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Jul 21st, 2019 5:47 pm | By | Category: SPECIAL NEWS COVERAGE

Today the raging debate at the beginning of Modi.2 is – Should India borrow overseas to meet its infrastructure needs ? The ex- RBI governor Raghuram Rajan, former FM P Chidambaram besides many economists has sounded an alarm bell on this idea of the Modi govt. Most people will justify that everywhere in the world Latin America, South East Asia, Russia etc have borrowed heavily from international markets to meet their investment needs. So why should India be left behind if it meets its stated goal ? The cautions sounded by the above financial luminaries are not without a reason. First, the infrastructure creation effort of South East Asia and even China in 80- 90’s came with the first step that of creating factories to manufacture for the world. These countries sought investments to set up manufacturing as also for infrastructure creation to move these goods for exports. But while the intent is good the experience of such borrowing has shown that most of this borrowed money creates fewer infrastructures and gets diverted to unproductive expenditures thereby raising the debt burden of the country. Economists call this a debt trap. Raghuram Rajan has rightly stated that all addictions start small. While PM Modi has noble intentions of infra creation the question to be asked is can we rely on Modi’s focus ? It has been seen that he has penchant for winning elections by announcing populist schemes. Will this money not be routed to such schemes ? Herein lay the nub. The foreign investor will definately be interested in investing in India as they will get good interest rates as compared to developed countries zero rates. But recent examples of such infra ventures are disheartening. Turkey’s Erdogan borrowed internationally to fund infrastructure but much of the money was funneled into building palaces and maintaining an affluent lifestyle putting Turkey in crisis. Ferdinand Marcos of Philippines borrowed heavily from foreign lenders to build factories and infrastructure but part of the money went in the coffers of the family. So are examples of Argentina, Mexico, Brazil etc. Most economists put it as losing ones way from the focus once the money starts coming in.

Second, it is Modinomics which says that to reach $ 5 trillion level a booster shot of mammoth infrastructure spending is required. This moves he believes will rekindle investor spirit as also take India from present $2 trillion level to $5 trillion. The idea of creating infrastructure by borrowing foreign money is an old one at that a doomed one too. It was not that Rajiv Gandhi and later PV Narsimha Rao (with Finance Minister Manmohan Singh) who opened India’s economy were not tempted to borrow abroad. After all it was during their regimes that the South East Asian economies were opening their gates to foreign investments. So why did India not open the gates for foreign money then ? In many debates and discussions it was ideated that India cannot withstand such huge money flows because it does not have the mechanism to absorb and rightly invest. It was also the thinking that such big money will come at a huge price and with its demands. Hence it was advised then that foreign borrowing adds to the external debt of the country making it vulnerable to shocks of capital flows. Foreign investor will invest today but as has been seen in the past they pull out of the country at the slightest trouble. Thus devaluing the currency and piling up debt higher than was originally borrowed. Besides India being a net importer of oil had already seen an economic crisis in 1991 that led to the country pawning its gold and in bargain opening up various sectors to investing. Given these experiences Indian economic thinkers always believed in the wisdom of not borrowing to meet infra expenses.Even in the UPA regime there was a need felt for raising money for infra needs but foreign debt was clearly not a welcomed idea. Besides who better than former PM Manmohan Singh to know what happened to South East Asian countries who opened their economy for foreign borrowers and later on faced a crisis as bets turned bad. After all it was all unfolding in front of him !
(By Bhagyashree Pande)

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