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http://news.ft.com/cms/s/096fc2d8-1ed9-11d9-9015-00000e2511c8.html India in precedent setting infrastructure move By Edward Luce in New Delhi Published: October 15 2004 19:37 | Last updated: October 15 2004 19:37 India is drawing up plans to use some of its almost $120bn of foreign exchange reserves to fund domestic infrastructure projects in a step that has no precedent elsewhere. The plan, which is likely to prove controversial, would help raise badly needed capital to upgrade India's ailing roads, railway and power sectors. India spends just $2bn a year on its road network, compared to $30bn spent in neighbouring China. The new Congress-led coalition, which unexpectedly came to power in May, has made expensive commitments to raise spending on health, education and other social priorities, none of which will provide a direct return to the government unlike infrastructure. Critics of the plan say it would be an inappropriate use of India's foreign exchange reserves and would add to India's already high fiscal deficit, which is roughly 10 per cent of gross domestic product if both central and state deficits are included. But senior officials say India's reserves, which have almost tripled in the past three years, are more than enough to cover any exchange rate shock, amounting to almost 20 months worth of imports. In addition, India's record foreign exchange reserves represent a large "opportunity cost", they say, since most of the money is invested in low-yielding US Treasury bonds. "We are subsidising the American economy," said one official. "These are scarce resources that can be put to better use." Under the plan, India's central bank would issue a bond of between $10bn and $15bn, the proceeds of which would go to a public infrastructure fund, which, in turn, would attract private capital. The resulting inflationary impact would be offset by a reduction in import duties, which is what New Delhi has pledged to do anyway. Montek Singh Ahluwalia, head of India's Planning Commission, said it would be more effective than simply "monetising" the proceeds of a normal government bond and assuming the resulting fall in interest rates would stimulate higher private sector investment in infrastructure. "Infrastructure investment generates a much higher yield than other investments but requires a large public sector component to stimulate activity," Mr Singh said. "Ultimately it depends on whether you think India needs its foreign reserves to be as high as this." Critics say it would risk creating "white elephant" projects since the funds would be controlled by the public sector, which has a poor record in India. But Montek Singh, who is the closest adviser to Manmohan Singh, the prime minister, says India's infrastructure needs cannot be fully met by public spending. "It is a question of thinking pragmatically," says one official. At just over $4bn last year, India attracts a fraction of the foreign direct investment of China. Economists say India needs to drastically upgrade its infrastructure if it is to raise annual growth from 6 per cent to 8 per cent.
