The Planning Commission, which has not submitted a formal proposal to the finance ministry for utilisation of foreign exchange reserves, is likely to argue that funds from this source should be used for investment in social sector projects.

"I have yet to hear from the finance minister," said Planning Commission Deputy Chairman, Montek Singh Ahluwalia.

We want the finance ministry to critically examine the proposal, however, what are foreign exchange reserves for if not to finance imports, he added.

"For bankable projects in the infrastructure sector, plenty of money is available. It is in precisely those sectors like irrigation and rural roads, where the private sector is unlikely to be interested, that the government would have to identify revenue sources. It is in these areas that the funds would be best utilised." said an official in the Planning Commission.

"We should recognise the importance of infrastructure in the country's development. The overall investment activity has to pick up and that has been our stance. We have comfortable liquidity and forex reserves," said Reserve Bank of India Governor YV Reddy.

"Whichever way infrastructure has to be financed, we should explore all avenues and that would help," he said, adding the proposal should be 'seriously' considered.

The proposal being discussed internally in the Planning Commission envisages issuing dollar denominated bonds representing claims against the forex reserves and not against the government.

Since these would not represent claims against the Consolidated Fund of India, they would not be reflected in the Budget, but operated through alternative windows -- a public account of the government or the RBI or authorisation to public financial institutions as in case of Relief Bonds.

The government could issue non-transferable non-interest-bearing government securities to the RBI in exchange for the claim on a quantum of reserves.

As a one-off transaction, with no on-going expenditure liabilities created, this would not violate the provisions of the FRBM Act in terms of the medium term time path of the fiscal deficit. The revenue deficit would not be affected at all.  The terms of issue could be linked to the US T-bill rate or the average returns on our forex holdings.

A floating rate bond would increase marketability of the product. On tenor of the bonds, the proposal says that they could be made open-ended with a lock-in period and with a put-call options.

When the securities are redeemed, the payment made by the government to the RBI should return to the government to a large extent through RBI dividends, ensuring that the over-all real budgetary impact would be largely neutral.

If the terms of the bonds are roughly similar to those of the US T-bills, resources raised would be virtually cost-less and could therefore be spent on non-direct return yielding public infrastructure or for viability gap funding.

All for the poor

The proposal being discussed internally envisages issuing dollar denominated bonds representing claims against forex reserves