HOPEFULLY, THE REVIEW of the regime for corporate access to external commercial borrowings would lead to a more liberal framework as, by the Government's own admission, it is too restrictive. The extant policy, for instance, imposes what it calls as the `end-use' restriction — a condition requiring the balancing of funds mobilised abroad with equivalent expenditure in foreign exchange. In other words, the Government would force a corporate to procure equipment from abroad merely because it has committed the sin of securing funds from overseas.

This hinders capital formation in the domestic economy, as it links investment decisions to a policy constraint (compulsory recourse to external supplies) on the means of financing. To the extent the external supplies are expensive and, hence, a project itself is seen as not viable, investments do not materialise. It distorts the competitive structure in an industry as entrenched players continue to enjoy market dominance not because they are inherently efficient but because policy constraints hobble potential new entrants. It is also a perverse form of negative protection to the local producers of capital goods as they are shut out of a potential market for their goods. There is an embarrassment of riches on the foreign exchange reserves front and the Government does not want to add to the problem of the Reserve Bank of India in managing them, by promoting fresh inflows through a policy of liberal access to external capital. But, then, if the reserves are adequate and the Government would still like the RBI to intervene in the forex market and keep the rupee at current levels, the Centre must at least explain how protecting the competitiveness of the export sector through such intervention is worth the sacrifice of fresh investments. The policy also makes a distinction between fixed and working capital with only the former recognised as an acceptable end-use of the ECB monies. There is no economic rationale for this, as the production process requires both forms of investments. Even the import of stand-by maintenance spares needed for capital goods would seem to be prohibited as they are usually inventorised.

No less inexplicable is the requirement that funds mobilised stay abroad till such time their end-use can be secured. It is not always possible to synchronise the flow of funds with project-related expenditure. Only on the basis of liquidity and interest costs does a borrower decide the timing of inflows while outflows would depend on the lead-time in procuring the project goods. The Government's obsession with the possible impact on exchange rate should not deprive an entrepreneur of minimum flexibility in fund management if inflows and outflows cannot be synchronised. In recent times, there has been a net outflow on this count as repayments of past loans outweigh fresh accretions. It should stay this way in the foreseeable future. The community of ECB borrowers is not the cause of any upward pressure on the rupee's value vis-a-vis other currencies. They have a strong case for some additional room for manoeuvrability in managing their finances through this source.

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