Time is ripe for India to use its massive foreign exchange reserves in infrastructure which will put the economy on fast track growth, World Bank's chief economist Justin Yifu Lin said on Friday.
"The only mantra now is to remove infrastructure bottlenecks so that the economy is ready for high growth path when global revival takes place," he said in Mumbai.
It might not have been advisable to use the over $250 billion forex reserves to pump in the economy earlier when India had high inflation, but now with deflationary trends, the government should use it to remove infrastructure deficits.
"This would not only revive growth momentum, but also generate employment," he said, favouring the government's fiscal stimulus packages.
Lin, who is also the senior vice-president of World Bank, said the monetary policy should also aim at further lowering interest rates and increase 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.
Such investments, he said, will not only increase demand, but also their growth, and the government revenues, which in turn will enhance overall demand.
India's foreign exchange reserves stood at $249.278 billion during the week ended February 27.
Explaining his 'beyond Keynesian' argument, Lin said the shovel-ready prescription of digging the same well again and again, propagated by Keynes, will not work to get over the recession.
Instead, he said, this is the time to select infrastructure projects like power plants, ports, roads and airports to gear up for higher growth as the global economy revives and ensure that there is no overheating.
Citing China's example, Lin said in the 90s when the Asian giant was growing at double-digit, inflation was high at over 20 per cent because of infrastructure bottlenecks. But after 2002, again when its economy was growing at double-digit, inflation hovered at around 3-6 per cent as the necessary infrastructure was in place, he added.
China utilised the economic downturn during the East Asian currency crisis to build the infrastructure.
Lin said there would be no overheating of economy at the present juncture if money is spent on infrastructure as project cost could be lower due to falling commodity prices.
"Investment in infrastructure could revitalise manufacturing in India, which accounts for only 16 per cent of the country's total output and contribute significantly to the job creation," Lin said.
The potential impact on productivity and growth could be a strong contribution to India's development, Lin said, adding India could both kick-start demand in the face of the current crisis as well as pave the way for longer-term growth.
On growing fiscal deficits, he said as long as it was prudently invested in projects, it would augur well for the revival of the economy.
In the present scenario, fiscal deficit would any way go up as India had National Rural Employment Generation programme aimed at providing jobs to the rural poor, he said, adding, instead it would be better to invest on projects that would generate employment.
Lin blamed excess capacity in developed economies for the current crisis and prescribed that these industrialised nations should transfer resources to developing economies in infrastructure development.
He also warned developed nations against protectionism which should not in any way help overcoming the crisis.
In this scenario, Lin proposed that developed countries invest a share of their stimulus plans into infrastructure projects in developing countries.
The world bank was also doing its bit and it has decided to increase its exposure to India to $14 billion for the next three years beginning 2009 from around $8.5 billion in the previous three years.
Central to the World Bank's effort to help the poorest countries, its Group President Robert B Zoellick has proposed an umbrella Vulnerability Fund to which developed countries could dedicate 0.7 per cent of their planned economic stimulus, he said.
The Vulnerability Fund, which could channel resources not only through the Bank but also through the United Nations or other multilateral development banks, would help countries without the resources to respond to the crisis by funding investments in key areas.