The Hindu Business Line : Not a core solution

ALL THAT CAN be said of the proposal initiated by the Planning Commission Deputy Chairman, Dr Montek Singh Ahluwalia, on the use of foreign exchange reserves for giving a thrust to investments in infrastructure projects is that it is a solution in search of a problem. None of the reasons advanced bear any merit on a closer scrutiny. The proposal involves three elements, of a conscious hike in deficit spending by the Government from the current levels; the use of the rupee resources thus generated to acquire foreign exchange and, then, finally the importation of infrastructure assets.

On the face of it, this would appear to be a profitable use of the burgeoning forex reserves with the Reserve Bank of India. But, then, it has never been anybody's case that the reserves are earning sub-optimal returns. In fact, the RBI has always prided itself on its record of management of forex reserves as comparable to the best. In any case, comparing the returns from highly liquid financial assets with possible superior yields from physical investments ignores the differences in liquidity and the risk characteristics between them. The other reason advanced for use of forex is that it allows public funding of infrastructure projects when clearly there is lack of private interest. But should public money rush in where private capital fears to tread? After all, if private capital has reasons to believe that the return on investments is not attractive then it would be more sensible to tackle the basic problem affecting viability rather than mask the issue by shifting the burden of funding to the people. Finally, if the issue is really about whether the country can afford a higher level of deficit spending than whatever is currently considered prudent, then the question that arises is: Could the Finance Ministry not be trusted to arrive at the correct level of deficit spending in the context of annual allocations for Plan schemes instead of the Ministry arriving at an initial estimate and the Planning Commission topping it up, as now proposed by Dr Ahluwalia? It is also a breach of legislative intentions as spelt out in the Fiscal Responsibility and Budget Management Act.

From a practical standpoint, too, the problem with a policy of using reserves to shore up infrastructure is that the potential for large imports in such sectors as roads or power plants may be limited. So, the additional infrastructure created in the economy has inflationary implications. The Planning Commission's argument that any increase in price levels of one set of commodities/services can be neutralised by fiscal and tax measures to soften prices in other sectors may not be feasible considering the broader social implications. For instance, to counter a general increase in price levels, the Government could not possibly lower the domestic protection level on foodgrains or other agri-commodities produced in the country. In the final analysis, the Government really has no option but to look at the issue not as a financing problem but as one of improving the outlook for infrastructure businesses.

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