The Hindu Business Line : Sense from Sensex — Removing infrastructural bottlenecks

REGARDLESS OF the upswing in the market sentiment, the danger of infrastructural bottlenecks making a shambles of the economy is real. The stark fact is that the country does not simply have on the ground infrastructure capable of underwriting mouth-watering growth projections that are doubtless driving market sentiment. Transport and communications — availability of power, adequacy of roads, condition of ports and airports, operation and maintenance of the railways — are already stretched to breaking point, and it can be said without any exaggeration that the situation can only get grimmer in the days ahead. Indeed, because of the rapidly mounting pressure on the rickety facilities, they are verging on a state of collapse.

Daunting, but doable

Experts have worked out that to facilitate the growth of GDP by every single per cent, the infrastructural capacity should be growing in advance at the rate of 1.8 per cent. Thus, an 8 per cent growth in the economy calls for commensurate infrastructure being put in place at the rate of not less than 15 per cent. Some estimates suggest that a massive investment of 7-10 per cent of GDP, or roughly, Rs 2,00,000 crore, is necessary to have infrastructure of world-class standards adequate to sustain the present rate of growth.

Since projects of this nature take an average of four years from concept to commissioning, this means that Rs 8,00,000 crore worth of projects should be in the pipeline at any given point in time. The figures are no doubt daunting, but it is not impossible to meet the challenge. Taking roads network as an example, if China can manage construction worth Rs 1,35,000 crore per year, why should India, whose human resource is neither inferior nor scarce, be content with an unmentionably abysmal expenditure of Rs. 9,000 crore? China has shown that the problem is not insurmountable.

The reasons for its consistently enviable record of performance are also an open secret: Better work culture, stricter enforcement of discipline, higher productivity and faster decision-making. China has a cohesive political and governmental system unlike India, where governments of different parties or their coalitions succeeding each other scrap the beneficial schemes of predecessors and push the country back by a few years in the bargain.

Use of Forex reserve

As regards finding the resources for the massive investment on the scale needed, the Planning Commission Deputy Chairman, Dr Montek Singh Ahluwalia, did some out-of-the-box thinking about using a part of the burgeoning foreign exchange reserve approaching $150 billion for investment in infrastructure. This idea has become a victim of paralysis by analysis at the hands of the "Argumentative Indian" (to use the apt description of Amartya Sen).

The proposition has also met with stiff resistance from that high priest of monetary management, the IMF, which has solemnly expressed "serious concerns" on the ground that it has "the potential to compromise perceptions of central bank independence and increase inflation". Emphasising the importance of undertaking any increases in infrastructure spending within the limits of the Fiscal Responsibility and Budget Management Act, it has put its weight behind private sector participation in infrastructure which, it says, would be forthcoming "if India will step up its efforts to improve the investment climate and enhance the regulatory framework for public-private partnerships."

The fear of inflation being pushed up to unacceptable levels arises from the possibility of millions of dollars having necessarily to be converted into rupees before they are put to use and the resulting injection of crores of rupees into the monetary system contributing to run-away prices.

This is easily answered: Inflation is a consequence of too few goods being chased by too much money. If purchasable goods are commensurate with the money on offer or in circulation, then, that reduces the scope of a disproportionate rise in inflation. The productive potential of the various sectors of the economy can help satisfy this criterion. Another way of warding off the possibility of inflation going out of control is to use a substantial portion of the allocation from the reserve for procurement of capital goods, provision for consultancy services and import of technology from abroad.

Yet another objection advanced is that the reserve is being held in trust on behalf of depositors of different categories, and they may demand it back any time. Diverting it to extraneous uses is liable to cause acute damage to credibility, and cannot in any case be ethically resorted to without their agreement .As regards this point too, ways can be found if there is a will. One that readily suggests itself is not to disturb the foreign exchange holdings, but to print the equivalent amount of money on the surety of a designated part of reserve which is unlikely to be demanded back at short notice and would serve as what the great economist, Frank W.Taussig of yore, would have called "safe specie bottom".

The component of India's foreign exchange reserve that could be properly called "hot money" that could be used for sub-serving purposes of realpolitik, or withdrawn in panic at short notice, causing meltdown of the kind that occurred in Mexico and elsewhere may be hardly one-fourth or less of the total. The quantum of foreign exchange that comes in to exploit the interest rate differential between the US and India can also be said to be negligible.

Mostly, the upward surge is explained by buoyancy in exports, capital inflows, including foreign investments, debt and equity raised by Indian companies in foreign markets, shrinking current account deficit, and possibly a strong rupee. The reserve composed of dollar accumulations on these accounts forms the dominant proportion.

Blown up fear of inflation

In addition, there are also private transfers of funds traceable to two sources: One, made up of the black or grey variety, held abroad by the Indian political, business and other sections of the affluent society (as partners in the parallel economy already touched upon), and the other constituting remittances from Indians living abroad to their families (being changed into rupees almost immediately on receipt), or to non-resident bank accounts, or for deals in real estate. According to the World Bank, in 2004 alone Indians working in other countries sent an astonishing $21.7 billion to their country of origin, making India the biggest recipient of remittances worldwide, even exceeding the inflow of $21.3 billion into China

This analysis shows that India has at its disposal abundant liquid resources, even after allowing for the import requirements and unforeseen or catastrophic contingencies. They are at present subsidising American economy, mostly in the form of US Treasury Bonds. Even assuming that their use will notch up inflation by a few points, it need not be a matter for alarm. Once India catches up with the level of world-class infrastructure it needs, and takes to a higher and higher flight path in tune with its economic priorities, the multiplier of growth will generate enough goods and services and bring inflation once again to affordable levels.

It does no credit to economic policy planners if they do not take care to fulfill the expectations of investors on the trading floor. They should be in constant quest of innovative and ingenious methods to accelerate the economy, for, the stakes are enormous, being nothing less than eradicating poverty and assuring full employment, and reaching food, nutrition, potable drinking water, education and health for all. Only thus can India wipe out the stigma of being a developing country in perpetuity and carve out a niche for itself as a member of the big league of advanced nations.

(Concluded)

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