Much is being made of the finance ministry's refusal to increase its budgetary support for the Plan (against a usual hike of around 10 per cent each year, this year it is going to be around 3 per cent), and how it will hit the gross domestic product growth target of 8 per cent that the prime minister has fixed for the 10th Five-Year Plan.

Actually, this is just so much bunkum.

Much of Plan expenditure is really revenue expenditure (for the state plans, the revenue expenditure component of Plan funds has gone up from 51 per cent in 1997-98 to 72 per cent in 2001-02), so the impact on investment-led growth is at best marginal.

During the same period, as a per cent of GDP, for the states, Plan-capital expenditure has in fact fallen from 1.71 per cent of GDP to 0.47.

The figures for Plan expenditure at the central level exhibit similar trends. Since increased Plan expenditure is not resulting in hiked investment levels, why make it? Good for you Mr Jaswant Singh.

But having said that, where is the 8 per cent growth going to come from? After all, as all of us know, India's savings rates are (falling) and way too low for us to achieve this kind of growth, right?

Wrong. For one, as management guru C K Prahlad pointed out a few weeks ago at a seminar, India has a lot of capital, it just isn't used properly.

The government holding 3.5 times the food stock it needs in the FCI godowns meant an additional cost of Rs 5,680 crore (Rs 56.80 billion) in 2001-02 alone, and is surely a huge waste of investment.

The fact that over Rs 100,000 crore (Rs 1,000 billion) invested in central government public sector units yields an annual return of just 1.8 per cent is another example of huge waste. So lack of savings is not the real issue, channelising it effectively is.

Equally interesting is the case of a huge waste that's staring us all in the face, and that's the burgeoning forex reserves of over $70 billion. There are two implications of this.

One, according to the Confederation of Indian Industry, servicing this capital (in the sense that India offers high interest rates to attract capital) costs us around 7-8 per cent, yet we earn under 2 per cent when the Reserve Bank of India invests these reserves abroad -- so that's a loss of $3.5 billion every year, a figure that's roughly equal to the total foreign direct investment we get into the country.

But there's another, more significant, implication that has been brought out in a paper by Deepak Lal of the University of California, Los Angeles and Suman Bery and Devendra Kumar Pant at the NCAER.

What the trio argue is that the government's policy of sterilising forex reserves have resulted in India's GDP getting compressed dramatically -- in the year 1999-00, had this sterilisation not happened, GDP growth would have gone up from 6.37 per cent to a whopping 10.15 per cent.

Here's how. As we all know, forex inflows, whether from export earnings or transfers from Non-Resident Indians abroad, all come to private citizens like you and I.

Normally, when you and I get money, what do we do with it? We convert the forex into rupees, and then spend it.

That's where the government comes in. Since excess rupees in our hands would mean more spending and therefore more inflation, the RBI issues bonds and induces us to invest in them -- in effect, the RBI sucks the money out of the system, and sterilises the forex inflows.

In effect, what Lal, Bery and Pant are arguing is that had domestic demand been allowed to increase (due to the inflows of forex) to the full amount, GDP would have expanded dramatically.

Sterilisation also results in raising the interest rate, and so hits investments.

Equally interesting is the analysis of why central governments in much of Asia typically sterilise forex inflows.

To understand this, let's assume the inflows are not sterilised. There is increased demand, and so local prices rise. When local prices rise, the real exchange rate appreciates, and that in fact is the mechanism through which the increased inflows are absorbed by the economy.

In fact, it is the desire to prevent inflation that is typically given by most governments as the argument in favour of sterilisation.

This, the paper points out, is an incorrect argument. For there is another way to skin the cat.

The real exchange rate can appreciate in another way. If you allow the nominal exchange rate to appreciate (that is, to allow the rupee to move from 49 to the dollar, to say 45), then the real exchange rate will also appreciate, without inflation levels going up.

But since the appreciation of the rupee hits exporters as their products now become more expensive, the export lobby generally argues against letting the rupee appreciate.

In the event, sterilisation is seen as the best alternative.

So the next time your exporter friend brags about how he or she's contributing to economic growth, tell him or her to go take a hike.