January 26, 2005

Money at Hand

The Telegraph, 26.01.2005

Ashok Mitra lets his imagination run away with itself when talking about the role of foreign exchange reserves in the Indian economy (“Money to burn”, Jan 21). Later in the article, he turns to the same old, and very general, arguments against “foreign imperialism”.

Mitra seems sceptical that the forex will be used to develop basic infrastructure. He insinuates that the deputy planning commissioner wants to deploy the reserves to build airports and roadways of international standard. A few things need to be remembered here. India has more airports compared to many countries, say China. But, India’s overall air traffic is very low and most of the airports are a drag on the finances of the Airports Authority of India. The government’s bid to prop up Air India and Indian Airlines has left Indian consumers without the choice of better and cheaper services for long. Thus, contrary to what Mitra believes, “qualitative” and “quantitative” upgradation of infrastructure would not not just attract foreigners, it would benefit Indians as well.

Two, the author is factually wrong when he claims that M.S. Ahluwalia has suggested that we spend all our forex, barring a $50 billion reserve stock, on infrastructure. Such an inflationary move would be insane, and the Planning Commission would never recommend it. Countries like China have long used their forex reserves to boost infrastructure, and India’s physical infrastructure is very poor in comparison. Three, the author makes the sweeping remark that the bulk of our reserves do not belong to us. He forgets that India’s exports have grown in rupee terms between April-July 2005 compared to the same period last year. This is not a one-off improvement — ever since liberalization, our exports have been growing significantly. The only reason for its somewhat slow pace compared to China are the enterprise-strangling policies we have had for half a century.

The foreign institutional investments pouring into the Sensex are not solely speculative in character, and arguing thus is an insult to India’s entrepreneurs who have built thriving, world-class companies. Mitra must be day-dreaming when he recommends more controls on foreign funds. State intervention in the economy is a thing of the past. India needs large doses of foreign investment to boost exports, employment and growth and whoever doesn’t realize this is out of touch with reality.


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