Mumbai: India should use its large foreign exchange reserves to fund infrastructure projects, the World Bank’s top economist said on Friday.
Justin Yifu Lin, who is also the bank’s senior vice-president, said if India can improve its infrastructure such as electricity, power, transportation and port facilities, it will be well on its path to achieve a 9-10% growth.
The country’s foreign exchange reserves are now $247.3 billion (Rs12.79 trillion). In May, the pile was $316 billion but since then the central bank has been selling dollars to protect the falling rupee on the back of foreign institutional investors (FIIs) selling Indian equities.
Lin, who was in Mumbai to deliver a lecture at Exim Bank of India, said developing countries need to invest in projects that would give them high returns in the future as otherwise the government stimulus packages will be unable to achieve targets.
Achieving targets: Justin Yifu Lin, economist and senior vice-president of World Bank. He warned that during a recession it is important not to indulge in protectionism but opt for liberal trade practices. Adam Berry / Bloomberg
He said that when a government offers stimulus packages to prop up a sagging economy, the public has to bear the burden through higher taxes. People start saving as they need to pay higher taxes and this, in turn, negates the government’s spending efforts.
“The issue is: who is going to pay for the projects in future? With the stimulus money, if you can invest in higher return generating projects, government will have enough revenue to pay for those projects and people will not be taxed. In that case, fiscal stimulus will have a large impact.”
He appreciated India’s fast response to tackle the slowdown but said there is still room for it to provide more fiscal sops and interest rates can go down further. At the same time, he admitted that global crisis was not India’s doing and thus the country has limitations on how much it can do to turnaround the situation.
“Your central bank responded quickly with rate cuts. In just three-four months you have brought down your rates sharply. Your government also proposed stimulus packages in a short period of time. But the fact is that it is a global situation.”
According to him, India can also safely increase money supply in the market without fear of inflation. The inflation rate, which was 12.91% in August, is now at its six-year low of 2.42%.
“You had high inflation in past few years but now you are moving towards deflation. You can use your foreign reserves for infrastructure projects. It will increase productivity,” he said. “When productivity increases and private sector players participate, your economy will expand and there will be no fear of inflation because a larger economy can absorb more money... It all depends on how you are implementing the projects.”
This is the best time to invest in infrastructure projects, according to the economist. “New projects will give you high returns if invested now. Two years ago they were costly so they wouldn’t have given you high returns.”
“If India can invest in bottleneck-reducing projects, it will create demands, jobs, and India can maintain gross rate at 5-6%. But most importantly, when the crisis gets over, India may have the opportunity to have a growth rate of 9-10% for decades.”
Lin warned that during a recession it is important not to indulge in protectionism. “No government should adopt protectionism. Protectionism may do the job for the time being but it will hurt other countries... We should always opt for liberal trade practices,” Lin said.
“Everybody wants to get out of the crisis as quickly as possible. If we go for protectionism, this crisis will extend. You pay the developing countries, they will pay back in future as they grow.”
Countries such as India, Lin said, will claim their own share in the global economy when the crisis is over because “you are still growing at 5-6% when other countries are facing recession”.
He proposed that multilateral organizations such as World Bank and International Finance Corp., a World Bank investment arm, can facilitate fund transfer to emerging markets economy for developing their infrastructure.
World Bank has called for creating a special fund, carved out of 0.7% of the developed countries’ stimulus packages, for developing emerging market economies.