India’s uneven experience with spatial industrial policy has made policymakers deeply cautious about zoning as a development tool. Special Economic Zones (SEZs), launched with high expectations in the mid-2000s, were meant to catalyse export-led growth and regional transformation. Instead, they largely became fenced enclaves with weak spillovers, underutilised land and fading relevance once fiscal incentives were rolled back. Against this backdrop, Andhra Pradesh’s decision to reorganise the State into three large Economic Development Zones represents a significant departure. The real issue is not whether this resembles SEZs, but whether it addresses the structural reasons zones failed in India.
Why SEZs lost credibility in India
SEZs, anchored in the Special Economic Zones Act, 2005, were designed to attract investment through tax holidays, duty-free imports and regulatory exemptions. While this model initially boosted exports, it produced islands of activity rather than integrated growth centres. As WTO disciplines tightened and domestic policies introduced sunset clauses, the fiscal value proposition eroded. Firms exited, and many zones hollowed out, leaving behind large tracts of idle land.
Economic design flaws: incentives without productivity
A central weakness of Indian SEZs was their incentive-driven design. Competitiveness depended on tax exemptions rather than productivity, innovation or deep supply chains. Once incentives faded, little remained to sustain activity.
Scale compounded the problem. Most SEZs were no larger than industrial estates, spanning a few hundred or thousand hectares. In contrast, successful international zones operated at city or metropolitan scale. The Shenzhen Special Economic Zone succeeded not because of tax breaks alone, but because it functioned as an integrated urban-industrial system, where labour markets, housing, logistics and supplier networks evolved together.
How Andhra Pradesh rethinks scale and structure
Andhra Pradesh’s zoning model implicitly recognises this scale constraint. Instead of fenced estates, it proposes three sub-state economic regions: North Coastal (centred on Visakhapatnam), Central Coastal (around Amaravati) and Rayalaseema (anchored by Tirupati). Each zone is built around a distinct production logic—port-led industry, agro-processing and logistics, or renewables and horticulture.
This matters because agglomeration economies—knowledge spillovers, labour pooling and supplier specialisation—emerge only beyond a critical spatial and economic threshold. By treating zones as regional ecosystems rather than isolated estates, the model attempts to correct a core SEZ design failure.
Institutional failure: fragmented authority and land rigidities
SEZs also faltered due to institutional fragmentation. Despite promises of “single-window clearance,” approvals were split across multiple ministries and agencies, leading to long delays and diffused accountability. By the mid-2010s, less than 40% of notified SEZ land was actually utilised.
Rigid land rules worsened the problem. Contiguity and minimum-area requirements made little sense for services or vertically intensive industries. Exit and repurposing were difficult, turning land into a speculative asset rather than productive capital.
A governance experiment in coordination
Andhra Pradesh’s proposed architecture directly targets these coordination failures. Each zone will be headed by a dedicated CEO with delegated administrative and financial powers, supported by zonal committees of regional ministers and legislators. A Chief Minister–chaired steering committee provides vertical integration across the State.
This structure seeks to collapse fragmented authority into a single decision locus per zone, reducing transaction costs and accelerating project timelines. Crucially, it also treats land as a flexible input rather than a one-time political transaction.
Political economy: changing incentives and accountability
Perhaps the deepest failure of Indian SEZs was political-economic. Zones often became instruments for land monetisation, with developers capturing rents while infrastructure costs were socialised. Once land was acquired and incentives secured, pressure to generate spillovers into surrounding regions was weak.
Andhra Pradesh’s model alters this incentive structure. Zones are embedded within the State’s normal political geography rather than carved out as exceptional jurisdictions. Outcomes become politically attributable to identifiable authorities—zonal CEOs, regional ministers and ultimately the Chief Minister—raising the reputational and electoral cost of under-performance.
Credibility beyond tax incentives
Policy instability further undermined SEZs, with repeated rule changes, tax withdrawals and inconsistencies across trade and industrial policies. Andhra Pradesh’s collaboration with NITI Aayog and the Singapore government on zone-specific vision plans functions as a non-fiscal commitment device, signalling longer-term policy credibility rather than short-term incentives.
What to note for Prelims?
- Objectives and limitations of SEZs under the SEZ Act, 2005.
- Low land utilisation and weak spillovers in Indian SEZs.
- Three Economic Development Zones of Andhra Pradesh and their focus areas.
- Concept of agglomeration economies.
What to note for Mains?
- Reasons for SEZ failure in India: economic, institutional and political-economy dimensions.
- Comparison between Indian SEZs and East Asian models like Shenzhen.
- Andhra Pradesh’s zoning strategy as a governance experiment rather than a fiscal one.
- Structural constraints of land markets, bureaucracy and political accountability in India.
