.. Indian scenario

Today India’s foreign exchange reserves are around USD 219 billion and in spite of the fact that Foreign Direct Investments (FDI’s) are on the increase and India’s economy is showing an upward trend, the basic infrastructure still is far from what it should have been for a country of its size and population. Reason: the infrastructure projects – irrigation, power generation, roads, ports, airports, railways, residential and office complexes, health care, education etc. all need a lot of funds.

In the recent past, the Indian Finance Ministry has been discussing with central bank, the RBI, ways of using part of its FOREX for funding infrastructure projects. There have been moves like:

• Establishing wholly-owned overseas subsidiaries of the government-owned India Infrastructure Finance Company (IIFCL) and

• Central Bank to lend a small part of its reserves to Indian companies implementing infrastructure projects to meet part of their capital expenditure abroad such as import of equipment etc.

But this thought process had invited its own criticism as under:

• The reserves though look sufficient, may be required in case of any financial crises, import cover for a reasonable period or in case of a war.

• The use of reserves will increase money and inflationary pressures. Ideally, if the entire amount borrowed from the central bank is spent on imports, then reserves would decline by an equivalent amount.

And in spite of this criticism, in February, four financial institutions — Citigroup, Blackstone, Infrastructure Development Finance Company Ltd and India Infrastructure Finance Company (IIFCL) — launched a five billion dollar infrastructure fund. In April, another private equity firm tied up with IIFCL.

… And now India’s Finance Minister P. Chidambaram has formally announced that India will require 475 billion USD investment in infrastructure projects during 2007-2012 with 5 billion USD annual spending from its FOREX.

.. China’s scenario

China’s reserves (1200 Billion + USD) already far exceed than what is required to ensure financial stability. China’s reserves are equivalent to 15 months of imports. Its central bank is thought to be switching from treasury bonds to American mortgage-backed securities and corporate bonds in an attempt to earn higher yields. One problem is that China’s investments are so big that they can move markets. Shifting money into euros would push down the Dollar. China would then not only suffer a capital loss on its remaining dollar reserves, but it could also be forced to buy yet more reserves to hold its currency down against a weaker dollar.

Fear of a capital loss, and dissatisfaction with unrewarding yields, have triggered various ideas on how to put the money to better use. Some of these are:

• Use some of reserves to buy oil and other commodities. The snag is that stockpiling oil would push up prices, yet absorb only a tiny proportion of the sums at China’s disposal.

• Buy gold but that would have similar results: if China invested just 5% of its reserves in gold, it could buy the world’s entire annual mine production.

• Spend more money on infrastructure improvement.

.. Meeting aspirations

Using reserves for infrastructure projects, including housing, health care, education and social security, both India & China will meet the aspirations of their combined 2.6 billion populations. Such investments will help relieve poverty in the long run. It would not only reduce the gap between rural and urban areas but also boost the potential growth rate of both these countries through welfare of their citizens at large.

Write to me what you think on this issue.

This entry was posted on Monday, July 30th, 2007 at 6:17 pm and is filed under Government, Investment, Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.