Leave those foreign reserves alone (2)

Experts oppose digging into reserves

The Economic & Political Weekly is a highly regarded publication among India’s economists and policymakers. It has weighed in against the government’s proposal to use foreign reserves to fund infrastructure development.

…the logic of using foreign exchange reserves to fund infrastructure development per se, and circumventing the banking system and financial institutions, is puzzling. There is sufficient liquidity in the system that can be tapped to fulfil investment requirements and, if lending to this sector has fallen short, it is because projects have been unbankable and returns have not been assured. Commercial banks’ predilection for government securities is well known and although a pickup in credit growth has reduced holdings in the first half of the year, the RBI has warned that the effective SLR is 39.74 per cent, much higher than the required minimum of 25 per cent. These funds, as well as the money chasing the overheated housing and retail sector, could be effectively redeployed for infrastructure development projects.

In this context, the creation of special purpose vehicles to generate fresh investment programmes for infrastructure, with in-built conditionalities to cover tariff reform and ensure bankable revenue streams has been mooted. To some extent, the inter-institutional group (IIG) of banks and financial institutions recently mobilised by the government to pool resources to the tune of Rs 40,000 crore (approx US$9 billion) for the development of airports, seaports and tourism is a step in this direction. The IIG has already worked out modalities to fund the infrastructure projects and the norms to make them bankable, thus helping to achieve their financial closure. Such initiatives need to be developed further and spread across several core sectors to generate the kind of momentum the government is looking for. Similarly, foreign firms who wish to invest in this sector should be bringing in foreign exchange, rather than pursue the (planning commission’s) proposal where the government would actually deplete its foreign exchange holdings to bring in FDI. This will prevent an already highly indebted government from incurring more debt and lead to the optimal use of existing financial resources in the country. [EPW]

Interestingly, President Abdul Kalam threw his hat into the fray too, seemingly supporting the government’s line. President Kalam, it must be remembered, is an aeronautical engineer who worked in India’s nationalised defence industry all his life.

In addition to the above missions, I have a suggestion. As you are aware, we have a growing foreign exchange reserve of about 120 billion dollars. The bankers can have a mission: how to invest and multiply a portion of FE reserve, if it is made available for investing in relatively higher yield enterprises[RB]