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Reserves for infrastructure may get India budget nod

REUTERS, Bombay
India's budget next week may give the green light to a controversial plan that will allow the use of foreign exchange reserves to fund infrastructure projects, even though it may widen the fiscal deficit and stoke inflation.
But analysts say the cashstrapped, communist-backed federal government, which spends nearly half its revenue on servicing debt, may be willing to take those risks to tackle India's rickety infrastructure and achieve the doubledigit growth needed to cut poverty in Asia's fourth-largest economy.
"There is a need to improve infrastructure and the government does not have enough funds to spend and the private sector is not too keen to invest," said Pradeep Srivastava, chief economist at the National Council for Applied Economic Research, New Delhi.
"The plan to use foreign exchange reserves for infrastructure is the first step in identifying the major issue on financing."
India's capital requirements for the infrastructure sector are huge but a stubbornly high fiscal deficit -- 10 percent of gross domestic product for both the federal and the state governments --leaves it with few resources.
Foreign exchange reserves, which in 1991 were barely enough for three weeks of imports, now stand at
$130 billion, the world's fifth-largest and enough to finance 15 months of imports.
That prompted Montek Singh Ahluwalia, the powerful deputy chief of India's planning commission, to argue that reserves were higher than required and that $5 billion a year could be used to fund infrastructure development over the next three years.
India's $600 billion economy has grown at nearly 6 percent a year in the past five years but the standards of its roads, ports and energy generation fall way below those of South Korea, Asia's third-largest economy.
Analysts estimate that India's airports and railways need about $55 billion in investment over the next decade, while the power sector needs $75 billion and telecoms $25 billion over the next five years.
Despite some opposition to the plan from the central bank and sharp criticism from rating agencies and the International Monetary Fund, which are all concerned about the high level of the fiscal deficit, Ahluwalia may get his way in Monday's budget.
"We have been consistently running high fiscal deficits for the past few years and managed to live with it," said Indranil Pan, chief economist at Kotak Mahindra Bank in Bombay.