Tuesday, November 09, 2004
India's Infrastructure Solution
Talking of foreign exchange (see Reuben's post below), Montek and Manmohan have proposed to use India's large forex reserves for developing infrastructure. Their argument is that India's poor Infrastructure (poor even on comparison to fellow Asian countries such as China, Japan, Korea, HongKong, Malaysia etc.) is (1) an impediment to foreign investment (and growth) and (2) india forex reserves are now excessive and can be used to improve them. Several comments have been made - many of which, at the end of the day, simply state suspicion. Even The Economist in its recent coverage on the issue is unable to clarify the stand of the doubters. Most discussions take place with a 'one hand- other hand view' without any alternative suggestion. So lets take a closer look - a look that requires a decision.
The first question is do we have enough (We have 121 bn now)?
As per some calculations (to get a rough idea), we have enough for the next year and a half assuming no inflows at all but the current rate of outflows (mainly imports). Of course, this is a misleading number since the source of inflows will not dry up. The major sources of inflow are (1) exports (which the government should promote. On such move was made by Chidambram by setting up the India Brand Equity Fund 9 years back. A stronger rupee would hurt.) (2) repatriation/local investments from Indians abroad (NRIs do beleive their money is safe and the current government is probably is a plus.) (3) funds and instituional investors storing or investing in india (the storing might not last for long as interest rates change. The investing is, in my guess, likely to increase as buyout specialists and other private equity firms venture in.) (4) financing by indian companies in foreign markets (depends on market conditions mainly, but not only, in US) (5) tourists (rather the per capita tourist spending and the number of toursits - only likely to improve with infrastruture) and (6) part of some 10 bn due to the Millenium bonds issue (that is not a source looking forward). With these sources in mind, I do think there is enough in the coffer (even if one subtracts 10bn).
But does that mean one should use it as Montek suggests.
or rather what concerns should be addressed while doing so?
1. Public projects (especially if large scale) have been notoriously inefficient in India. Moreover, the private sector is more efficient and can do this by itself. After all, the telecom industry changed in India quite rapidly. So maybe this is not a good idea?
I think the guys behind the plan are aware of it and are pushing private-public colloborations in their talks on the issue. (See Montek's interview here). In addition, telecom provides a very different profit scenario for a firm than building better roads!
2. Imports might increase as we grow faster and the surplus might not look that high anymore?
Yes, and it is important that any such plan is accompanied to reduce import taxes, duties etc. so that the import prices are now lower.
Apart from these two, most objections are ideological. In sum then, after a real quick look at the issue, the idea does seem attractive if executed carefully. And this is where the difference lies. At the end of the day, 121 bn amount is enough if the government/RBI knows 'policy' and for governments not well trained in such skills, no amount is high. I think Montek and Manmohan might just be the right people.
The first question is do we have enough (We have 121 bn now)?
As per some calculations (to get a rough idea), we have enough for the next year and a half assuming no inflows at all but the current rate of outflows (mainly imports). Of course, this is a misleading number since the source of inflows will not dry up. The major sources of inflow are (1) exports (which the government should promote. On such move was made by Chidambram by setting up the India Brand Equity Fund 9 years back. A stronger rupee would hurt.) (2) repatriation/local investments from Indians abroad (NRIs do beleive their money is safe and the current government is probably is a plus.) (3) funds and instituional investors storing or investing in india (the storing might not last for long as interest rates change. The investing is, in my guess, likely to increase as buyout specialists and other private equity firms venture in.) (4) financing by indian companies in foreign markets (depends on market conditions mainly, but not only, in US) (5) tourists (rather the per capita tourist spending and the number of toursits - only likely to improve with infrastruture) and (6) part of some 10 bn due to the Millenium bonds issue (that is not a source looking forward). With these sources in mind, I do think there is enough in the coffer (even if one subtracts 10bn).
But does that mean one should use it as Montek suggests.
or rather what concerns should be addressed while doing so?
1. Public projects (especially if large scale) have been notoriously inefficient in India. Moreover, the private sector is more efficient and can do this by itself. After all, the telecom industry changed in India quite rapidly. So maybe this is not a good idea?
I think the guys behind the plan are aware of it and are pushing private-public colloborations in their talks on the issue. (See Montek's interview here). In addition, telecom provides a very different profit scenario for a firm than building better roads!
2. Imports might increase as we grow faster and the surplus might not look that high anymore?
Yes, and it is important that any such plan is accompanied to reduce import taxes, duties etc. so that the import prices are now lower.
Apart from these two, most objections are ideological. In sum then, after a real quick look at the issue, the idea does seem attractive if executed carefully. And this is where the difference lies. At the end of the day, 121 bn amount is enough if the government/RBI knows 'policy' and for governments not well trained in such skills, no amount is high. I think Montek and Manmohan might just be the right people.
