The Hindu Business Line : Managing the reserves smartly

With foreign exchange reserves at around $194 billion as of late February, India has indeed come a long way from 1991, when the figure was a mere $5.8 billion. In a decade and a half, the country has moved from a paucity of funds to an embarrassment of riches, with the promise of more to come. While India's reserves are still very modest in comparison to China's — estimated to be over $1 trillion as of end December 2006 — they are still no mean achievement, considering that just 15 years ago, there was only enough in the national kitty to pay for a few weeks' imports; the reserves are now good for 10-12 months of import cover and will perhaps touch the quarter trillion mark before the year is out, throwing into sharp relief the issue of the their optimal use for development.

In his Budget of 2005, the Finance Minister, Mr P. Chidambaram, mentioned the idea — mooted earlier by Dr Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission — of using a part of the forex reserves to fund infrastructure. In this Budget, he reiterated it as part of innovative financing initiatives. The idea seems obvious and, therefore, irresistible; what better way to use these precious reserves than as a form of sovereign guarantee, an "insurance wrap" as the Finance Minister observed, a kind of official imprimatur to get the rest of the funds for this core sector over the Eleventh Plan period? But the obvious need not be the most optimal choice and in the case of a country that came close to reneging on its global commitments just 15 years ago, forex management has to assess adequacy of reserves in the light of complex risks and global commitments. This does not mean just import cover, as in 1991, but also the international investment position, consisting of its global assets and liabilities, both of which are rising with economic integration.

The notion of adequacy is debatable; some might cavil at the idea of the RBI parking funds in risk-free securities and deposits with central banks abroad, earning 3-4 per cent interest. But there is no room for error in devising ways of using this vast resource. Before planning to dip into reserves or discovering schemes for infrastructure that successive Budgets since 2003-04 have done, New Delhi must reform the regulatory framework with its accent on low user charges, dated labour laws and other ailments that have built a history of negative returns. Having done that, it can sit back and watch others put their money into the sector, like it did in the growth sectors. That makes better business sense.