Kriyaa Hi Vastoopahutaa Praseedati

Daily Answer Writing, Indian Economy

OAS Mains-2019 Daily Answer Writing-18/05/2020

Paper:   General Studies Paper-II

Section:  Indian Economy

Topic:  Foreign Trade, RBI

Question 1

Give the present state of Special Economic Zones in India. Why Indian SEZ programme failed in contrast with that of China

Sample Answer

Special Economic Zones in India

  1. They are certain localities which offer tax and other incentives to their resident businesses. Until 2000, India did not have SEZs, and instead had a number of export processing zones (EPZs), which, although similar in structure to the modern SEZ, failed to attract many firms to India.
  2. India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia’s first EPZ set up in Kandla in 1965.
  3. The government, accordingly, introduced the SEZ. Structured closely on the already successful model of China, they are designed to help stimulate both foreign and domestic investment, boost India’s exports, and create new employment opportunities.
  4. India’s Special Economic Zone Act, 2005 further amended the country’s foreign investment policy and converted its EPZs to SEZs, with notable zones including Santa Cruz (Maharashtra state), Cochin (Kerala state), Kandla and Surat (Gujarat state), and more.
  5. The SEZ Rules, 2006 lay down the complete procedure to develop a proposed SEZ or establish a unit in an SEZ.

Reasons for failure of SEZs in India

  1. In India, SEZs were set up to provide a hassle-free environment for exports and to replicate China’s success in using SEZs to boost manufacturing and employment. But the policy seems to have backfired.
  2. Far from turning India into a powerhouse of manufacturing exports, the control-free industrial enclaves have become centres of corruption and scams.
  3. As per a research paper by Meir Alkon of Princeton University, this is because of the failure of local Indian politicians to select SEZ sites that offer maximum development potential. Site selection for SEZs has been guided by self-serving agendas rather than considerations of growth and development.
  4. Local politicians often influence bureaucrats at state-owned industrial development corporations to secure land for personal gains. As such, sites for SEZs are selected based on real estate speculation rather than the economic potential of a region.
  5. If not for profit through land deals, local politicians also use site selection of SEZs to target specific ethnic and caste groups to create vote banks.
  6. State governments in India suffer from an ‘incumbency disadvantage’, where they hold office for shorter durations, which discourages them from pursuing long-term development of their region.

In contrast, China’s local leaders have a greater incentive to develop more productive SEZs. Promotions of local leaders in China are often based on parameters such as GDP (gross domestic product) growth in their jurisdictions, which means they are more motivated to pursue local development.

Many of India’s SEZ’s now lie vacant, hurting not just economic growth but also equity. As real estate businesses have thrived under the guise of SEZs, rich fertile lands have been diverted away from farmers without any real development.

What can be done?

Government should undertake comprehensive social-impact study to determine the compensation due to farmers for taking away their livelihoods. The government should also return the unutilised land back to farmers.

Performance-measuring mechanisms should be put in place so that the promoters can be held accountable.

There is a need for greater coordination across different ministries and departments of the central government and between the central and state governments.

As India competes with other countries to attract businesses and FDI, the incentives given to SEZs in India should be more predictable and in line with what is offered by competing countries in Asia.

Question 2

“Independence and autonomy of institutions like RBI is critical for India. However, these can’t happen over large public interest” Comment

Sample Answer

Recent public spat between RBI and central government over interference of later in policy formulation of RBI has drawn criticism. The recent impasse between RBI and the government arises from a recent ill-timed and ill-advised speech by RBI deputy governor Viral Acharya. The speech followed some unnecessarily tough posturing from the government, threatening to invoke the dreaded Section 7 of the RBI Act. 

Provisions of Government’s interference in RBI’s governance:

According to the RBI Act’s Section 7 (1), “the central government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest”

The Allahabad high court, in a judgment in August, said the government could issue directions to RBI under Section 7 of RBI Act.

However, the government has only initiated consultations with RBI on different issues under Section 7 (1) and not invoked it.

Has Government really crossed its executive powers in this case?

  1. First instance: During the hearing of a case filed by the Independent Power Producers Association of India in Allahabad high court challenging RBI’s circular regarding exemption to power companies in certain cases, court said that government could issue directions to RBI under Section 7 of RBI Act. Hence, government was only following guidelines by the court.
  2. Second instance: The government sought the governor’s views on using RBI’s capital reserves for providing liquidity.
  3. Third instance: It pertained to regulatory issues, which includes withdrawal of Prompt Corrective Action for public sector banks, thus easing constraints on banks for loans to small and medium enterprises (SMEs).

In all the above cases the government has only initiated consultation process with RBI on different issues under Section 7 (1) and not invoked it. Hence, it can be said that government has only used its power under RBI act to advise the central bank.

What can be done?

The RBI believes it is protecting hard-earned reserves from politicians who are likely to fritter it away. The elected government believes that it represents the public interest and no unelected technocracy should usurp that function. The government is after all the 100% shareholder, and the central bank’s rating is clearly bounded by the sovereign rating.

The best way to bridge the two is to organize a conditional release of reserves. For example, One condition could be that it should only be used to recapitalize banks. Another could be a pre-designed advance payment of annual dividend. Finally, it could be a reserve-for-share swap where the government gives the RBI shares in non-bank public sector units (PSUs) in return for excess reserves.

Concomitant with recapitalization of PSU banks should be a timetable for governance reform—granting the RBI the authority to regulate PSU banks and creating a government bank holding company that permits a series of board and management changes in PSU banks so that the current problem is not repeated.

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