The Hindu Business Line : The SEZ conundrum

Like so many contentious policies that defy resolution one way or other, the Special Economic Zone surfaces in the public vision time and again. While the Commerce Ministry continues to uphold the SEZ as the appropriate vehicle for development within the shortest time conceivable, the Finance Ministry doubts the claim and is busy totting up the revenue that the Government will lose if the policy is pursued without check. That the SEZ development agenda is being followed despite the objections that have been raised, not simply by North Block on revenue considerations but also by the Government's allies, especially the Left, is evident in the popularity that the SEZ Act has gained among a wide spectrum of economic activity, from real-estate to food-processing. Both at the Commerce Ministry and in the States, the SEZ is the most favoured policy statement for wooing investors. Not surprisingly, the Finance Ministry has come out with some new data on the revenue losses in the light of the unabated interest in the SEZs.

The revised estimates of the cost to the Exchequer jack up the figure by Rs 8,717 crore so that by 2009-10 the total cost might stand at a lakh crore rupees. Significantly, the losses are more or less equally divided between direct and indirect tax revenues, a feature that gets to the core of the problem with the SEZ policy — its bad incentive rip-off. Normally, with direct and indirect taxes being reduced, one would expect a gain in revenues as economic activity picks up and liberal income-taxes bring more tax-payers into the fold. This is evident from the latest collections that show a steady rise in direct, that is, income and corporation tax revenues with indirect taxes diminishing in importance. Overall, the Exchequer gains in revenues. In the case of the concessions for SEZ developers and units within the zones, the Government loses on both counts. More than that, the exclusivity of the concessions punishes those in the non-SEZ areas by making them, in effect, subsidise the SEZs.

The Commerce Ministry's defence of the SEZ on the grounds of employment generation is debatable given the record of the erstwhile Export Processing Zones. Armed with flexible labour laws and liberal imports, SEZ units will be tempted to reduce labour costs through high capital investments in technology; that will boost productivity, not employment. In the meantime, the revenue losses shall be tangible and may impact the Finance Ministry's ability to fund the Eleventh Plan programmes through tax revenues, as the Planning Commission would like it to.

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