The God of Small Things

The Government of India -- notably the Ministry of Commerce, in the case of SEZs, but the Finance Ministry and the Reserve Bank of India (RBI) as well -- is able to take seemingly very minor regulatory decisions that have, in some instances, fairly significant implications for particular constituencies. A good example came recently in the form of recently amended SEZ rules. Manufacturers located in special economic zones will now have a full year to sell goods, including gems & jewellery, displayed in foreign shops and designated show-rooms, without attracting penalties. The previous limit had been six months. Unsold good can be re-imported within a year from the date of their export. The justification for the policy change: the global economic downturn.

Economic crises has, in fact, become something of a catch-all excuse for any number of policy revisions and discretionary decisions, including extensions on the amount of time within which SEZs must be developed, and rules governing external commercial borrowing by SEZ promoters. To avoid the appearance of favoring business interests, rule changes are often packaged alongside restrictive conditions of various types. For instance, the relaxation on external commercial borrowings on 'infrastructure' are limited to non-residential/non-commercial-real-estate portions of the SEZ; they cannot be applied, for instance, to Integrated Model Townships. Because money is fungible, the logic implicit in this restriction (that the Government of India and Reserve Bank do not want to encourage speculative investment in residential developments) is undercut in practice.

Pro-industry rule changes are also coupled with what are meant to be perceived as countervailing get-tough policies to ensure compliance with new or existing rules by those actors to whom concessions are being granted. Vowing to crack down on firms that have violated ECB norms, a statement by the Finance Ministry declared that the government will revoke access to the 'automatic route' (i.e., non-licensed procedure) for overseas loansby such companies. According to the statement: 'Currently, the ECB policy is not explicit about accessing of ECB by the corporates, which have violated the extant ECB policy and are under investigation by the Reserve Bank and or Directorate of Enforcement'; henceforth, however, a 'request by such corporates for ECB will be examined under the approval route', which hardly seems like a harsh punishment -- except insofar as the approval route will tend to result in demands for illicit payments by those granting these approvals. A strange form of disincentive, to be sure, but possibly effective.