Rien wrote:I'm confident that there is money and a good plan to solve the problem in place. Modi's track record on infrastructure is good.
Yes he has a past track record, but I want to see him perform as a PM on this front first, not because I don't think he can do it, but because his performance level as a PM, and the rate of execution of projects at the national level , has not been quantified yet.
I think there is a huge opportunity cost faced by us and the other Asian countries in having these huge reserves.http://www.igidr.ac.in/money/mfc-13/OPT ... 0INDIA.pdfhttp://demo.ncaer.org/downloads/IPF2008/paper2.pdf
We find that India is foregoing as much as 2% of its GDP by accumulating excess reserves instead of
employing resources in alternative uses
I want to take that money and sink it into infrastructure. We have the Contingency Reserve Agreement, so we don't need these huge reserves to forestall a repeat of the IMF crisis of 1997.
This is nothing new. The topic was discussed at length here on this thread several years ago. If you look it up online, most, if not all, of the material on the topic came about in the mid 2000s. None of them came to a common conclusion. Here's a contrarian one:http://web.stanford.edu/group/siepr/cgi-bin/siepr/?q=system/files/shared/pubs/papers/pdf/SCID256.pdf
However, neither the capital inflow to India nor the size of FER is significantly large when compared with some other countries in the region. The sources of accretion to FER are mainly CSSE, IRWA, and portfolio investments - not FDI (which is more stable) as in the cases of China and Singapore. Therefore, India, which is accumulating FER for precautionary and safety motives, especially after the embarrassing experience of June 1991, should avoid utilizing reserves to finance infrastructure. Infrastructure projects in India yield low or negative returns due to some difficulties – political and economic – especially in adjusting the tariff structure, introducing labor reforms and upgrading technology. The use of FER to finance infrastructure may lead to more economic difficulties, including problems in monetary management.
Using forex in infrastructure is an interesting idea, but fraught with risks. For one, it takes on exchange rate risk. India's record at managing a stable exchange rate is poor. Check CNY-USD vs INR-USD. It's a matter of what the central bank's authority is. PBoC treats exchange rate stability as an important goal. RBI does not. The dynamic of interaction between the Chinese govt and PBoC is different from what RBI has with FinMin. the PBoC even has authority to issue sterilization bonds, which RBI does not. For these reasons, as well as the qualitative nature of our forex reserves as opposed to that of the current account surplus East Asian nations, the idea is not likely to gain any policy traction in India today. Maybe after a few years of maintaining a trade surplus, but not now.
Rien wrote:There are also risks in building too much infrastructure far ahead of projected need. Look at China's fast rail. Will those investments ever pay off? But yes, obviously we need far more infrastructure than we have now. But money is an issue.
That's an oversimplification. The more specific issue is that we don't have financial entities capable of lending money in one go, at a cheap enough rate. Our banks are small. Even SBI is a pygmy by global standards. When banks have a small capital base, they cannot lend much capital out cheaply. In fact, the central concern stated by the Deutsche Bank report above is the inadequate capital base of Indian banks, which means any big project requires independent negotiation with several banks, all of which individually offer a high rate of interest that a fewer number of large banks can. Export driven growth requires cheap access to capital, sufficient support infrastructure, and a capable labour pool.
Further, the concern about "building too much infrastructure" is extremely misplaced, in my opinion. Once we've spent over a decade investing 40% of GDP, we can worry about overinvesting like them. A lot of future projections are colored by existing constraints. Planners often underestimate demand, because we're not good at projecting exponential growth from latent demand. Take New Delhi Airport. The massive T3 was supposed to give it breathing room until 2017-18, but it has already near full utilization and T4 has been advanced, to be completed in another two years. Even after T2 is ready, Bombay Airport will saturate very quickly. It's the same story elsewhere - despite a lot of new ports and road/rail connectivity built recently, average berthing time (data posted earlier) has increased in the past half a decade, which means they're struggling to maintain turnaround time.