Foreign reserves are no magic wand

The proposal is to utilise US $5 billion per annum of reserves for the next two years to finance high import-intensive infrastructure projects with suitable calibration in import duty. The Government would be increasing its deficit through issuing securities, with the RBI monetising part of this deficit by picking up these Securities and the Rupee resources obtained by the Government being used to purchase foreign exchange of the equivalent amount and utilise them towards financing preferably 100 per cent imported infrastructure projects.

The key questions which arise are the following:

• Is there need for greater public investment in infrastructure?

It would be difficult to argue against the merits of doing so. The cost and quality of Power remain exceptionally high; Port constraints make trade expensive; Airports need enlargements; Telecom requires rural connectivity; the National Highways and rural network need huge resources for timely completion; while the Railways need investments for safety, modernisation and faster trains on commercially viable corridors.

The following issues would however need to be addressed:

Is poor infrastructure a result of inadequate resources? We all know that each year finance ministers are able to show somewhat improved fiscal performance emanating from underutilisation of funds either from tardy defence purchases or inadequate Plan expenditure. Even during the current year, there is a utilisation slack in Ports, Power and other infrastructure areas. So the ability of the public sectors to efficiently spend resources poses endemic challenges in improving the quality of public services which have deteriorated in recent times.

The issue of public expenditure versus private expenditure or what has become fashionable public-private partnership needs to be addressed. If deregulation creates new space for private investment, then the sectors or segments which need continued public funding need delineation. Assuming, that private investment is still shy while infrastructure improvement can brook no delay, the issue of inadequate sector reforms looms large. Private investment in Power remains shy because power sector reforms notwithstanding, the Electricity Bill 2003 still needs credible implementation particularly by many state governments. Building new electricity projects by financially sick electricity boards or NTPC taking up more national projects without sector reforms is not sustainable. Similarly, strengthening the Railways Golden Quadrilateral, modernising and upgrading tracks is inescapable but cannot be a substitute for long-overdue Railway reforms. These inter-alia include a sunset clause for distortionary rail tariff between passenger and freight, depoliticisation of Railway tariff fixation, corporatisation of several activities on which experts agree. Montek has been a strong votary against entitlement-driven devolution with a preference for performance-based access. This principle can hardly be given a go-by in the present debate.

Since the foreign exchange reserve is essentially not government money against which it is proposed to issue Bonds, there are still several choices open to us. First, to temporarily extend the date by which the agreement with the RBI on the borrowing limit by the Government becomes fully operational. The full prohibition from subscribing to the Government’s securities in the primary issue stage only clicks in 2007. This can yield low-cost finance for infrastructure projects. A temporary extension of this agreement may be preferable than an amendment of the Fiscal Responsibility Management Act itself whose enactment was not easy to achieve. The second option is along the lines of the Planning Commission’s proposal by utilising the foreign exchange reserves and issue of securities with monetisation of the fiscal deficit. The third option is to recognise that the additionality of expenditure on infrastructure has a compelling economic and social case and accept an additional fiscal deficit of 0.5 per cent to 0.75 per cent per annum in larger interest. The fourth is for a year or two to concentrate on quality of public expenditure, complete ongoing sector reforms, rationalise public portfolios and reprioritise expenditure. In the public debate, these options and their implications need closer examination. The issue is as much about the modality of financing as about the quality of public expenditure, effectiveness of delivery system and the underpinning of sector reforms.

At the same time, while in the present climate, it may be fashionable to find clever ways to enhance public expenditure, this is no substitute for addressing the more endemic sector problems. Montek has the credit for raising a public debate on these issues since urgent infrastructure improvement has overwhelming multiplier benefit. The Prime Minister’s call for an early consensus on these options has struck the right chord. Foreign exchange plenty by itself is no magic wand to our economic ills.

write to nksingh@expressindia.com