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Declaring entire India as SEZ will spur tionwide growth

Sentinel Digital DeskBy : Sentinel Digital Desk

  |  29 April 2015 12:00 AM GMT

By Priyanku rayan Baruah

The recent move by the Indian Fince 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 tionwide 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 tionwide 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, ratiolizing 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.

Even Japan feels the brunt of reduced business optimism as more and more companies in the country move away from ‘Abenomics’ to foster growth. However, the more recent deflation beating policies churned out by Japan could possibly see a revival of business expectations as prices are driven up next year.

Japan, the third largest economy in the world, has been facing a steady recession period for quite some time now. The Gross Domestic Product has shrunk considerably in successive quarters, the Yen has recorded a seven year low against the dollar and the infrastructure capacity has seen a massive fincing deficit. While many believe that this recession is short lived, there is no doubt the country’s recession would have a direct impact on India as well as the rest of the world.

India enjoys an economic partnership agreement with Japan. However, the recent years have seen a drop in the bilateral trade between the countries, with the currencies of both countries falling against the dollar. Japan’s private foreign direct investment in India has been around $15-16 billion since 2000. Indian Prime Minister rendra Modi’s recent visit to Japans saw a mutual agreement that would see FDI commitments between the two countries rise to over $35 billion in the next few years.

The weak yen would lead to more Japanese exports reaching Indian shores and abroad. With the yen expected to remain week for more period, one would expect Japan to switch to options like borrowing in yen and buying in other currencies. This carry trade option would facilitate the increased flow of money into manifold Indian equities and assets. And with Indian markets valued higher than the fundamentals, any foreign investor who is interested in the yen carry trade can touch ground in India. Despite the recession faced by many other countries, India has a market that has high growth rates and can easily absorb large investments.

An interesting thing here is that in spite of having different economic conditions than Japan, India follows a similar pattern as Japan in its equity based asset allocation plans. India’s stock market may be performing well, but the rampant scandals and scams in the market have made many retail investors equity averse

According to a report published by the Markit Global Business Outlook Survey, India continues to top the list when it comes to being optimistic about business activity. The report revealed that India’s optimism shone through even as other countries like Chi, Japan and the Euro Zone were either reeling in or recovering from recession.

India’s net balance read +35% in October this year and is significantly higher than the combined average of the BRIC comprising of Brazil, Russia, India and Chi, with the figure standing at +27%. India also stands higher than the worldwide trend, which was recorded as +28% in the survey.

The profit outlook for the next one year also projects India’s balance reading to be about +34%, higher than the global reading of +20% and the BRIC reading of +19%.

The Markit Global Business Outlook Survey also highlighted some of the major concerns that companies worldwide have about the outlook for the next 12 months. The fear of a downturn in the Euro zone, a worsened global economic climate, higher interest rates in the US and Britain, increase in geopolitical risks from problems in West Asia and Ukraine, and increasing political uncertainty in the UK, US, Japan and other countries.

The survey indicated that among all the countries that were surveyed, those in Britain were the most optimistic about the next 12 months. This was recorded even as expectations about activity levels dropped to an all-time low in the services and manufacturing sector since June 2013. The business expectations were considerably low among the other major emerging markets as indicated by the study.

As such, one of the main reasons for the reduced economic growth in the last few years was the unsatisfactory performances of the major EM (emerging market) economies. Reports suggest that this trend would only intensify with time over the next few months. Tensions are rife across the BRIC as business optimism sunk to the lowest recorded level since the global fincial crisis.

While an increase in business expectations provides some hopes for companies in Chi, Russia continues to remain a major concern with its currency spiraling downwards, as well as with general uncertainty. These factors have contributed to the country’s business expectations dropping significantly low over the past year.

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