The finance ministry seems to think that the letters do not add up to much. This is legally correct, but the US parent has its commercial reputation at stake; it cannot lightly renege on its moral commitment to the debenture subscribers. In any case, should not the FIs be left to do their job, since they have more expertise in such commercial matters than the presumptions mandarins of the finance ministry?

FIs are term lending institutions; they finance industrial fixedcapital. It is their job to boost industrial investment. The problem is that not all industrial projects have the right risk profile from the point of view of the term lenders. So it is just possible that the FIs may have more funds on hand than they can deploy in industrial lending. They may well decide that the debentures of GE caps or other foreign subsidiaries, backed by letters of comfort, are fairly liquid and worthwhile. A peremptory instruction to them to desist makes little sense. The Finance Ministry should focus its attention instead on why worthwhile projects -- from the point of view of risk-taking lenders - are scarce, and what should be done to spawn them in large numbers.

GE capital is engaged in retail financing of commercial vehicles, cars and consumer durables. Domestic NBFCs in the business may complain that since they cannot generate letters of comfort, they do not enjoy a level playing field. But by blocking FIs from investing in GE caps, funds will not automatically flow to domesticNBFCs, considered high risk by the vast majority of lay Indian investors. This is dog in the manger swadeshi. Also, in the current situation, savings exceed investment.

If the investment shortfall continues, GDP (income) growth will slow down (or fall) and this will eventually reduce savings to match investment. But the diversion of savings into consumption could prevent a fall in GDP (income) growth, though savings would decline (a consequence of increased consumption) to the level of investment. The mandarins of the North Block should mull over the alternatives.