The Hindu Business Line : IMF chief cautions against using forex reserves

`CAUTION ON FOREX FOR INFRASTRUCTURE': The IMF Managing Director, Mr Rodrigo de Rato, with the Reserve Bank of India Governor, Dr Y.V. Reddy, at a meeting in Mumbai on Thursday. — Paul Noronha

Mumbai , March 17

TAPPING the country's foreign exchange reserves to fund infrastructure projects would be a mistake, according to Mr Rodrigo de Rato, Managing Director, International Monetary Fund.

Addressing bankers and other delegates at a meeting organised by the Reserve Bank of Indiaon Thursday, Mr Rato said, a country should not be using resources of the central bank for investment in the State projects. "That would be a mistake," he said.

There have been suggestions from different quarters on the Government using the forex reserves for infrastructure development.

Highlighting issues on `India-prospering in a globalised economy', he said the country needs to put its public finances on solid footing.

The Government's ability to finance large deficits domestically with apparent ease may have reduced the sense of urgency to make the difficult choices necessary to turn the fiscal situation around. But large deficits have had a major, if almost silent cost, he said.

Reducing the borrowing needs of the Government would help free resources for private investment, which remains low by regional standards. Public investment is also low compared with much of Asia.

Interest payments, wages and subsidies take up nearly half of all the Central Government spending leaving a little room for the much needed public investment and basic social services, he said.

India's large infrastructure gap acts as an important constraint on growth. By creating space for high priority spending, fiscal reforms can have a major impact on economic growth. Lower fiscal deficits will improve financial intermediation, he added.

India's banks currently hold around one third of their assets in the form of Government securities, compared with eight per cent in Singapore and 15 per cent in Thailand.

"If this century is to be the Indian century it will be driven in large part by the private sector and the Government must focus on creating conditions to allow productive activity to flourish and give all Indians the tools needed to take part", said Mr Rato.

Indian needs to continue to restructure its domestic economy to allow it to reap the full benefits of globalisation. The country needs to generate in excess of 100 million jobs in the next decade simply to keep the unemployment rate from rising.

On interest rates he said, in the medium term interest rates will move up but in a measured manner.

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