IMF chief economist Raghuram Rajan has cautioned the government on the huge revenue losses on account of Special Economic Zones, but praised the scheme that will help make India's exports globally competitive.
In an article in the latest issue of IMF's quarterly magazine Finance & Development, he said the scheme to create export promotion zones was 'praiseworthy' and 'laudable.' This would provide environment and infrastructure that 'will allow them to be internationally competitive.'
However, the India-born economist, who recently announced quitting IMF by the end of this year, observed that even in these zones interest groups were pushing for tax holidays and some segments of government were supporting this demand.
"Not only will such tax holidays make the government forgo revenue it can ill afford to lose, they also offer firms an incentive to shift existing production to the new zones at substantial cost to society," he said.
"If you create perverse economic incentives and then rely on bureaucrats to stand in the way of businesses exploiting those incentives, the outcome will be little more investment than would otherwise have happened and a lot less revenue, but much richer bureaucrats," he said.
The SEZ policy has been in a big controversy, especially due to divergent opinions of finance and commerce ministry.
While the finance ministry argues that SEZs would result in revenue losses to the tune of a staggering Rs 170,000 crore (Rs 1,700 billion) in the next five-ten years, the commerce ministry has asserted that the zones would not only attract over Rs 100,000 crore (Rs 1,000 billion) of fresh investments but also create more than 500,000 jobs.
The Reserve Bank of India had recently expressed concern over revenue losses, though it noted the losses can be justified if SEZs generate linkages with the rest of the economy.
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