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Thursday, December 21, 2006

India's Reserves and Infrastructure

This is a very strange story. They want to try and recycle reserves to finance infrastructure projects. Now either this is a piece of midwinter madness, or they have thought of something which neither I nor anyone else has:

India is exploring whether it can use a part of its near-record foreign-exchange reserves of $175.5 billion to fund the nation's bid to modernize roads, ports and airports, the finance minister said.

Prime Minister Manmohan Singh said in October that the nation will need as much as $320 billion over the next five years to improve roads, ports and other infrastructure, underscoring the key nature of public works in attracting companies, generating jobs and speeding up economic expansion to cut poverty. India's economy has grown by an average of about 8 percent in the past three years.

``I've asked the finance secretary to prepare a note on how the foreign reserves can be used for'' funding infrastructure, Finance Minister Palaniappan Chidambaram said in New Delhi today.

The government will set up a panel to look into the financing of infrastructure projects headed by Deepak S. Parekh, chairman of Housing Development Finance Corp., the finance minister said. The panel will submit its initial report within 6 weeks, Chidambaram told a conference on infrastructure.

The world's second-fastest-growing economy after China is expected to grow by 8 percent this year, the central bank said.

India, which is aiming to cut its fiscal deficit to 3 percent of gross domestic product, should eliminate wasteful expenditure, Chidambaram said, reiterating the $320 billion investment needed for infrastructure.

India's foreign-exchange reserves have grown fourfold in the past five years, enough to cover more than a year of imports.

n 1991, they dipped to a record low of $975 million, barely enough to pay for a week's imports, prompting Singh, then finance minister, to initiate economic policies that led to the opening up of local markets to international investors.

India's foreign-exchange reserves rose to a record $175.5 billion in the week ended Dec. 1, before dropping the following week. The reserves comprise overseas currencies, gold and special drawing rights with the International Monetary Fund.

Any move to use the reserves for funding long-term projects may have an impact on the country's deficit and the central bank's ability to tackle volatility.

``We need to see the details of how exactly the government intends to go about this and what impact it may have on the fiscal deficit,'' said Indranil Pan, an economist at Kotak Mahindra Bank Ltd. in Mumbai. ``The central bank may be reluctant because they need a buffer to prevent volatility in the financial markets.''

Many central banks buy or sell dollars from their reserves, to stem gains in the local currency or to provide support when it declines in the event of panic selling of assets by overseas investors. India's public debt was about 83 percent of gross domestic product as of March 31.

Reducing infrastructure bottlenecks may encourage companies such as Intel Corp., the world's largest computer chip-maker, and Ford Motor Co. to invest more in India. Manufacturing makes up 17 percent of India's economy, half the level in China.

Better infrastructure in neighboring China, which began opening its economy in 1978, 13 years before India did, helped it attract $60 billion of foreign direct investment in 2005, compared with India's $50 billion since 1991.

India, which spends a seventh of China's $150 billion investment in public works each year, according to Morgan Stanley, has boosted spending by a quarter to 992 billion rupees ($21 billion) since April 1 to modernize its transportation and communication links.

The finance minister refused to comment on the government's bond sale plan when asked whether there would be any changes on account of buoyant tax collections.

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