SEZs must diversify beyond U.S. market and IT services: CEA

India's Chief Economic Adviser (CEA) highlighted that approximately half of all Special Economic Zone (SEZ) exports flow to just two destinations — the Unite...

What Happened

India's Chief Economic Adviser (CEA) highlighted that approximately half of all Special Economic Zone (SEZ) exports flow to just two destinations — the United States and the Netherlands — describing this as a "concentration risk" in a world of increasing trade fragmentation.
The CEA called on SEZ units to diversify both their destination markets and their sectoral focus beyond IT services, which currently dominate SEZ activity.
The remarks were made in the context of escalating US tariff uncertainty and shifting global supply chains, both of which amplify the risks of heavy market concentration.
A more diversified SEZ export profile — across geographies and sectors — was identified as necessary for India's long-term trade resilience.

Static Topic Bridges

Special Economic Zones (SEZs) — Legal and Policy Framework

Special Economic Zones in India are designated geographical enclaves operating under the Special Economic Zones Act, 2005, which received Presidential assent on 23 June 2005 and came into force on 10 February 2006. SEZs are treated as deemed foreign territory for trade and customs purposes, enabling export-oriented units to access duty-free imports, simplified procedures, and tax incentives.

The SEZ Act, 2005 replaced earlier Export Processing Zone (EPZ) policy; it was accompanied by the SEZ Rules, 2006 and administered by DPIIT through Development Commissioners.
SEZs must export their entire production (with minor exceptions); they are not primarily domestic-market suppliers.
From FY2005-06 to FY2023-24, the share of SEZ exports in India's total exports grew six-fold, from approximately 6% to 38%.
IT zones account for approximately 60% of all operational SEZs, followed by multi-product manufacturing zones (10%) and pharmaceuticals and engineering (approximately 5% each).
Major SEZ hubs: Bengaluru (IT), Hyderabad (IT/pharma), Chennai (IT/auto), Noida (IT/electronics), Surat (gems/textiles), Kandla (multi-product).

Connection to this news: With IT SEZs dominating the landscape and the US being the largest market for IT services exports, the structural concentration the CEA identified is a direct consequence of the sector-geography alignment within the SEZ ecosystem.

Concentration Risk in Export Markets

Export market concentration risk refers to the vulnerability of an economy or sector when a disproportionate share of exports flows to a small number of destination countries. A demand shock, policy change, or geopolitical friction in the concentrated market can cause outsized disruption to export revenues, employment, and foreign exchange earnings.

The Netherlands connection: Rotterdam (Netherlands) is Europe's largest port and serves as the entry/transit hub for much of Europe-bound Indian merchandise exports, causing statistical over-attribution of exports to the Netherlands in trade data (the "Rotterdam Effect").
The US accounts for approximately 17–18% of India's total goods exports and an even larger share of IT/software services exports.
WTO trade diversification literature recommends that no single market should account for more than 25–30% of a country's exports to avoid structural vulnerability.
US tariff changes, technology export controls, and visa restrictions for IT workers are the three main channels through which US-concentration translates into systemic risk for Indian IT-SEZ exporters.

Connection to this news: The CEA's statement specifically names the US and Netherlands as the twin concentration points and frames it as a structural trade-resilience issue — not merely a short-term tariff concern.

IT Services Dominance in SEZs and the Diversification Imperative

India's IT-ITES sector generated approximately $245 billion in revenue in FY2024 (including hardware and services), with software services exports constituting a large portion of SEZ activity. While IT SEZs have been a growth engine, their sectoral concentration limits the manufacturing base and supply-chain depth that India's broader industrialisation strategy requires.

The Development of Enterprise and Service Hubs (DESH) Bill was introduced in Parliament as the proposed successor to the SEZ Act, 2005, aiming to broaden SEZ-like benefits to domestic market-oriented units and manufacturing — though it has not yet been enacted.
GIFT City (Gujarat International Finance Tec-City) operates as a Special Economic Zone for financial services, representing an attempt to diversify SEZ activity beyond IT.
Global Capability Centres (GCCs) — currently 1,700+ in India — are predominantly located in IT SEZs; GCC diversification into engineering, R&D, and advanced manufacturing is a stated policy priority.
Export diversification targets under India's Foreign Trade Policy (FTP) 2023 include expanding merchandise exports and the share of non-IT services.

Connection to this news: The CEA's call to move SEZs beyond IT services aligns with the DESH Bill philosophy and GCC diversification strategy — using the current geopolitical reshuffling as an opportunity to rebalance.

Key Facts & Data

Share of SEZ exports to US + Netherlands: approximately 50% of total SEZ exports.
SEZ share in India's total exports (FY2023-24): approximately 38% (up from 6% in FY2005-06).
Legal basis: Special Economic Zones Act, 2005; SEZ Rules, 2006; administered by DPIIT.
IT zones as a share of operational SEZs: approximately 60%.
India's total IT-ITES export revenue (FY2024): approximately $245 billion.
US share of India's goods exports: approximately 17–18%.
Chief Economic Adviser who made the statement: V. Anantha Nageswaran.
Rotterdam Effect: Netherlands appears disproportionately large in Indian export data because Rotterdam serves as the European transit/entry hub.
Proposed successor legislation: Development of Enterprise and Service Hubs (DESH) Bill — not yet enacted.
GCCs in India: 1,700+ (predominantly in IT SEZs).