor industries.
3. Export Promotion: SEZs streamline export processes, enabling Indian semiconductor players to access global markets efficiently.
4. Clustering Effect: SEZs enable the co-location of supply chains, from wafer fabrication to testing and packaging units, promoting economies of scale.

Challenges:

1. Land and Licensing Delays: Semiconductor units require large, contamination-free land parcels with water and power security, often difficult to ensure in SEZs.
2. Skill Deficit: There is a shortage of highly skilled technical manpower trained in chip design and fabrication.
3. Technology and Investment Gaps: India’s SEZs struggle to attract global semiconductor giants due to weak R&D base and lack of critical technologies.
4. Limited Domestic Demand Linkages: SEZs, focused on exports, do not sufficiently cater to growing domestic chip demand under current norms.

Way Forward:

1. Integration with India Semiconductor Mission (ISM): Align SEZ policies with the ISM to ensure coordinated development.
2. Plug-and-Play Infrastructure: Establish semiconductor-specific SEZs with turnkey facilities.
3. PPP Model: Encourage global collaboration through public-private partnerships and technology transfer.
4. Reform SEZ Act: Amend the SEZ Act to allow flexibility in domestic sales and value addition mandates.

SEZs, if integrated with strategic planning and targeted policies, can act as vital engines for India’s semiconductor ecosystem. Leveraging them effectively will be key to achieving Atmanirbhar Bharat in electronics and semiconductors.