Where146;s the money?

Prime Minister Manmohan Singh chose a Keynesian pitch at the Asian European Summit in Beijing, and committed India to large-scale infrastructure projects to revive domestic demand. But the scope for increasing government expenditure on infrastructure to pump-prime the Indian economy today is limited compared to what can still be achieved through improving liquidity in the financial system. Indian infrastructure needs have been placed at above 500 billion for the eleventh five year plan. Today bank loans are drying up for the infrastructure sector and numerous large projects are being shelved. There is a need for policymakers to act fast and proactively on this front.

The RBI data may show that bank credit has increased 29 per cent above last year, but this situation is rapidly changing. Infrastructure companies in India already suffer a disadvantage, as there is no access to long-term credit. Instead of a 10- or 20-year bond being used to pay for, say, a hydel power plant, infrastructure companies at best have access to five-year bank loans, which need to be rolled over. This funding model was difficult in the best of times. Now when banks are averse to taking risks both in terms of maturity mismatches on their balance sheets, that could potentially create liquidity crunches as well as the credit risk, borrowing has become even more difficult. This can be addressed to an extent by easing the liquidity situation for banks. Banks should be allowed to use oil and fertiliser bonds to meet SLR and repo requirements. Since these are government bonds, they should have the same status as regular government bonds. This step will make it easier for banks to borrow from the RBI8217;s repo window. Second, all limits on foreign flow of funds for private sector infrastructure bonds should be removed. FIIs, NRIs, hedge funds, SWFs and anyone else who wishes to invest in these should be allowed to do so.

Even if this may not have an immediate impact, as money starts flowing in the money markets again, it may help this sector in the next few months. Curbs on the real estate sector, a large element of which is infrastructure, should be removed. Effective regulation is needed, but the sector should not be starved of funds. If the RBI intervenes in the foreign exchange market, which it should ideally not do, it should sterilise its intervention fully with CRR cuts that put liquidity back into the system without waiting for the call money rate to go up. High rates, even for a few days, can upset the system again. There should be no uncertainty that in the coming days the system will have adequate liquidity.