The recent move by the Indian Finance Ministry rejecting the demand of restoring the fiscal sops to dedicated special economic zones (SEZs) within the country is a welcome move. Government policies need to be tailored in such a way that they reduce tax exemptions instead of increasing those. The time has also come to correct the misplaced notion that only certain favoured enclaves like SEZs can help India transform into a manufacturing powerhouse. In order to experience improvements in investments and exports as well as to boost job production and economic activity, the entire country needs to be made into and treated as a special economic zone.
What are SEZs in the first place? Special economic zones are considered as artificial constructs that help promote the country’s export oriented production. SEZs usually function as enclaves separated from the rest of the country in terms of taxes, labor laws, infrastructure and administrative support. SEZs were considered essential in those days when the economic success of a developing country could not be taken for granted. However, the need for such enclaves has reduced significantly today.
The current economic status calls for a nationwide potential for growth. This can be attained only if the entire country is considered as one giant SEZ and possesses efficient infrastructure as well as speedy taxation and administration. This will allow one to prevent taxes from cascading. It would also make it easier for tax incidences to be monitored constantly at each and every stage of production.
Aiding in nationwide growth, the government must take several appropriate measures, including allowing private sector to mine coal commercially in order to increase the supplies to power plants, rationalizing labor laws and fast tracking project approvals.
Much of the regulations related to these projects lie in the hands of the respective state governments. As such, these governments would need to improve and develop the regulatory environment. The GST aka Goods and Services Tax would call for a borderless market, and would facilitate the seamless offset of the taxes paid at each stage of production. This would eventually help achieve the goal of not exporting tax aka a zero tax rate on exports.
The need of the hour is for India to increase its share of manufacturing in the current economy. This can be done by implementing GST, investing in infrastructure, easing the process of doing business in the country by cleaning up politics and stopping rent seeing, reforming labor laws, training young individuals in assorted skills, and reforming the existing compact between capital and labor in order to allow both to reap the fruits of globalized growth. A handful of SEZs at selected locations within the country are not going to help this happen.
The finance ministry recently rejected the return of fiscal sops to SEZs in the country. In order to achieve global growth, India would need to ditch the idea of having several SEZs within the country, and instead act as one giant special economic zone itself.