IMF warns India on SEZs

The International Monetary Fund on Thursday asked India to "very carefully" look at the much-touted Special Economic Zones, saying the giveaways and tax sops to the zones could divert industrial activity from the rest of the country.

"Overall, it (tax sops for SEZs) becomes yet another giveaway, which the government cannot afford," Raghuram Rajan, chief economist, IMF said in Sinapore after releasing the World Economic Outlook by the Fund.

It seems that tax sops are the only reason for setting up smaller SEZs of 10 hectares, he said, adding it would be far better to make people compete on the basis of the quality of the infrastructure they create in such zones.

People should be made to compete on the basis of rules and regulations that are there in SEZs to attract capital than making them attract capital because the tax laws are more beneficial, he said.

"Clearly, when you have economic zones of the size of ten hectares being set up, it is not clear that all these benefits of infrastructure, regulation, and so on, can in fact be implemented in those ten hectares," Rajan said.

Tax sops and giveaways may also divert a lot of activity from the rest of the economy into these zones, which creates problems of inequitable regional development, "also something that the Reserve Bank has focussed on," he said. Reserve Bank recently said in its annual report that SEZs could aggravate an uneven pattern of development, as they may pull out resources from less developed areas.

According to Finance Ministry's estimates, SEZs could lead to a revenue loss of Rs 1,75,000 crore (Rs 1750 billion) in direct taxes, customs and excise duties over the next five years, while the Commerce Ministry says the zones will lead to Rs 44,000 crore (Rs 440 billion) revenue gain for the government in a year.