SEZ What? - II

Continued from previous post

It is the SEZ as a policy and the wisdom behind that I question.

For this let me list the salient features of SEZ. [From WIKI]

1) Special tax incentives for foreign investments in the SEZs.
2) Greater independence on international trade activities.
3) To promote export.

First To develop India needs investment, foreign investment will be an important component in that. However tax incentives are not very effective in long terms,

Second International trade activities should not be restricted, period. This should be one of the principles of the economic policy and the law through out the country (and not only for a special region) should reflect this.

Third Trade is trade, whether it is export or domestic is of not much consequence. In principle if the producers are competitive they are as capable of competing in domestic market as in international market. A long list of economist (from Adam Smith downwards) have criticized this tendency of policy makers to overvalue exports due to mistaken notion of markets and enacting policies which subsidizes

Ultimately it all boils to what is the purpose of taxation and what is the purpose of laws.

Taxation should be as far as possible for purpose of financing the state and Law should be promugulated when they help in ensuring protection of freedom and rights.

Therefore having a differential rate of taxation and a different set of laws implies

1) Either that tax and laws in rest of the country are not what they should be.
2) Or the taxes and laws in special economic zones are not what they should be.

Both the cases are unaccpetable.*

By creating SEZ the powers that be either create Tax arbitrage. Further, this sort of shortcut neglects to address totally unjustified restrictions on Indian economy and irrational labour regulations.

Therefore the need of the hour is to focus on the fundamentals of economy and remove the flaws, and not to create arbitrarily and ill thought schemes borne out of control freaks in bureaucracy and legislature.

* In one case I do concede that giving financial incentives makes sense which is to direct growth towards backward areas, this is not only beneficial to the specific areas but also eases off the pressure of immigration from more developed areas.