Monday, October 02, 2006

The SEZ situation

SEZ - Special Economic Zone for those unfamiliar with this particular Three Letter Acronym. Broadly, these are specially demarcated zones where industris can be set up with tax concessions amd a host of other benefits. The commerce ministry has been pushing for these with the intention of trying to emulate China where the brightest and most growing citiies / zones have benefited immensly from the SEZ concept.
However, not everything is a plus. These SEZ have to be setup in large tracts of land, and the only land available at such scales is agricultural land. The other main problem is from the finance ministry which has to arrange for all the revenue needed by the Govt for its grandiose spending plans. With SEZ's coming up, the Finance Ministry sees loss of tax revenue at a large scale and hence is very vocal about the problems it sees. In addition, there is a lot of buzz that a lot of these SEZ proposals are nothing but industuries going to re-locate their current setup to these new zones to save tax, this implying that new capacity setup is more of a myth. The RBI also tends to feel that a lot of this rush into SEZ's is essentially a real estate play and is insisting that banks be very careful in lending to this sector.
If all these are true, then indeed SEZ's are bad and should be banned lock stock and barrel or maybe allowed under special considerations only. The problem with this argument is that a lot of this opposition is essentially self-serving or for special interests.
Land is a precious commodity, and like all precious commodities, should be properly evaluated. If land has multiple uses, then the best and most highly valued use should be favoured. It would be nobody's argument that the land is more valuable if it is being used for industrial value addition rather than for farming. As long as the farmer is getting a valid marked linked price for his land, there should be no objection. However, politicians being what they are, if an issue can give them publicity, why not jump on it.
With regard to the tax implications, if the SEZ policies can bring in fresh capital (needs some monitoring), then it will have a multiplier effect on the economy of the whole region. It will result in higher wages, greater employment, establishment of allied/ancillary units and eventually higher taxes. There is no reason why we cannot emulate the Chinese model in a democractic way.
RBI has suddenly turned very conservative (we can actually see almost open confrontation between the Finance Minister and the RBI Governor on a wide variety of issues). RBI I think is of the belief that everything is portending towards an asset bubble and it is the only institution that can prevent that from happening. RBI should continue monitoring, but it needs to be more objective.
However, these issues need to be cleared fast, else the opposition on these false premises will continue to grow. We already had a case of Mrs. Sonia non-PM Gandhi raising a word against such policies. The only good thing about all this discussion is that state Chief Minister's have suddenly started believing that these SEZ's can bring a lot of benefits to their states and have turned into full fledged converts.

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posted by Ashish Agarwal @ 12:00 PM