Infrastructure Development: FM’s Call for Forex Reserves

Sometime back, we have had a nationwide debate on whether or not to use the surging foreign exchange reserves that are lying idle for infrastructure development in the country. One section of the economists led by the Planning Commission, believing that the current level of foreign exchange reserves is pretty good to meet the import requirements and all other external payment obligations of the country for more than normally accepted periods, and as maintenance of reserves of such magnitude is costing the country dearly, opined that usage of foreign exchange reserves to augment infrastructure development in the country is a viable alternative.

As usual, there is another school of economists who argued that using Forex reserves for infrastructure development is not a prudent act, for usage of short-term funds for long-term purposes that too, for investments which do not ordinarily generate foreign exchange earnings, can create liquidity crisis should FIIs withdraw their investments from the capital market. In support of their argument, they even cited the 1997 East Asian crisis.

They have another argument, which is very fundamental in nature and thus merits everyone’s attention: the current level of poor private investment in infrastructure project is not due to lack of funds but more because of lack of clarity in our policy initiatives. How else, they questioned, can we explain the high inflows of private capital into sectors like telecom while little or nothing has flown into roads, power transmission, etc. And they did have a point to make.

Probably, infrastructure sectors such as roads, power generation and transmission, etc., are not making business sense to private investors, either due to frequent shifts in our policy stances or the embedded social obligations of those projects, where non-enforceability of toll collection on all, free supply of power to certain sections, etc., is in vogue. In other words, what is being argued is that it is not lack of funds, but the conducive “atmospherics” that is holding back private investments to flow into infrastructure.

They have another question: What is the big difference between committing fresh investment for infrastructure development through deficit financing and using forex reserves, for both are known to result in increased money circulation in the system and any increase in money supply will eventually result in increased prices. Hence, they strongly refuted the idea of using Forex reserves for infrastructure development, and thus the idea was shelved.

Now, suddenly, the Finance Ministry has again raised the idea of using Forex reserves that today stand at $160 bn for infrastructure development. This sounds pretty encouraging, for the 8% growth rate that we have achieved during the last three years is making heavy demand for augmenting infrastructure in the country.   

We must, for once, come out of the text-book mould and give a trail to what David Hume once said: “In every kingdom into which money begins to flow in greater abundance than formerly, every thing takes a new face: Labor and industry gain life; the merchant becomes more enterprising; the manufacturer more diligent and skillful, and even the farmer follows his plough with greater alacrity and attention. This is not easily to be accounted for.” He is of the firm conviction that money supply stimulates industrial as well as labor activity as money integrates less monetized and less developed areas with more developed regions of the economy. He therefore advocated a policy of “keeping alive a spirit of industry and increasing stock of labor in which consists all real power and riches”. Hence, he concludes: “Although the absolute quantity of money is a matter of great indifference, there are only two circumstances of any importance: Namely, the gradual increase (of money supply), and its thorough concoction and circulation through the state.”

Today, we are endowed with more reserves, better skilled labor, and a more robust economy, and an all pervading “can-do” confidence in the country to consciously practice expansionary fiscal policies for sustaining the growth rate that we have achieved in the recent past, if not to give it a further boost. And today, all the economists are in agreement that infrastructure in the country must be augmented.

So long as the deficit is not for hiking government employees’ salaries, it cannot become that bad—even if such investing in infrastructure leads to temporary price rise it should be endured for “tomorrows” will be brighter. Such a bold initiative is bound to result in economic transformation of the society. Even otherwise, there is a substantial difference in augmenting infrastructure through direct government borrowings and borrowings against foreign exchange reserves through a special purpose vehicle: The former by virtue of becoming a part of budget results in monetization while the latter becomes a contingent liability.

All things considered particularly, the encouraging phenomenon of falling fiscal deficit at the center and the 8% economic growth rate that we have been witnessing for the last couple of years that, too, due to structural factors rather than cyclical elements, it is time we take out-of-box decisions. We can no way sit quiet and watch for things to fall in place.  So, let us act, and act quickly, for the idea is already a year-old.

(February, 2007)