The Hindu Business Line : Tapping the reserves

India has thought it appropriate to use its own reserves for real economy needs. But welcome as the IIFCL in London is, too little has been done too tardily.

After more than a year, the plan to use a part of the country’s foreign exchange reserves finally got off the ground with India Infrastructure Finance Company Ltd (IIFCL) announcing a London subsidiary that will get the first line of credit from the Reserve Bank of India. The subsidiary will help Indian companies investing in infrastructure to fund import of capital equipment for their domestic projects. When the subsidiary commences operations next month, it will do more than commit public investment for infrastructure; it would have pioneered the first initiative of this government in the innovative use of surplus foreign exchange assets.

Against the backdrop of the country’s massive financing needs, the RBI’s credit of $250 million may be tiny. It is the first tranche of the proposed $5-billion that the IIFCL will raise through the RBI for its subsidiaries abroad. That amount was announced by the Finance Minister in last year’s budget as the sum that the central bank would lend from the reserves for infrastructure. The policy that led to this development, however, has had a protracted history with the central bank’s traditional approach to foreign exchange assets as safeguards against external shocks. But Singapore, China and Korea have shown how reserves can be deployed more profitably after accounting for rainy days. While these countries have used their massive surpluses to foray into Wall Street, India has thought it appropriate to use its own reserves for real economy needs. But welcome as the IIFCL in London is, too little has been done too tardily.

India’s reserves have crossed $300 billion and the mandated amount of $5 billion is far too paltry. The Deepak Parekh Committee on Infrastructure Financing had suggested double that figure and an additional 10 per cent on accretion to reserves. The 11th plan estimates $490 billion for the requisite push for this sector. Reserves are more than adequate for external shocks; surely, it can commit more for such an important sector. Its current returns on government bonds or deposits in other central banks do not cover the cost of sterilisation of the reserves pile-up as the Parekh Committee noted last year.

The stresses that the fisc will bear on account of various subsidies and the farm waiver may be justified; similarly, the burden of its guarantee on the RBI credit to fund roads, power and irrigation will entail small costs for immeasurably large long-term social and economic benefits.

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