Should we employ our forex reserves to fund big infra push that can revive growth?

The possibility of using foreign exchange reserves for funding infrastructure is a debatable proposition and all the pros and cons in going down this route need to be understood.
Image for representational purpose (File photo | AFP)
Image for representational purpose (File photo | AFP)

The development of infrastructure as a tool for diversified, long-term sustainable growth of the economy has been made a major plank by the present government as a part of its economic strategy. The recent announcement of the 'Gati Shakti Plan ' of Rs 100 lakh crores and a 'National Hydrogen Mission ' by the PM on Independence Day indicates the new vision for making India a US$ 5 trillion economy in the near future. The infrastructure sector is known to have a multiplier effect on development because of its backward and forward linkages with the rest of the economy.

Financing of infrastructure is however a big challenge with limited fiscal resources available with the Government. The deployment of our 'Foreign Exchange Reserves, as one of the resources for infra development has recently come up as per media reports. Here we discuss the broad modalities and options available:
Funding modalities

The normal range of infra projects funding is quite long ranging between 15 to 25 years depending upon terms of the award of the contract by the authorities like NHAI or state-level power agencies etc. As such, ideally speaking, pension funds and insurance funds should normally come forward for the funding of such projects since they are having long-term resources as a backup. However, in India, a major portion of the funding has so far been through the banking system and some specialised NBFCs like PFC, REC IREDA etc. But Banks have sectorial limits and a high percentage of NPAs to contend with.

In these circumstances, looking at alternate avenues of funding is very important. NHAI is looking at dollar funding and the highways minister has spoken of plans to explore the possibilities of deploying foreign exchange reserves for long-term infrastructure funding.
Use of forex reserves to fund the infrastructure sector

Foreign exchange reserves are held and managed by the Reserve Bank of India as part of its assets. These primarily consist of foreign currencies, mainly US dollar, gold etc. During the 1991 crisis, India was in a very precarious position when it came to forex reserves, with just US$ 5.8 billion to show. This constituted less than a fortnight of the total import bill. Over time, India has built its kitty of reserves and we are now at a comfortable position of US$ 620.576 billion as of July 30. This constitutes about 15 months' worth of import bills.

The possibility of using foreign exchange reserves for funding infrastructure is a debatable proposition and all the pros and cons in going down this route need to be understood.
These reserves are primarily meant to act as a cushion or backup against external stress triggered by various economic factors and to protect our currency and handle various issues relating to international trade. Earlier, the availability of these reserves helped us in withstanding global events like the Asian financial crisis of 1997, the global financial crisis of 2008, and the taper tantrums of 2013. With possible volatility emerging due to the current geopolitical situation, whether the quantum of reserves we have is a surplus at all for usage other than required for international transactions itself needs to be assessed.

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Countries like Brazil and Russia have import cover of 21 and 26 months respectively against 15 months for India.
For infrastructure development, we require long-term funds and carving out the funds out of reserves will involve a 'trade off' against the availability of cushion, as these funds are not in the nature of long-term surplus available. Asset-liability management issues similar to those faced by banks will also need to be assessed.
One possible use of these reserves can be thought to be in the field of hedging activities. Financing institutions having foreign funds require provisions to be made for hedging against their forex borrowings. Against these reserves, RBI can provide a backup facility to infrastructure funding institutions and the cost thereof at present borne by these institutions will get reduced. This will indirectly support the financial institutions and the benefit can, in turn, be passed to the ultimate developers of infrastructure projects. This possible mechanism needs further deliberations to evolve a workable solution.
Alternate Avenues

While the possible usage of foreign reserves for infrastructure development funding and the modalities evolve over time, we should continue to rely upon instruments/sources like INVITs, Infrastructure debt funds, credit enhancement guarantee funds. etc. This will facilitate the timely availability of crucial funding of infrastructure.
The author is managing director, Resurgent India, an Investment Bank and a SEBI registered Category I Merchant Bank

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