'Forex inflows should flow into infrastructure'

Fears have been raised in many quarters over the excessive inflow of foreign exchange into the country. The way the special purpose vehicle has been structured, it is unlikely to use much of the reserves either.

If the country is deluged with people wanting to pick up financial assets from the country, there are a number of ways of handling it.

One option will be to let the money flow in and not sterilise it. If people do not want to use forex, the rupee can be allowed to appreciate. But this idea is likely to be opposed.

Another option is not to sterilise the inflows, protect the impact on the exchange rate, cut Customs duty and encourage imports. This has been done to an extent in the Budget. Of course, you would also remove controls on capital outflows.

These options are sensible, but they will have to be done gradually. The alternative is to invest in infrastructure that can be pushed up steeply.

In my view, the inflows should go into infrastructure. The ideal way will be to sterilise the inflow, build reserves and push liquidity into system. If banks do not know who to lend to, we can pump in directed demand.

The country needs a lot of infrastructure. The SPV is a mechanism to channel money to finance infrastructure projects. If there is too much liquidity, the SPV can mop up the extra amount and use it to finance projects. Lack of projects is a problem, but that is more because the effort has not been made to identify them. Rs 10,000 crore (Rs 100 billion) could easily be used.

As the process is kicked off and there is more demand, there is nothing stopping the government from raising the limit. If the National Urban Renewal Mission is to come through, and even if two mega cities are serious about putting in place major investments, the demand can go beyond Rs 10,000 crore.

The way the SPV has been structured, it is a conscious decision not to give money to ministries in their budgets. They will have to come up with projects.

The part of a project that will require normal debt will have to be appraised by financial institutions. This is meant for roads, railways and states (urban infrastructure). It will take them time to get ready and gear up to the system.

The existing public sector system is so used to getting money from the Budget, they cannot prepare a good project for scrutiny by financial institutions. Rs 10,000 crore is a reasonable limit, but if momentum builds up, we can go beyond the limit.

However, if constraints to the mechanism do not allow going beyond that level and inflows keep building up, a decision will have to be taken on other options.