The finance ministry has knocked Planning Commission Deputy Chairman Montek Singh Ahluwalia's proposal to use $10 billion of the country's foreign exchange reserves -- estimated at around $121 billion -- for funding infrastructure projects.

Ministry officials said there were tools available within the existing mechanism like the India Development Initiative, which could take care of the funding needs for infrastructure projects by extending the benefits like interest subsidy.

The commission had proposed the creation of a fund of $10 billion over two years out of the foreign exchange reserves to finance capital goods imports for infrastructure projects. The proposal was discussed at a meeting between Ahluwalia and Finance Minister P Chidambaram last week.

The expenditure department and the Budget division in the finance ministry had looked at the Plan panel's proposal but were apparently not convinced.

"Moreover, there are no new projects, leave alone bankable ones in the infrastructure sector," an official said.

Officials also pointed out that the funds under the corpus of the Rs 1,000 crore (Rs 10 billion) infrastructure equity fund were still to be used. In addition, barring the financing of 11 private power projects, with an estimated cost of Rs 14,000 crore (Rs 140 billion), the Rs 50,000 crore (Rs 500 billion) available with the Inter-Institutional Group -- a consortium of major domestic lenders -- were still unutilised.

There is also the view that imported capital content in most infrastructure projects did not exceed 15 per cent of the project cost. Even if the reserves were used for importing capital goods, domestic funds would still be required to finance the projects.

Officials also said the government could ill afford to approach Parliament to amend the Fiscal Responsibility and Budget Management Act since the rules had been notified only in July. "It would send a very poor message about the government's commitment to reform the fiscal situation in the country," an official said.

Ahluwalia had recently suggested that the increase in deficit would have to be monetised to ensure that private investment was not crowded out. This would require the Reserve Bank of India to buy bonds and release funds. Ahluwalia had said monetisation would ensure that the use of the reserves would not result in inflation.

Finance ministry officials said that in the long run, prudent policy suggested that the government draw down its foreign exchange reserves, because having a high level of reserves made the country vulnerable to fluctuations in the dollar rate vis-a-vis the rupee.

According to a background note prepared by the Commission, with a current account surplus of 1.5 per cent of gross domestic product (GDP), and just under 2 per cent of the GDP coming in as voluntary external capital inflows, the investment rate would have to increase by 3.5 per cent of GDP before the government would need to draw on the reserves for infrastructure purposes.