A much-anticipated study commissioned by the finance ministry has concluded that claims of big drops in tax revenues from the proliferation of Special Economic Zones (SEZs) has been grossly exaggerated, while the potential benefits in terms of enhanced economic activity and employment are substantial.
“This policy is an important initiative taken by the government. In our country where 60% of the population is dependent on agriculture, we need to promote economic activity outside it. This is one initiative that has been taken and there can be no foolproof policy. Whichever way you look at it, it (SEZs) is a net gain,” said Aradhna Aggarwal, a reader in Economics at the department of Business Economics, Delhi University, and author of the study.
The study, carried out by the Indian Council for Research on International Economic Relations (Icrier), puts the finance ministry in a spot as it has been vocally opposed to the setting up of a large number of SEZs. The ministry had cited an earlier National Institute of Public Finance and Policy study to claim that SEZs would lead to a Rs90,000 crore loss in revenues.
The revenues issue, which has put the finance and commerce ministries at odds over SEZs, has taken somewhat of a back seat in recent months though, as the issue of land acquisition for SEZs became an emotive issue for critics of the zones. “If the size of SEZs are optimal, in the long run they will spawn economic activity to more than offset revenue losses,” said N.K. Singh, former revenue secretary. Currently, too many SEZs have been sanctioned, he added.
The Icrier study, Economywide Impact of Export Promotion Schemes: A quantitative assessment of SEZs, EOUs and STPI, was commissioned by the revenue department in November. “We received the (final) report 10 days ago,” said a senior official at the finance ministry. The report would be sent to a parliamentary panel that wanted an independent study to be conducted on the economic impact of SEZs, the official added.
The study looks at several scenarios and also factors in the multiplier effect that SEZs would generate in the domestic tariff area (DTA) through the demand for inputs. It has assumed an investment projection of Rs2.3 trillion, based on the approvals submitted to the commerce ministry, and an incremental capital output ratio, the output generated by every additional unit of capital, of 3.5.
In the first scenario, which assumes that no IT firm would migrate to SEZs, the revenue losses from taxes foregone would be about Rs19,429 crore over three years through 2009.
Over the same period, the benefits would include generation of direct employment of 530,000 people and indirectly, through construction activity, of 1.3 million. The net economic activity or the contribution of the SEZ to the national income is estimated at Rs95,429 crore. In other words, even after accounting for revenue losses, the net economic benefit would work out to Rs76,000 crore.
The study has also included the multiplier effect on the rest of the economy as the units in SEZs demand inputs from the DTA. The enhanced economic activity, it argues, would generate Rs21,000 crore in additional tax revenues over the next three years and additional employment of 1 million people. Together, they more than offset the losses in tax revenue.
Since several IT companies have begun to migrate to SEZs, the Icrier study has also simulated the losses and gains in these scenarios. Since this will not be new economic activity generated because of SEZs, the total economic benefits stand reduced. The study has assumed two scenarios, where software firms account for 40% and 60% of SEZ units. In both instances, though the net economic benefits stand drastically reduced, they more than offset the tax income foregone, Rs19,429 crore. In the case of 40% migration, the net economic benefit is Rs29,500 crore and Rs19,747 crore when the assumed migration is 60%.
At the end of the first week of August, approvals had been granted to set up 362 SEZs, of which 136 had been notified. A commerce ministry statement said Rs45,377 crore had been invested in notified SEZs and 38,405 people were directly employed in them.