New Delhi – A government panel is currently formulating new Special Economic Zone (SEZ) regulations aimed at bolstering manufacturing and aiding exporters in navigating the challenges posed by steep US tariffs. The panel, comprising officials from the Commerce and Industry Ministry, NITI Aayog, and exporters, is exploring measures to help SEZ units leverage the domestic market in response to diminished competitiveness in the US.
The move comes after numerous SEZ units, particularly those predominantly serving the US market, requested de-notification due to the sudden imposition of tariffs, rendering their exports uncompetitive. While exporters have, until now, absorbed losses to maintain their presence in the US market, the situation has prompted a re-evaluation of SEZ policies.
Indian SEZs have struggled to match the success of their Chinese counterparts, which have significantly transformed manufacturing in China. Data indicates that India’s SEZ exports in FY25 reached $172 billion from approximately 276 units, with domestic sales accounting for only 2% of total production. SEZs currently benefit from tax advantages, including duty-free imports and domestic procurement.
Exporters are advocating for a ‘reverse job work’ policy, enabling SEZ units to undertake work for the domestic market. This longstanding request aims to enhance the efficiency of SEZ units, which often experience underutilization of labor and equipment capacity due to the seasonal nature of export demand.
According to a source familiar with the discussions, the primary concern regarding reverse job work revolves around the duty exemption on inputs. The government is keen to ensure fairness to domestic industries, which pay duty on capital goods, unlike SEZs. Factoring mechanisms are being considered to level the playing field.
Instead of pursuing a lengthy SEZ bill, authorities are exploring quicker methods to implement changes and support exporters impacted by US tariffs. However, the Finance Ministry has yet to provide its approval due to concerns about potential revenue implications.
The gems and jewelry industry is among the most vocal proponents of SEZ reforms, with approximately 65% of India’s studded jewelry exports originating from SEZ units. This sector is particularly vulnerable to US tariffs, as the US is the largest market for these goods. The Gem and Jewellery Export Promotion Council (GJEPC) has requested measures such as allowing reverse job work, domestic tariff area (DTA) sales, extended export obligation periods for US shipments, and interest moratoriums on packing credit and working capital loans.
Experts also cite concerns about a potential negative trade balance within SEZs. While traditional gems and jewelry exports are growing slowly, imports of raw materials are increasing. A report by the Indian Council for Research on International Economic Relations (ICRIER) suggests a thorough review of the trade balance, especially following the removal of Net Foreign Exchange Earnings (NFE) criteria for incentives.
SEZs have faced productivity challenges even before the US tariffs. The ICRIER report notes a decline in the number of gems and jewelry units in SEZs in recent years, attributing this to factors such as better non-fiscal incentives in competing countries, withdrawal of fiscal benefits in India, pandemic-related disruptions, and policy uncertainties.
Low investment in Research and Development (R&D) and Foreign Direct Investment (FDI) within SEZs are also areas of concern. The ICRIER survey revealed limited R&D investment among gems and jewellery SEZ units, along with gaps in skills training and technology adoption. Limited investment protection agreements and negative perceptions hinder FDI inflows, impacting technology acquisition, brand building, and marketing efforts.
