The Hindu Business Line : Forex at the core

Regardless of stray hints about the likely impact of a tight money policy on growth rates, the economy seems to be sailing ahead at a fair clip with policymakers equally optimistic about fair winds. The latest CSO data for April, however, suggest less-than-robust growth and the possibility of abating winds; manufacturing growth in April, at 15.6 per cent, was two percentage points less than in November while both basic and capital goods indicate declining trends. These are auguries that the United Progressive Alliance Government has to factor into its plan for the next two and half years; over that period the full effects of its tight money policy could played out into declining growth rates. The most urgent task then is to stave off any such possibility.

The best place to start would be on Mint Street. If, as North Block claims, inflation has fallen below 5 per cent, the Reserve Bank of India must be congratulated on achieving its task in such a short time. And if the price rise has indeed been checked, the Monetary Policy must now work to ease more liquidity back into the system; at the very least, the RBI must desist from ratcheting up interest rates. And while it stays off the currency market, both North Block and policy advisors should sing the same tune on capital inflows. Last week, the Finance Minister cleared the air when he dismissed the idea of restrictions on capital inflows; the country, he said, must "learn to manage" them. That is easier said than done. For months, debate has centered on the use of forex reserves for infrastructure. So far the idea of a Special Purpose Vehicle (SPV) to co-finance External Commercial Borrowings for capital expenditure abroad, an idea mooted in the Budget, has remained just that. Assuming that it is up and running in a few months, as the Finance Minister proposes, infrastructure development would still be stuck in the thicket of regulations that have delayed so many power projects, for instance. Land acquisition is still fraught with tension and such issues as user-charges for utilities have to be yet sorted out.

The basic reforms are precisely the ones that New Delhi is shying away from; the regulatory framework that has to be dismantled in the same way that licensing and other constraints on investments were done away with in the 1990s. As the tangle was cleared, capital rolled in. The same holds for power. Current estimates for infrastructure are upwards of $400 billion for the next five years. Accessing those funds is far less a problem than putting them to proper use. That should be New Delhi's priority.

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