Finance ministry questions forex use for infra

The plan to use part of the country's $200 billion-plus foreign exchange reserve for infrastructure financing has hit another hurdle "" the finance ministry.

The budget division in the department of economic affairs has expressed its inability to provide guarantee for borrowing from the RBI as it may violate the fiscal responsibility law.

Finance Minister P Chidambaram had said in his Budget speech that loans by the RBI to the two proposed overseas subsidiaries of India Infrastructure Finance Company Ltd (IIFCL) would be guaranteed by the government and that the RBI would be assured a higher rate of return on its incremental investment.

However, in the last meeting on the Deepak Parekh Committee report on infrastructure financing, which had suggested these measures, the budget division held it could not provide more guarantees as it had already reached the stipulated limit.

The Fiscal Responsibility and Budget Management (FRBM) Act permits the government to provide contingent liability guarantees of up to 0.5 per cent of the national income (GDP) annually. Within this ceiling, the central government extends guarantees on loans from multilateral and bilateral agencies, and bond issues and other loans raised by PSUs and public sector financial institutions.

"The government may have to increase the contingent liability limit or keep the guarantee provided for the RBI loan out of the scope of the Act. A decision has to be taken at the highest level," said a finance ministry official.

While the RBI has rejected the proposal for the second overseas subsidiary of IIFCL for providing credit guarantee insurance to Indian companies for their overseas borrowings, it has agreed to give $5 billion per annum to the first subsidiary for providing loans to Indian companies for overseas capital expenditure.

The stock of contingent liabilities in the form of guarantees given by the government increased from Rs 1,07,957 crore at the end of 2004-05 to Rs 1,10,626 crore at the end of 2005-06.

The number of guarantees during the same period declined from 505 to 492. The net accretion of Rs 2,668 crore during 2005-06 amounts to 0.07 per cent of GDP for the year.