Thursday, January 27, 2005

Using Forex reserves for Infrastructure development

Putting forex reserves to good use By M K VENU (ET)

The government is looking at earmarking about $10 billion of RBI’s forex reserves for investment in various infrastructure sectors over a period of time. It is safe to assume that India’s reserves will cross $150 billion in the near term.

So setting aside 6-7% of the reserves for investment in infrastructure seems reasonable. Earlier this year, China also decided to use up about $15 billion of its reserves ($470 billion) to recapitalise its banks.

Muddled on forex for infrastructure By ARVIND PANAGARIYA (ET)

Infrastructure hawks would respond that the return on the infrastructure projects is higher so that the future income streams from them can more than compensate for the extra interest on the RBI-held securities.

Fiscal fundamentalists would counter that the increase in the GoI debt, which is already large, would make the financial markets within and outside India jittery: the latter may judge the return from infrastructure projects to be lower and more uncertain.

As a last point, it is puzzling why, at a time when the RBI is rapidly accumulating reserves to avoid a large appreciation of the rupee, the government continues to borrow large sums abroad.

Powering projects with forex reserves By S. Padmanabhan (BusinessLine)

In the power sector, the equity investment climate has always been buoyant. But the expected investment has not flowed into this area because of viability and bankability issues. Once deficit financing reaches out to strengthen these areas, equity and debt investments will start, says S. Padmanabhan.

The reform paradox By S. Balakrishnan (BusinessLine)

These calculations are naturally not in the domain of investors and bankers. Their concerns are returns of equity and safety of funds of lenders. And structuring infrastructure projects that satisfy these tests has proved challenging and, in most cases, impossible. Where Governments took these responsibilities on themselves, the results have been disastrous, as has been clearly established in the case of the ill-fated Enron-promoted Dabhol Power Company.

That, in essence, is the paradox. If you can reform the system, incentives are not necessary. If you cannot reform, even God cannot help you.

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