The Hindu Business Line : The reform paradox

The pro-investment case is simple. Infrastructure development and improvement is the need of the hour (Morgan Stanley's Chief Economist, Mr Stephen S. Roach, on a recent visit to India, described the best of our roads as far below China's) and lacking, as the Government does, sufficient rupee resources, why not harness the huge kitty of dollars for the purpose? After all, the reserves are earning paltry returns, given the low level of interest rates worldwide.

We are obviously talking of big-ticket projects. The former head of the Infrastructure Development Finance Corporation is reported to have said there are not enough of them. Perhaps what he meant was bankability — the lender's confidence about project viability and repayment of his loan.

There is a point in this. Infrastructure projects typically have a lot of externalities. The direct beneficiaries of a project more often than not cannot afford or are unwilling to pay for the benefits they derive. The hope is that it will catalyse investments that would otherwise not be made which will ultimately convert to a faster rate of growth of the economy.

These calculations are naturally not in the domain of investors and bankers. Their concerns are returns of equity and safety of funds of lenders. And structuring infrastructure projects that satisfy these tests has proved challenging and, in most cases, impossible. Where Governments took these responsibilities on themselves, the results have been disastrous, as has been clearly established in the case of the ill-fated Enron-promoted Dabhol Power Company.

Much of the discussion on the use of reserves has centred around its implications for money supply, the fiscal deficit and inflation. If the Government invests directly in new projects and the RBI funds the spending, high-powered money is created. The RBI must, therefore, sell equivalent dollars to the market so that the Government's action is liquidity- neutral. As the reserves belong to the Government, in effect it is selling forex assets to raise rupees, making the whole thing budget-neutral as well.

The critical issues are different.

To take the example of the power sector, it is a Gordian knot. We have to put a stop to the supply of free power and arrest losses from transmission and distribution (or theft and dacoity as astute observers have put it).

If we can do these, the Electricity Boards would become profitable and attract investments on their own. There would be no need to cajole private investors with guaranteed returns.

That, in essence, is the paradox. If you can reform the system, incentives are not necessary. If you cannot reform, even God cannot help you.

More Stories on : Insight | Economy | Financial Scan

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
The reform paradox

Surging rupee likely to erode corpus of NRI deposits

Rupee declines; securities weak

Laser Soft tool for Corpn Bank

NBFC stocks in limelight

SBI to finance Tata vehicles

Maruti finds new customer base in SBI tie-up

Corpn Bank plans more rural branches

Dena Bank forms cell to check credit quality

United Bank to relocate branches in Kolkata

Andhra Bank mega loan mela

Securitisation Act amendment Bill passed by Lok Sabha

Book released