The Hindu Business Line : Leg up for infrastructure

THE Planning Commission Deputy Chairman, Dr Montek Singh Ahluwalia, has said that a part of the forex reserves of $127 billion should be used to make government investments in infrastructure. This suggestion should be implemented immediately. We get a measly return of 3 per cent on our forex reserves.

The country is simultaneously suffering due to lack of infrastructure. There has been continuous reduction in government investment in infrastructure.

Private investment has come in telecom and highways but not in areas such as rural roads and irrigation, which are not necessarily bankable though beneficial. An increase in government investment in these areas is, therefore, required.

A section of economists is opposing Dr Montek Singh's suggestion. The first argument is that the Reserve Bank of India should not purchase more than the required amount of dollars; that is, not create the reserves in the first place. The rupee will rise and the country's foreign trade will realign at this higher exchange rate. We are unwittingly selling our goods at a low price by keeping the price of the rupee low. There is strength in the argument.

Indeed, we will have to learn to live with a strong rupee. However, this does not solve the problem of investment in infrastructure. It is better to implement both policies together. The government will have to impose a tax to make the investments.

This tax can be imposed either by building forex reserves, using them for investment and, in the process, allowing the rupee to fall leading to a reduction of the purchasing power; or by imposing a tax directly. The forex reserves are a tax insofar as it reduces their purchasing power. The second objection is that more imports will have to be made to eliminate the huge forex reserves. A better way to do this is to reduce the Customs duty and allow the market to determine the direction of imports.

It is not good to allow the government to determine the nature of imports as will happen if we use the forex reserves for investment. However, there are some problems in reducing Customs duties. One, revenues will fall and necessitate higher taxes on other sectors. Two, the market may decide to import lipsticks instead of steel.

The third objection is that the fundamental problem with investment in infrastructure has more to do with red-tapism and corruption rather than finance. It is possible to attract private investment in some areas as has happened in telecom and highways.

Surely institutional reforms may bring investment in many areas. But in some areas, such as the rural roads, the forex should be used as much as possible, for they may not get funds from elsewhere.

The fourth objection is that use of forex reserves will increase liquidity in the money market and lead to inflation. But this will happen only if the RBI converts the forex dollars into rupee. Inflation will not rise if the government imports directly, say, steel for the uniguage project.

The fifth objection is that the government will have to borrow to make these investments because the forex reserves are owned by the RBI. The fiscal deficit will rise and credibility will be eroded. The UPA Government notified the Fiscal Responsibility Act under which it has to reduce its fiscal deficit. The use of forex reserves will lead to a violation of this Act in its very first year. The facts are correct but not the conclusion. The credibility of the government is not determined by fiscal deficit alone. Private investors also see whether the fiscal deficit is for financing current or capital expenditure. The government credibility would increases with higher capital expenditures. The quality of fiscal deficit is more important than its level.

All the arguments against Dr Montek Singh's suggestions lack substance. The additional benefit of his suggestion is that we would begin the process of dismantling the Great American Empire. The American economy is being kept alive by purchase of dollars mainly by Asian countries. Correction of this imbalance requires that we sell dollars and force a collapse of the dollar. We should, therefore, implement the suggestion expeditiously.

(The author is a New Delhi-based freelance writer. He can be contacted at bharatj@nda.vsnl.net.in)

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