The Hindu Business Line : Funding infrastructure

Given the capacity of the economy to raise funds, using forex reserves and adding to the money supply that the RBI wants to curtail appears strange.

Presenting the budget for 2007-08 in February, the Finance Minister, Mr P. Chidambaram, stated that a part of the foreign exchange reserves would be used to fund infrastructure. Addressing a group of industrialists in Mumbai on Monday, Mr P. Chidambaram said that issues concerning the use of forex reserves were being sorted out. Nine months after informing the nation of the government’s unique plan to part-fund infrastructure investments through a Special Purpose Veh icle, New Delhi is still clearing the decks for a proposal that has not always drawn unanimous support from all policymakers.

That a plan for such a critical sector is still incubating suggests the lack of clarity on issues that the government should really be focusing on to lay the infrastructure for a sustained nine per cent growth. The general feeling in New Delhi seems to be that given the magnitude of investments envisaged for the sector in the Eleventh Plan period — Rs 3,20,000 crore — the Government should contribute some part to attract further investments. Given the fiscal prudence norms on government spends, the best bet seemed to be to draw upon forex reserves. At the core of that plan is the mistaken belief that the country is beset with capital shortage whereas it is awash with money, as the Reserve Bank of India would testify. After all, it has been siphoning off the excess liquidity; over the last three CRR hikes an estimated Rs 60,000 crore — nearly a fifth of the envisaged target for the Eleventh Plan — has been impounded, and thereby rendered unproductive. The private sector raised $7 billion — Rs 28,000 crore — through external commercial borrowings (ECBs) in April-June 2007 alone and would have raised more had the RBI not slapped restrictions on that source. The surge of liquidity in the domestic system predates the unique plan New Delhi is working on and there is no reason why all that excess money should not be used for better roads or more power stations, or townships for that matter.

Given the capacity of the economy to raise funds, using forex reserves and thereby adding to the money supply that the RBI wants to curtail appears strange, to say the least; far better to clear the environment for investments. Environmental issues, land acquisition legislation and other procedures differ widely across States that, in turn, result in varied investor perceptions on the best States to do business in. Besides, New Delhi’s own record of timely project deliverables has often been uninspiring. An enabled environment for infrastructure will attract funds the way it did into the financial and hi-tech sectors; the experience since 2004 should teach New Delhi that invaluable lesson.

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