Dig into forex kitty : World Bank mantra

Government-led projects that address the economy ’s main bottlenecks will see India climb out of the current economic morass. Towards this even if the government has to spend more, it should be done, World Bank chief economist Justin Yifu Lin said. Lin thinks the time is ripe for India to invest its massive foreign exchange reserves in infrastructure to help pull the economy out of the current rut and put it back on fast track growth. “The only mantra now is to remove infrastructure bottlenecks so that the economy is ready for the high growth path when the global revival takes place,’’ Lin told mediapersons. The economist was in Mumbai to deliver a speech at an event organised by Export-Import Bank of India.
Using forex reserves for infrastructure might not have been advisable earlier when the country had high inflation, but now with clear deflationary signals, the government should use it to remove infrastructure bottlenecks in the economy. “This would not only revive growth momentum, but also generate employment,’’ Lin said. He feels that in case India is able to manage 5-6% annual rate of growth in these difficult situations, once the tough times are over, 9-10% growth rate would be possible. The World Bank official said monetary policy should also aim at further lowering of interest rates since inflation was no longer a concern; this besides increasing money supply to stimulate demand. “Making fiscal stimulus plans work by releasing bottlenecks to growth in developing countries offers a potential win-win solution,’’ Lin said. India’s annual rate of inflation eased to near a 7-year low level of 2.4% as of end-February, below the previous week’s level of 3%.
Referring to China’s budget deficits in the 1990s when it was over 30% but subsequently reduced to about 20%, Lin said increasing government debt was a short-term phenomenon. Lin feels the main cause of the global recession is the excess capacity created over the years. “Excess capacity in the real sector is the real issue. If we don’t deal with this, problems in the financial sector will continue,’’ Lin said. He feels that the problems in the financial sector are a reflection of those in the real estate sector. He also asked governments to restrain from turning to protectionist policies to insulate their respective economies. Although there are severe problems in several economies, “we should still support free trade’’, Lin said. World Bank was ready to support investments in projects which address the economic bottlenecks. Countries should go for “bottleneck-reducing projects’’, he said. On the question of state intervention to save private financial institutions from going belly up, Lin said it was important for governments to pump in funds to prevent financial institutions from failing, “but it is also important to stimulate the real sector’’. Lin—the first person from a developing country to occupy the post of top economist at the World Bank—feels that developing countries will come out of the crisis faster than developed ones.