SPECIAL ECONOMIC ZONES (SEZ): AN ANALYSIS

The Special Economic Zone (SEZ) has recently turned highly controversial in India. One aspect of the controversy relates to land acquisition, which is an important issue in its own right. To get a better view over SEZ we need to analyse the basic concept, benefits and costs associated with SEZ.

Conceptually, SEZ operates like foreign entities within the territory of a country. They are usually separated by physical barriers from each other and from rest of the countries. They have no trade barriers. The countries apply trade barrier strictly within the area excluding SEZs. Which is called the Domestic Tariff Area (DTA). Any good sold by agents within DTA to agents inside SEZ are treated as exports of the country and those purchased by agents in DTA from SEZs are treated as imports subject to custom duty. Any trade between SEZ and outside world is allowed to by pan all customs requirements applicable to DTA.

Any public, private or joint sector enterprise, state and central government can establish SEZ. The minimum stipulated area for a multiproduct SEZ is 1000 hectares with at least 25% of the area earmarked for the development of processing. The minimum area is reduced to 100 hectares if the SEZ is devoted exclusively to services or is located near a port or airport. The limit is 200 hectares if the SEZ located in a state listed in the rules or a union territory. The police provide tax breaks to SEZ developer as well as to units located in SEZ. Among other things the developer is granted a complete tax holiday for any 10 consecutive years in the first 15 years, beginning with the year in which SEZ is notified. Likewise, units in SEZ are given 100% tax exemption from profit tax in the first 5 years and 50% for 2 additional years.

From an economic standpoint, the first question which arises is whether the SEZs would improve efficiency vis-à-vis the status quo. To answer this we need to analyse the cost and benefits regarding SEZ. SEZ may show lower efficiency due to absence of various tax breaks; the least-cost location of a unit may be outside the SEZ. Also, tax break in the SEZ that are not available elsewhere will result in loss of revenue. This loss will have to be recovered from alternative sources leading to further inefficiency.

Against these costs, we must consider the benefits of SEZ. First, international trade in India remains subject to substantial bureaucratic red tape. Domestic indirect taxes that must be reimbursed, when goods are exported are not always fully reimbursed. The SEZ help overcome these inefficiencies. Second, the use of instrumentality of SEZ to relax some of the most burdensome provisions in the labour regime helps see the emergence of firms.

CONCLUSION:

There is no doubt that ideally, India should provide the same business environment and flexible labour market regime it is trying to create in SEZs in the entire country. It should also refrain from the tax breaks it has offered. But the expected benefits of SEZs as implemented still dominate the costs.  The ultimate test of their success will be whether or not they help promote large-scale manufacturing of labour-intensive products. If success is achieved, it can even open door to the extension of the policy throughout India.

-ANAND PRAKASH

B.A.(H) ECO. 3RD YEAR

Inflation: boon or bane?

Today the worldwide economic scenario presents contrasting look with USA &European Union grappling with falling output, low levels of demand and record levels of unemployment. Opposite is the case with emerging nations including INDIA, CHINA, etc. where prices are sky high threatening their long yearning dream of making 21^st century as ASIAN CENTURY. In nutshell, west is being haunted by deflation having its roots in recession of 2007 and east is down with inflation.

Current events like USA debt-ceiling crisis, its downgrading by S&P(STANDARD & POOR) and countries like SPAIN, ITALY,GREECE giving out grim look on economic front, it’s  evident that world economy is reeling under the burden of rising burden of government debt in OECD countries. Policymakers, across the globe, are vouching for different measures ranging from cutting public spending to raising taxes.

Although a seemingly paradox, INFLATION can prove to be the cure for this debt addiction of big economies. Inflation erodes the real value of outstanding debt. It is a tax by another name that helps governments balance budgets. It is unpopular, but right now spending cuts and tax increases look even more unpopular. In cases of political gridlock, inflation can be an unwitting solution because it can happen without explicit government action.

 We will see how it happens through a simple illustration. Take the case of USA. As is the situation, US govt. need to repay the debt to other sovereign bond holders not in terms of dollar but in the form of foreign currency. Here comes the role of foreign exchange market.

Let the general price level in USA be PA and the general price level in foreign country is Pf .Exchange rate between these two nations in its simplest form would be determined as:

                               EXCHANGE RATE, FX=Pf/PA ;               

Here FX is the effective price that USA will pay for the debt. As the price level in USA will rise, a sort of inflation which is, it will pay fewer amounts in real terms.

Mathematically, if PA goes up, FX would fall; keeping Pf constant.

Neither massive stimuli (as in the US) nor austerity budgets (as in the UK, Greece, Portugal, Ireland and Spain) look like producing much-needed growth. Without growth, the debt/GDP ratios of these countries will keep worsening. The limits of Keynesian economics have been exposed cruelly. Big stimuli can get you out of a recession, but cannot guarantee that growth will be fast enough to automatically tame burgeoning debt. Keynes formulated his theories in the context of a closed economy. But today OECD (organization for economic co-operation & development) economies are open, so fiscal and monetary stimuli can leak out. If you stimulate consumer spending through tax cuts, you may simply stimulate imports rather than domestic production. A monetary stimulus may mean that cheap money is used to invest in other countries, not your own. This partly explains why huge stimuli in OECD countries have fuelled growth in emerging markets and commodity producers rather than in the OECD.

 Inflation will enable the OECD to strike back. It will erode the real value of huge foreign exchange reserves – and private holdings of OECD gilts (govt. bonds) and corporate bonds – held by developing countries, and thus amount to a massive write-down of OECD debt. Developing countries will want to diversify out of OECD gilts (bonds), but there are no comparable adequate alternatives.

SO what we hear every day that everything is relative and not absolute comes true for Inflation. Rising prices do burn big holes in our pocket but in the context of USA & European Union, it could well prove to be a blessing in disguise.

-         Kumar Ashutosh

simpleashu441@yahoo.in