At the Bankers? Conference, Mr Montek Singh Ahluwalia?s proposal to use foreign exchange reserves more productively received support from the president. The Montek plan is to use forex for infrastructure development, whereas the president mentioned investing in enterprises that yield higher returns. There is no disagreement that forex reserves are excessive, at around $120 billion, although the Reserve Bank of India governor advised caution even at the conference. Mr Y.V. Reddy must have had in mind global oil prices. Even if one factors in global oil prices and what the RBI governor refers to as transactions, precautionary and stabilization motives for holding foreign exchange, at least $50 billion worth of reserves are excessive and fetch returns marginally above 2.5 per cent. There is hence near unanimity that reserves must be used more productively.

But no one questions the way reserves have been built up, probably because leaving decisions to market forces is still alien to the Indian mindset. Reserves have been built up because the National Democratic Alliance government wished to prevent rupee appreciation and this purchase of dollars in turn infused liquidity into the system. The market-based solution is thus one of liberalizing trade and capital accounts, reducing spreads between domestic and global interest rates by reducing deficits and allowing the rupee to appreciate. Also, capital inflows have slackened because of hardening in global interest rates.

Such across-the-board reforms are not contemplated. Hence, the idea of using forex reserves in selected sectors like infrastructure. Thirty billion dollars will be pulled out of reserves, $5 billion in 2004-05, and ploughed, perhaps through a special purpose vehicle. In the process, rupee appreciation pressures will be eased. This wrongly suggests that the problem with infrastructure development is resources and not policy. While inadequate infrastructure does constrain growth, if policies like user charges are in place, both public and private resources will flow in. This entire idea smacks of discretionary resource allocation. Why single out physical infrastructure and who has decreed that physical infrastructure is more important than social infrastructure? If the United Progressive Alliance goes ahead with broad-based liberalization, markets will determine exchange rates and volume of reserves and also the best channels that resources should flow into. Instead, a problem is created and then its symptoms treated. Governments will argue that RBI intervention in the forex market is designed to stem volatility, but no one will buy this argument. India still has not got used to the idea that forex is no longer a scarce commodity that must be allocated in accordance with the country?s best economic interests.