Indian Libertarians

Cronyism by Modi govt

srinivas.chakravarti Tuesday August 19, 2014

The past two months have provided proof, that the so called 'acche dinn'(good days) are certainly amiss for the near and distant future. It seems as if we are back in 2004 at the start of the UPA term, with the announcement of various new social welfare programs, infrastructure projects, tweaking of existing programs, and SEZ projects. There is little proof that the Modi govt is any different from the previous government.


Any visible changes seem too small, around the edges which will have no significant on the Indian economy.


A prime example of the continuing cronyism of the previous government is the latest announcement from the Commerce ministry regarding new Special Economic Zone "incentives".


The typical list of incentives includes tax holidays for a fixed time period for private firms to start new businesses, and increase investments in existing ones. A common theme that runs through the SEZ project is the acquisition of land, primarily farm land. The government at the Center and states always run into the difficulty of convincing farmers to sell their land to the government at a "fair price". The farmers are generally promised a market price for their sale of land, which most of the time turns out be a false promise, and a distorted price.


Do the people who support the SEZ projects consider the fact that in the long run, sale of the large farm lands will drive the prices of land high, which leads to an unsustainable boom in real estate?


Does the thought of directing away land as precious capital and a scarce resource to taxpayer subsidized activities in manufacturing and IT/ITeS cross their mind? Do we know if the firms in the manufacturing and IT sector are actually competitive, if it not for taxpayer funded subsidies? Do they even consider the impact this has on higher education, and creating an unsustainable boom in education? Can it be ignored that State intervention has created an education bubble in India, which has rendered a vast majority of students to mere low skilled employees?


Apparently the failure or partial "success" of the SEZ program can be fixed by this -

The SEZ policy, which was initiated with a bang by the previous UPA government, ran into rough weather with the Finance Ministry withdrawing the tax incentives available to SEZ developers and the units there in.Of the 566 formally approved SEZs, only 185 are in operation. Many of them could not come up because of the decision of the government to impose Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) in 2012."Reviving SEZ will give a boost to the manufacturing sector, which has registered near zero growth in last two financial years," the official added. Perhaps the government realized that tax holidays after all were not the best way to go, and imposed a new tax on firms which benefitted from the SEZ projects.


Once the tax holiday ended, the firms had to bear the cost of paying a tax along with the existing taxes. If it is not profitable to produce goods and services, minus the crony benefits provided by government, does it not make sense to let firms bear the initial cost of setting up their respective businesses, and not tax them at all?


To make matters worse we hear this -

Voicing concern at a large number of stalled SEZ projects across the country, Prime Minister Narendra Modi has said a high-level team has been constituted to review the problems and resolve them at the earliest."In the PMO, there is a special team to look into why SEZs are not finding takers and to suggest solutions for the benefit of the entire country," he has said.As expected, we continue to see a failure of government intervention, in spite of all the great government "successes" in building highways, roads and power plants.Maybe it is time to question the merits of government planning of the economy.Note : Read more at SEZs are an insult to Free Markets