Money for infrastructure

If you've had too much to eat, the best thing to do is fast for a while and give the body time to digest the stuff. If you don't like fasting, but still want to continue consuming, you have to find artificial ways of getting rid of what's already in your stomach.

Since 1997, India has grown and stored more food than it knows what to do with; since 2001, this has been the story with foreign exchange, too.

The food mountain is being used to fuel the food-for-work programme, which is a politically sensible way of reducing grain stocks before rats chew their way through them. The proposal to use around $10""20 billion of the country's $118 billion forex hoard to fund infrastructure projects falls in the same category.

On the face of it, it sounds like a good way of dealing with the "surplus," except for two things: one, the forex does not belong to the government, and, two, there is no equivalent of a food-work-programme yet.

That's why mandarins in the Planning Commission, the RBI and the finance ministry are working overtime to invent a mechanism for using forex for domestic investment.

They will have to contrive something, and like all contrived things the solution may be less than optimum. In a nation inured to sub-optimal solutions, perhaps nobody is too worried on this front.

The normal and straightforward way of dealing with excess""any excess""is to let the market intermediate. If the rupee were allowed to find its own level without too much of nannying by the RBI, the reserves would become more manageable very quickly.

Politically, of course, that won't work since exporters will complain that their incomes have declined. A second way could be to do what the Chinese did a few months ago: they handed over $45 billion to banks to clean up their balance sheets.

The banks were then told them to keep on lending without worrying too much about Basel I norms, which China is obliged to follow. If India did this, most public sector banks could come out looking squeaky clean and start running up NPAs again on behalf of their political masters.

A forex utilisation plan now being thought up by officials is to simply print more rupees and hand them over to a special purpose vehicle for importing infrastructure-related equipment and services. This way the forex can be "bought" by the SPV in exchange for deficit-financed rupees.

This scheme offers the benefit of financing infrastructure without courting inflationary damage from excess money supply back home. But the upshot still remains more or less the same: whether you export less (due to a peppier rupee) or import more infrastructure projects (through SPVs or otherwise), the direct business benefits will mostly go to manufacturers and suppliers abroad.

On the other hand, there will be spinoff benefits for the Indian economy in either case. The best way may therefore be the simplest: allowing the rupee to rise and freeing imports.