Can the Empowered Group of Ministers Demand RBI Changes

The press trust of India is reporting that the Government of India's Empowered Group of Ministers (EGoM) has asked the Reserve Bank of India (RBI) to classifies SEZs as infrastructure projects rather than as speculative real estate projects. This matters because of the interest-rate implications of being an infrastructure project (the rate is lower), and because of tax benefits that could accrue to infrastructure-based projects. This is particularly true of manufacturing-based SEZs, where there are various tax- and duty-deferring or other such credit schemes in operation, including many for exporters.

The EGoM and the supporters of this proposal justify the move as necessary given the global economic slowdown. This has manifested itself in the form of drastically reduced credit availability, but also in the form of declining Indian exports, which were down 12% in October on a year-to-year basis -- the first decline of any kind in more than five years.

Apart from the long-term policy issues involved, the immediate questions that arise are whether the EGoM is indeed empowered to take this decision -- or, if merely advisory, what status it has as an input to future cabinet decision-making -- and whether such authority, if it existed, would be a good thing. Looking forward, we can anticipate further controversy surrounding the mechanisms through which such a decision should, could, or would be repealed. There is also the reasonably robust politicial-economy rule of thumb that says that it is harder to take away an existing benefit than it is to deny the granting of such a benefit in the first place. So, regardless of which agency is authorized to reverse such a decision, were it to be effected (and thus far the RBI has not taken specific action), it will face great pressure, once the economic climate improves, to leave in place a tax benefit put in place to cope with stormier times.