RBI rings alarm bells on Govt146;s SEZ policy

8220;Revenue implications of taxation benefits would also need to be factored. The revenue loss for the government in providing incentive may be justified only if SEZ units ensure forward and backward linkages with the domestic economy,8221; the RBI said. The Finance Ministry had recently estimated a huge tax loss on account of SEZs.

The central bank also differed with Planning Commission deputy chairman Montek Singh Ahluwalia on meeting the targets under the FRBM Fiscal Responsibility and Budget Management Act and warned that any deviation deviation from the FRBM targets will have both national and international repercussions in terms of credibility.

8220;With the resumption of progress in approaching FRBM targets in 2006-07, reductions in key deficits have been budgeted to fulfill the minimum annual stipulations,8221; the RBI said. Consequently, larger deficit reductions in 2007-08 and 2008-09 will be required to meet the FRBM targets, the RBI in its Annual Report for 2005-06.

Ahluwalia had recently advocated for more funds for the X1th Plan rather than belt tightening to meet fiscal targets.

Any slippage in achieving the FRBM targets could erode the gains achieved in the initial year of the FRBM. It could also generate a chain effect at the State levels to relax targets set out in their fiscal responsibility legislations, the RBI said.

The RBI retained the growth forecast for the economy. Developments during 2006-07 so far suggest that the growth momentum of recent years is likely to continue during the year.

At the same time, there are continuing signs of demand pressures, especially high credit growth, that could exert upward pressure on prices when associated with supply shocks such as from oil. 8220;These pressures have the potential for impacting stability and inflation expectations,8221; it said.

The pass through of higher oil prices has been halting and not full and headline inflation in a way understates the problem, the central bank said.