Cost effectiveness of SEZ in generating incremental investment and employment is open to question – WTO report
Highlights from the report:
++ India's tax to GDP ratio is relatively low and seemingly insufficient to meet its developmental needs. Further public spending on infrastructure and social services is constrained by the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, which requires India to reduce its fiscal and revenue deficits and to eliminate the revenue deficit by 31March2009. Private investment is also deterred by high real rates of interest, while foreign direct investment (FDI) at around 1% of GDP has remained disappointing. In order to meet its FRBM targets, the Government has introduced tax reform to improve collection and increase revenue. Expenditure reductions include further reform of the targeted public distribution system (TPDS) and a partial dismantling of administered pricing for petroleum. However, state-owned enterprises remain a considerable demand on government resources and the recent decision to "pause" privatization will have implications for future government support for these enterprises.
++ India's legal system is based on written law. The judiciary is headed by the Supreme Court, which has jurisdiction over all disputes between the Central Government and states or between the states. The Supreme Court is also the court of final appeal for cases heard by the High Court in each state, and by district and session courts at the local level. The legal system is burdened by insufficient resources and procedural delays, resulting in a large and apparently growing backlog of cases before the high courts and the lower courts. Measures are being taken to address the backlog of cases, including through the establishment of fast‑track courts and greater funding to the judicial system.
++ While import barriers have been falling, India's export regime continues to be complex. Export prohibitions and restrictions are largely unchanged since India's last Review. However, in order to reduce the anti‑export bias inherent in India's import and indirect tax regime, a number of duty remission and exemption schemes are in place to facilitate exports. While a number of these schemes are open to all exporters who use imported inputs, several schemes are targeted at sectors such as electronics (hardware and software), agricultural products and services. Export processing zones, export-oriented units (which are now special economic zones (SEZs)) also offer tax holidays to investors. According to Ministry of Finance estimates, revenue forgone from such schemes was Rs538 billion in 2006/07, with an additional Rs21billion estimated for the SEZs. The cost effectiveness of the schemes in generating incremental investment and employment is open to question. As many of the industries attracted, especially by the SEZs, appear to be capital intensive, it is not clear that this is the most effective way to create employment opportunities, especially for the less-skilled labour force. India also provides export assistance through export insurance and financing schemes by the Export-Import Bank of India.
++ Measures have been taken to simplify the tax structure, especially for indirect taxes, resulting in a substantial increase in revenue collection. Tax reforms have also been pursued to meet the fiscal deficit targets set by the FRBMA and include the introduction of a new value-added tax and an increase in the number of services subject to a service tax. The introduction of the VAT by all but one state opens the way for an eventual goods and services tax. India maintains an "excise" tax (CENVAT), which is a tax on manufacturing, but appears to have elements of a value-added tax as well: currently providing around 25% of Central Government tax revenue, the CENVAT remains the largest source of indirect tax revenue. In the longer run, further streamlining of India's various indirect taxes are planned so that the VAT, the CENVAT, and the services tax will be replaced by a broad-based goods and services tax.
++ The main changes in protection of intellectual property rights include the passage of new legislation on patents, aimed at bringing Indian legislation in line with the TRIPS Agreement, and the establishment of a new Geographical Indications Registry in 2003. Steps are also continuing to improve enforcement of intellectual property rights including through increased seizures of infringing materials, and fines, although apart from copyright infringement, there are few data available on enforcement.
++ Infrastructure remains a major bottleneck. In sectors such as telecommunications, where the market has been exposed to competition, there have been significant benefits to consumers, including through increased penetration, especially of mobile telephony, and a decline in tariffs. Progress has also been made in improving the transport infrastructure, especially road transport, where the network of national highways is being expanded. Although rail transport is one of three activities reserved for the public sector, private-public partnerships are being encouraged in some areas, for example, such as freight transport and railway infrastructure development. Liberalization has also taken place in air transport, resulting in an expansion in the number of airline operators and a decline in prices; foreign investment restrictions have also been relaxed (up to 49% of total equity is permitted), although foreign airlines are forbidden from investing in the sector. In contrast, maritime transport and port services continue to suffer from inefficiencies and constitute a major impediment to trade. Another major constraint on economic activity is the energy sector, where there are frequent shortages of supply and little progress appears to have been made in tackling the losses of state electricity boards, and transmission and distribution losses.