The Hindu Business Line : Revive plan to use forex for infrastructure

After President Bush's visit, there was a sharp increase in the forex reserves. What has fuelled this spurt, and why is there no more talk of using the reserves to fund infrastructure projects?

Reserve Bank of India data tell us there was a sudden increase in forex reserves after the US President, Mr George Bush's visit in March. It is well known that the US is running a huge trade deficit, being met by purchase of US Treasury Bonds by the central banks of India, China and Japan. Last year, the RBI had virtually stopped such purchases. According to RBI data, India's forex reserves, which were $141 billion at end-March 2005, remained at exactly that level on February 24, 2006. Expectedly, the rupee appreciated in this period.

In March, there was a sharp increase in the forex reserves, which rose quickly to $152-billion on March 31, and further to $155 billion on April 14. While there was no accretion to the reserves in the eleven months before President Bush's visit, $14 billion was added in just six weeks after his visit.

Unstated agenda?

Perhaps the unstated agenda of his visit was to persuade the Prime Minister, Dr Manmohan Singh, to start pumping India's wealth into the American economy. Indeed, he appears to have succeeded. It can be said that the timing of President Bush's visit and the spurt in reserves were just a coincidence. If that is so, the other reasons for the sudden jump in forex reserves have to be made known. None is forthcoming.

The RBI's Report on Foreign Exchange Reserves of January 10, 2006 hints at adequacy of reserves. It says that the reserves must reckoned not only against imports but also in the light of volatile foreign capital inflows. But it goes on to indicate that there is no alarming situation here: "The traditional indicator of reserve adequacy, viz, import cover of reserves, which fell to a low of three weeks of imports at end-December 1990, rose to 11.5 months of imports at end-March 2002... At end-March 2004, the import cover of reserves was 17.0 months, which came down to 14.3 months as at end-March 2005 and further to 11.2 months as at end-September 2005."

The import cover is adequate and there is, in the central bank's words, only a `marginal' increase in the ratio of volatile capital flows and reserves. This provides no justification for the steep rise in reserves observed recently.

Forgotten suggestion

There is another change that causes concern. Soon after the formation of the UPA Government, the Deputy Chairman of the Planning Commission, Dr Montek Singh Ahluwalia, had expressed the need to use a part of the forex reserves for improving infrastructure. In one interview he suggested that about $5 billion-a-year could be so used. That suggestion was in the right direction and generally welcomed by economists.

Such a policy would be beneficial in three ways: The sale of US Treasury Bonds would put pressure on the US dollar. Various American think-tanks have warned that such action would be concomitant with the decline of America's global reach. A weak America would provide greater opportunity for India to spring into the centre of world politics.

Second, the decline in the value of the US dollar vis-à-vis the rupee would mean American apples would be less expensive in India, while Indian rice will be costlier for Americans. Third, the investment in infrastructure would work as a lubricant in the economy. The farmer would be able to reach his goods to the market at lower cost. Of course, our exporters would be affected. But that loss would be made up by greater flow of world savings into the economy due to upward movement in the value of the rupee; and by gains to importers.

Stress on infrastructure

It is surprising that Dr Ahluwalia too has changed his tune after President Bush's visit. Interacting with the Editors of Bloomberg News on April 19 in Washington, DC, he was asked whether India could actually reach the 10 per cent growth rate. He replied that infrastructure was "the single biggest thing."

Nobody opposes the idea that India is going to build infrastructure through public/private partnership. And different models of public/private partnership are now being explored and actually are being put in place."

This all very good. But note the absence of any reference to the use of forex reserves for the public funding of rural infrastructure. That was precisely the point made by Dr Ahluwalia earlier. Further, there has been precious little heard of setting up Special Purpose Vehicles for using forex reserves in this direction. All this leaves one with a deep doubt that the RBI's foreign exchange policy is actually being framed to serve the US' interests rather than India's.

(The author is a freelance writer. He can be contacted at bharatj@sancharnet.in)

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