While advocating the use of foreign exchange reserves to boost economic activity, World Bank Chief Economist Justin Yifu Lin today said that there was scope for more monetary measures and fiscal space to boost spending in India.
Lin, the first non-American or European to hold the World Bank chief economist’s job, told reporters that countries should not worry about the deficit levels during the present economic crisis and should instead step up spending on bottleneck-removing projects.
“India has a lot of bottlenecks. If India can use the opportunity to invest in bottleneck-removing projects, it will generate demand, create jobs and a growth of 5-6 per cent will be maintained. After the crisis, 9-10 per cent growth can be maintained for decades,” said Lin, adding that infrastructure could be a focus area.
He said that globally, though the problem started with the financial sector, the root to the problem was in the excess capacity in the real sectors and governments needed to encourage demand. On his first visit to India after taking up the assignment in June last year, the Chinese economist said that the government should identify projects that could generate high returns and when the economy recovered and add to the growth, which would take care of the deficit levels.
Asked about the possible sources of funds, Lin said, “Apart from sources such as World Bank, it (India) still has some scope from the fiscal channel. If you invest, deficit will increase but it will increase growth and generate revenue. Deficit will be a short-term phenomenon.”
He said that other option was to use forex reserves of close to $250 billion, especially because inflationary pressures had eased. “The returns will be higher as (input) costs have come down,” he added.
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Based on a suggestion from Deputy Chairman Planning Commission Montek Singh Ahluwalia a few years ago, the government has started leveraging the foreign exchange reserves. A few days ago, RBI released the first tranche of $250 million (about Rs 1,250 crore) to IIFC Plc, the UK subsidiary of India Infrastructure Finance Company (IIFCL). The funds would be used to part-finance import of capital goods by Indian companies in the infrastructure sector.
The government and RBI intend to use around $5 billion of the reserves to finance infrastructure projects.
Lower inflation had also created scope for central banks to reduce interest rates further and advocated that money supply should be increased, Lin said.
“In developed countries, people anticipate an increase in taxes in the coming years and therefore may increase savings. So, the demand may not increase much… If we can find projects that can generate high returns in the future, the fiscal stimulus will have a larger impact,” Lin said. While all economies should focus on bottleneck-removing projects developing countries had more bottlenecks to deal with, he said and added that digging up roads and rebuilding them over and over again would not help.
He added that higher real sector demand would also help in dealing with bad debt and putting banks on the recovery path.
The World Bank chief economist also warned that the global economy might contract this year and said that there was a high risk of the present economic crisis getting prolonged.
In addition, he reiterated World Bank President Robert Zoellick’s suggestion that developed countries should transfer a part of the stimulus package to developing countries.
Besides, he said that countries should not adopt a protectionist approach as it would affect jobs in other countries, and could affect imports.
WB to approve $2.6 bn assistance for 3 companies
The World Bank today said that it would soon finalise an assistance of $2.6 billion (around Rs 13,400 crore) for three Indian companies.
The multilateral agency’s board is expected to clear funding of $1.2 billion (Rs 6,180 crore) for PowerGrid Corporation, $1 billion (Rs 5,150 crore) for India Infrastructure Finance Company Ltd and $400 million (Rs 2,060 crore) for the Small Industries Development Bank of India (Sidbi).
The funding was part of the plan to provide an assistance to $14 billion to India over three years.
The bank is also expected to finalise a plan to aid government recapitalise public sector banks.