The case for FDI (Foreign Direct Investment) assumes that the country does not have funds for investment. Not many perhaps know it is the other way round. Far from not having funds, the country idles its own funds, not knowing what to do with it, where to invest it. Idling money is an overhead on the national economy.

Look at commercial banks. The CMIE Monthly Review for June 2004 shows that banks are struggling with surplus funds. So, for lack of investment opportunities, they sink their money in Government Securities.

The CMIE review says that commercial banks had sunk Rs 42,055 crores in Government Securities in just six weeks from April 14 to May 2004. In the 12 months ending March 2004, banks invested an all-time high figure of Rs 1,27,776 crores in Government Securities.

According to the RBI (Reserve Bank of India), Government Securities account for 41.5 per cent of the net funds of banks. As against the statutory limit of 25 per cent, the additional amount banks have kept invested in Government Securities for want of other avenues, is a whopping Rs 2,69,777 crores or $ 60 billion!

This is idle money for which banks are starved of investment opportunities. Imagine in an investment-starved economy, banks starve for opportunities to invest $ 60 billion!

Look at forex reserves. It is $ 120 billion, and increasing at over $ 2 billion a month.

According to the latest RBI report, the return on forex reserves invested abroad has come down from 4.1 per cent last year to 2.1 per cent in 2003-2004. So on a national asset of Rs 5,40,000 crores we get a return of just Rs 11,340 crores.

Since we do not know how to invest this amount in India, we keep it in the US and subsidise the US economy at 2 per cent interest! Not knowing what to do with idle bank funds of over $ 60 billion and surplus forex of at least $ 60 (out of $ 120) billion helplessly lent at throwaway rates abroad that we are seeking FDI.

Yes, we lacked funds till the mid-1990s. Can anyone say now that for lack of funds we need FDI?

The numbers are clear. We have huge surplus funds, local as well as foreign. We have to make them investment friendly. The challenge is how to make surplus bank funds and surplus forex funds — aggregating to $ 120 billion — investment-friendly.

The policy makers, blinded by market fundamentalism, have failed to see the Indian reality. Free market ideologues told Indian business that it was for them to get long-term funds from the market, local or foreign, and it was not for the Government to create long-term capital. The assumption was that the market would produce long-term equity. But the Indian capital market did not. And will not. Why?

A family based economy in which families provide social security will not go for risky, stock market investment. It will seek safe investment. So even at atrociously low interest, Indian families go only to banks. Result, banks accumulate funds as short-term funds, not available for long-term investment.

With market fundamentalism as the rule, IDBI and IFCI models became an anachronism, a liability. Lucky ICICI escaped to become a bank and began lending money for houses, cars, motorcycles and refrigerators. IDBI and IFCI, which lent more on political advice, turned sick.

What then is the remedy? With such huge stock of short-term surplus lying idle, it is ridiculous to seek FDI saying we are short of funds. The truth is we do not know how to invest our own money.

The answer lies in appropriate Government intervention. It will have to give guarantees to banks and make them invest their short-term funds in IDBI and IFCI equity and long-term bonds. This will convert short-term funds of banks into long-term investment-friendly funds.

That means in a country like India where there is no publicly provided social security, equity market cannot do the trick. The Government will have to intervene to facilitate creation of long-term capital. This is the clue to solving the investment shortage, that is, convert short-term bank funds into long-term funds through proper Government intervention.

In some form or the other the developing world does this, but we do not. Why? We look to the free market US only for solutions to our problems. Not realising over half the households in the US punt in stock markets, while just about two per cent of Indian family savings find their way into stocks.

If the Government converts short-term bank funds into long-term funds, we can generate investment up to $ 60 billion.

Forex funds too can be turned into investment-friendly funds in India, particularly for exporters. Even small Tirupur garment exporters, who pay double digit interest, can operate an escrow account and on the basis of their export potential, they can be given forex loans at say 4 per cent or 5 per cent for modernisation. This will mean nil risk as borrowers earn forex and will pay back in forex. So the reserves are safe.

The Government will get more than 2 per cent return and exporters will get loans at 4 to 5 per cent and be more competitive — a win-win situation for both.

So the issue is not where from to invest, so FDI, but where to invest?

Lesson: First invest our own idle money and then go for FDI. We will need FDI when we are capital starved. We are not now.