Radical Delhi plan to fund infrastructure
Use of US$120b of reserves may have consequences for US budget deficit
Use of US$120b of reserves may have consequences for US budget deficit
By ANTHONY ROWLEYIN TOKYO
INDIA'S plan to use up to US$120 billion of its foreign exchange reserves to help fund domestic infrastructure projects signals a radical departure that could influence the way other developing countries in Asia and beyond finance infrastructure, and could also have an impact on foreign exchange markets.
It comes at a time when the International Monetary Fund and the World Bank are considering fiscal incentives to get developing nations in general to spend more on infrastructure.
The move by the new Congress-led coalition in Delhi is designed to help India overcome serious infrastructure deficiencies in its road, railway and power sectors that could hinder economic growth.
It marks the boldest step so far by any Asian government (which collectively hold nearly US$2 trillion in reserves) to deploy its reserves actively in the domestic economy instead of keeping them invested in US and other foreign government securities.
China has diverted some US$45 billion of its reserves to dealing with its banking sector problems but India's initiative is much bigger.
Analysts say the move could have considerable significance for the funding of the US budget deficit, as well as for the exchange rate of the US dollar, if other countries opt to use their reserves more actively in their domestic economies.
India has not so far been able to attract foreign investment in basic infrastructure on anything like the scale that China has. At the same time, the Indian banking system has proved incapable of providing long-term bank loans for infrastructure on the scale needed, while the domestic bond market is also underdeveloped. Recently the Asian Development Bank issued its own rupee bonds in India to help bridge the infrastructure gap.
According to a report in Saturday's Financial Times, critics of the government plan say it would be an inappropriate use of India's foreign exchange reserves and would add to the already high fiscal deficit.
But Indian officials argue that the country's foreign exchange reserves have tripled in the past three years and are now high enough to cover almost 20 months of imports - far higher than the IMF-recommended minimum ratio.
The fiscal deficit issue may not prove to be a problem for India or other countries that opt to spend more money on infrastructure development. This is because at their annual meetings in Washington this month, the IMF and the World Bank decided to examine the idea of giving developing countries more 'fiscal space' to deal with their infrastructure funding needs.
According to an IMF spokesman, developing countries that invest in infrastructure, and thereby add to a nation's income-generating potential, would be able to deduct such spending from their budget, for the purposes of achieving the 'primary balance' which is regarded as the good housekeeping seal of fiscal management.
Debt services payments on infrastructure loans from multilateral development banks would also be deductible.
This would be a significant concession to emerging market economies at a time when there has been a massive shortfall in hoped for private sector investment in infrastructure, leaving governments bearing around 70 per cent of the total burden.
Those governments that invest most claim they are penalised in terms of the way their primary budget balance is calculated by the IMF.
World Bank president James Wolfensohn estimated in Washington that developing countries need to double infrastructure investment to around 7 per cent of GDP if they are to meet economic growth and poverty reduction targets.
Copyright © 2004 Singapore Press Holdings Ltd. All rights reserved.
It comes at a time when the International Monetary Fund and the World Bank are considering fiscal incentives to get developing nations in general to spend more on infrastructure.
The move by the new Congress-led coalition in Delhi is designed to help India overcome serious infrastructure deficiencies in its road, railway and power sectors that could hinder economic growth.
It marks the boldest step so far by any Asian government (which collectively hold nearly US$2 trillion in reserves) to deploy its reserves actively in the domestic economy instead of keeping them invested in US and other foreign government securities.
China has diverted some US$45 billion of its reserves to dealing with its banking sector problems but India's initiative is much bigger.
Analysts say the move could have considerable significance for the funding of the US budget deficit, as well as for the exchange rate of the US dollar, if other countries opt to use their reserves more actively in their domestic economies.
India has not so far been able to attract foreign investment in basic infrastructure on anything like the scale that China has. At the same time, the Indian banking system has proved incapable of providing long-term bank loans for infrastructure on the scale needed, while the domestic bond market is also underdeveloped. Recently the Asian Development Bank issued its own rupee bonds in India to help bridge the infrastructure gap.
According to a report in Saturday's Financial Times, critics of the government plan say it would be an inappropriate use of India's foreign exchange reserves and would add to the already high fiscal deficit.
But Indian officials argue that the country's foreign exchange reserves have tripled in the past three years and are now high enough to cover almost 20 months of imports - far higher than the IMF-recommended minimum ratio.
The fiscal deficit issue may not prove to be a problem for India or other countries that opt to spend more money on infrastructure development. This is because at their annual meetings in Washington this month, the IMF and the World Bank decided to examine the idea of giving developing countries more 'fiscal space' to deal with their infrastructure funding needs.
According to an IMF spokesman, developing countries that invest in infrastructure, and thereby add to a nation's income-generating potential, would be able to deduct such spending from their budget, for the purposes of achieving the 'primary balance' which is regarded as the good housekeeping seal of fiscal management.
Debt services payments on infrastructure loans from multilateral development banks would also be deductible.
This would be a significant concession to emerging market economies at a time when there has been a massive shortfall in hoped for private sector investment in infrastructure, leaving governments bearing around 70 per cent of the total burden.
Those governments that invest most claim they are penalised in terms of the way their primary budget balance is calculated by the IMF.
World Bank president James Wolfensohn estimated in Washington that developing countries need to double infrastructure investment to around 7 per cent of GDP if they are to meet economic growth and poverty reduction targets.
Copyright © 2004 Singapore Press Holdings Ltd. All rights reserved.
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