Stronger rupee will hurt infra projects
The sun, the moon and the stars would have disappeared
long ago, had they happened to be within reach of predatory human hands. —
Havelock Ellis (1859-1939), English psychologist
The rupee has been steadily appreciating in the recent past.
Over the past six months, the rupee has gained an estimated 14 per cent,
currently trading at Rs $4 from an average of Rs 44.48 in December 2006. While
this indicates the maturing of the Indian economy, it has covenant difficulties.
India relies significantly on dollar-denominated loans from multilateral
financing agencies like World Bank and its affiliates. When the rupee
appreciates against the dollar, the loan value shrinks. This diminution can hurt
badly. Recent press reports indicate that the Mumbai Urban Transportation
Project coming up with World Bank assistance is facing adversities. Dollar
devaluation has resulted in the World Bank loan value dropping by a significant
Rs 300 crore leading to a curtailment of several project components. This is
just one of the many cases that will soon come to light.
An important dimension to multilateral agencies funding is that it is availed
for social projects—urban transport, water and sewage management, state and
rural roads, sanitation etc. Thus, the appreciation in the rupee has an
undesirable but unavoidable social cost, in some sense, often resulting in a
deprivation of basic amenities that social projects promise. Take the case of
World Bank which has been a very active lender to Indian projects since 1944. As
of end-June 2007, the Bank had 67 active projects with a total commitment of
$14.3 billion. This is a significant amount which, for a frame of reference, is
the total foreign direct investment inflows in India in 2006-07.
Assuming that the rupee has appreciated by even 10 per cent between loan
finalisation and disbursement, the reduction in World Bank loan value could be a
whopping $1 billion. If one factors other loans by multilateral agencies, and
even FDI for that matter, the collective impact could be quite serious for an
infrastructure-starved country like India.
The rupee appreciation cannot be wished away, nor can the situation be reversed
overnight. In fact, the trend is likely to persist. It is said that every
adversity has an equivalent seed of benefit. In this context, the seed of
benefit lies in creating project-management efficiencies. Striving for timely
project completion will definitely result in an overall cost saving, and could
very well help in counterbalancing the shrinkage in rupee value of
dollar-denominated loans. An appreciating rupee also favours importers as the
net outgo in rupee terms drops. Project implementing agencies must expedite
their imports in this strong-rupee regime so that the overall impact on the
nation is balanced.
Independent of everything, controlling time overruns always offers a reasonable
insulation from cost overruns. Rarely does one see an Indian infrastructure
project, particularly government-owned, completing in time. In fact, it does not
even start in time except perhaps for the timely foundation stone laying
ceremony which seldom symbolises commencement of physical work. It is time to
realise that a project delayed is a project denied.
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[January 14-20, 2008]