This is an archived blog post from The Acorn.
India’s infrastructure is a bottleneck. The good news is that Manmohan Singh’s government has realised this and intends to do something about it. Prime Minister Singh himself announced that India needs almost US$160 billion to modernise its infrastructure. The bad news is that with India’s combined government deficit bordering around 10% of GDP, the government is not quite in a position to foot the bill.
So Montek Singh Ahluwalia, the Prime Minister’s handpicked pointman for economic reform, hit upon a plan — why not use those foreign reserves that the Reserve Bank of India (RBI) has been steadily accumulating over the last decade. Surely, $5 billion a year, that too for an important cause should’nt hurt? Given the fact that much of these reserves are invested in assets that generate relatively low returns, does’nt it make sense to spend them on building those roads, airports and electricity grids that India so desperately needs? (linkthanks Sunil)
There are several things wrong with this.
The last resort
First, a key objective of those reserves is for the central bank to manage India’s monetary policy, to keep exchange rates stable and in times of crises to defend the Rupee. As India gets increasingly plugged into the global economy, it will be difficult to predict how big a war chest it will actually need in a financial crisis. So while it may appear that $100 billion in reserves is a lot of money sitting around and gathering dust, the purpose for which it is actually intended suggests that it should be touched only as a last resort. Montek & Manmohan Singh need to consider other options first — some of which may involve the Prime Minister’s Leftist political allies raising hell.
Dont let ’em touch the bank
Second, the quality of governance in any democracy improves with the independence of its institutions. The RBI must be free to manage monetary policy, without undue interference from the Executive. Independent institutions like the Supreme Court and the Election Commission have shown themselves to be effective because they are independent, while institutions like the Central Bureau of Investigation and various state police forces have become tools of politicians. RBI’s independence cannot be traded off to pay for roads. And where would the buck stop — there are any number of critical issues which require massive amounts of money, for example, healthcare and education, which some would argue are as important as infrastructure? Once a precedent is set, all kinds of demands would be made on those limited reserves.
Little trickles down
Third, India’s record on official corruption suggests that much of the government funds allocated for development projects end up in the wrong pockets. Infrastructure projects anywhere are notoriously susceptible to corruption, more so in India. If any funds taken from India’s hard-earned reserves could truly be well spent, then a case could perhaps have been made to dig into them. But as it stands, there is no guarantee at all that the $5 billion will not disappear into the Great Indian Black Hole, making the use of reserves ineffective.
The private-sector does it better
How then does the government plug the $160 billion infrastructure gap? The answer lies in the government allowing the private-sector to play the game. Considering that there is a latent demand for infrastructure services, the private-sector is likely to find the projects viable if it is presented with half-a-decent business model. Telecommunications infrastructure was modernised within three short years on the back of massive private investment. Roads, electricity and irrigation canals too can go the same way. Oh yes, some out-of-date political ideologies may need to be punctured first.
Related Links: Brad DeLong on reserve accumulation; the Economist on Montek & Manmohan’s plan; and an older post on the ‘rising Rupee’
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