Two ways to use the money

Two ways to use the money

The role of the state has changed dramatically in the last five years.

The initial years of globalization of trade and the lifting of barriers to trade in goods, services and financial instruments were brought to an abrupt halt by 9/11. Concerns over internal security, immigration and financial flows brought in several restrictions after 2002, with the state intruding into citizen’s lives more than ever.

This year, the credit crisis, and the reactions in the UK and the US have brought home the fact that the state has an interventionist role to play in the economy as well. Paul Samuelson, in International Herald Tribune last week, argued that he, as one of the authors of the complex derivative devices that have been let loose in the financial markets, is ready to revisit some of his arguments of a decade ago and that recent events have convinced him that free market forces need to be tempered with appropriate state interventions and state regulations.

There is yet another development. Several developing countries with large foreign exchange surpluses have created state institutions of investments overseas—a colonization through money that the recipient countries are watching with some apprehension. These sovereign funds currently exceed $500 billion, and are likely to double in the next five years. The influence of the state can thus extend over geographical boundaries.

India can take unique advantage of these conceptual changes. Our state institutions and interventions in the economy have continued through the reform phase, and indeed, structures of oversight, in the financial markets, in security, and in monetary policy are intact. I am sure several free marketers would be horrified, but I do believe this is the time for a unique set of interventions by the state, though some may be considered unorthodox. I attempt two suggestions here.

Clearly, there is concern at RBI and North Block about the absorption of foreign exchange inflows, and the balancing act of maintaining the value of the rupee, and managing credit, is proving to be tough. Perhaps it is time to consider the establishment of a sovereign fund in the manner of other countries, and given current surpluses, even a modest start up of $25 billion would be good. That these funds can be kept fisc neutral has been demonstrated by several countries.

RBI must have oversight, but the management of the funds should be with professionals - not bureaucrats - with the finance minister, external affairs minister and the commerce/energy minister on the governing board. There could be two objectives—the first to maximize returns through careful investments, and to ensure that returns are better than those on the deployment of reserves by RBI, and the second to secure needed resources, particularly energy and commodity resources, for the country. A part of the fund could also be earmarked for development through aid programmes, with India funding long-term commercial projects in the recipient countries. The earmarking of reserves to the fund would dilute the sterilization requirement to that extent, and accord relief to monetary interventions by RBI.

The second is a bigger dream.

There was a report that Mitsui has decided not to invest in India because of poor infrastructure. We need expressways badly. Equally, we need relief in urban transportation, and in urban water, sanitation. It is possible to conceptualize high-density corridors between Chennai and Tiruchy/Madurai, Delhi to Jaipur/Chandigarh, Mumbai to Ahmedabad/Vadodara etc. Why not, in a new deal, develop these corridors (and others) into mass rail transit systems through ultra fast trains? Quite apart from dispersing the population, this would create jobs, new service industries, reduce the pressure on land, water and sewerage and make life easier. Even at $25 billion, the annual spend won’t exceed one tenth of that, which could easily be obtained by a Delhi Metro type undertaking from the market (there are easy, non-budgetary means of funding). It is possible to create somewhat complex structures that would have no budgetary impact, and find repayment mechanisms. Then to focus on improving water, sanitation, health and education. I will expand on this in my next column.

We need a new paradigm for improving infrastructure, not more Bluelines and flyovers—the success of Delhi Metro is evident as a mass transit system. We have to develop infrastructure ourselves, whatever the cost, only then will overseas investors be interested. A clear role for the state here.

Both the proposals would squeeze out excess liquidity, and keep the India story alive and growing. But there is nothing in these for those crony capitalists—the biggest beneficiaries of reforms so far. It needs government and the bureaucracy to act—improve governance and dedication. I believe it can be done. No politics could prevent this—it is for the aam aadmi directly.

S. Narayan is a former finance secretary and economic adviser to the prime minister. We welcome your comments at