(RBI) said that “growth momentum of recent years is likely to continue during the year” but cautioned on the Special Economic Zones (SEZ) as a model for developing industries and generating jobs. Reviewing the economy in its annual report, the RBI said that India has seen high economic growth over the last 3 years supported by strong services and manufacturing expansion suggesting that this growth has “structural factors, although supported by cyclical and seasonal components,” and is likely to continue. However, it said that the SEZ model “could aggravate the uneven pattern of development” as it would pull “out resources from less developed areas” and the “revenue implication of taxation benefits” could be “justified only if SEZ units ensure forward and backward linkages with the domestic economy.”
The Government had announced major tax breaks for SEZs and
many corporate majors announced plans to create such zones to benefit from these breaks. However, major investment bankers such as Morgan Stanley had warned that intent to start SEZ is different from actual investments and management would require sizeable policy changes. A decline in exports caused panicking Board of Trade officials to propose SEZ
as a panacea for investments and quick procedural clearances.
The argument was that many countries including
Singapore
and
Japan have been asking for SEZs that will accelerate investment and trade with India. While the SEZ model will improve procedural aspects, the ones proposed in India are much smaller in size and not derive the benefits of large scale ones as in China. ONGC
has plans to build its new
USD 6 billion plant in Mangalore SEZ
but it is unclear how that a SEZ model for that project will help the Indian economy.
Internal divisions over the loss of revenue and justifiability of this plan between Finance Minister P. Chidambaram and Commerce & Industry Minister Kamal Nath surfaced displaying once again a lack of political accountability and forums for consultations with experts and stakeholders for collaborative decision making within the Indian governance model.
The debate over SEZ primarily stems over perceived benefits of industrialization such as employment generation, development of ancillary industries, alleviation of poverty, etc that needs to be balanced with the loss of revenue streams from tax breaks. Strangely, the leftist line is that such forms of development will rob underdeveloped areas of resources and benefit only the rich because China ’s growth model is based predominantly on such a model. The RBI’s observation should be seen as a warning against open-ended SEZs that would continue to grant tax breaks into perpetuity—which is precisely the current policy. The RBI’s reference to “forward and backward linkages” is a clear indication that the current policy is half-baked encouraging profiteering and haphazard growth. For example, while industrialization should be encouraged, the current policy grants tax breaks to property developers and excessive land to industries at nominal costs is inexplicable.
The RBI also highlighted several risks, primarily linked to the global economy, which could compromise economic growth. These include escalation of crude oil prices, mismanagement of macroeconomic imbalances in major economies (specifically the US ), inflation from input cost increases and supply shortage, and a hardening of global interest rates. While most of these factors are beyond the control of Indian managers, internally evident risks include water management from monsoon imbalances, infrastructural bottlenecks, and mismanagement of inflation. The visiting IMF Managing Director Rodrigo de Rato echoed the same concerns as the RBI
