Financial News
SEZ policy: RBI frowns on revenue implications
Thursday, 31 August , 2006, 08:11

Mumbai: The policy of setting up Special Economic Zones (SEZ) is not much to the liking of the Reserve Bank of India.

For the RBI, though SEZs are to act as growth catalysts, there are concerns that the zones could aggravate the uneven pattern of development by diverting resources from less developed areas.

"The revenue implications of the taxation benefits also need to be factored. The revenue loss for the Government in providing incentives may be justified only if the SEZ units ensure forward and backward linkages with the domestic economy," said RBI in its Annual Report 2005-06 released on Wednesday. Under the SEZ Act 2005, which came into force from February 2006, units will get income-tax exemption.

Fiscal policy

Referring to the fiscal policy and the FRBM (Fiscal Responsibility and Budget Management) rules, the RBI has pointed out that revenue and gross fiscal deficits slipped in 2005-06 over the levels in the previous year. Larger deficit cuts are a must to meet the FRBM targets in the next two years. It would require an improvement in tax revenues by widening of the tax base and trimming of tax exemptions, the report said.

The RBI also said any deviation from the FRBM target would have both national and international repercussions in terms of credibility.

Economic Outlook

Despite hardening interest rates and rising inflationary pressures, the near-term outlook for Indian economy is optimistic, the RBI said in its annual report.

"Early trends from industrial production, service sector indicators and corporate performance and other indicators support an overall optimistic near-term outlook."

At the same time, the report pointed out that there are continuing demand pressures, especially high credit growth, that could exert pressure on prices when associated with supply shocks such as from oil."


Inflation was contained to 4.1 per cent by end March 2006 within the indicative trajectory of 5-5.5 per cent during 2005-05.

The report, however, said, "In view of the international oil prices remaining high and volatile, the outlook on inflation as well as choice of the appropriate manner of dealing with the pass-through of oil prices remains clouded."

Foreign exchange liberalisation

While the committee on capital account convertibility had submitted its report last month, the RBI in its report said, "In regard to foreign exchange market, the calibrated liberalisation of capital account transactions will be continued."

Demographic dividend

It has called for improvement in the educational facilities in the country as the country is expected to benefit further from the demographic dividend emerging from a higher proportion of younger population.

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