Rising Foreign Exchange Reserves: A Potential Source for Infrastructural Development in India?

Abstract

Since the inception and execution of the New Economic Policy introduced by the Government of India in 1991, the Indian economy has seen significant changes both in the domestic and the foreign front. There have been macroeconomic stabilizations within the country as well as new directions in foreign trade. In the past 16 years the world has seen India transform from a developing economy to an emerging economy. Along with China, it is being referred to as an Asian superpower. The past performance of a robust service industry, specially in the field of IT and ITeS, judicious fiscal and monetary policies in the home front and above all, prudential foreign policies have catapulted India to the second position in the list of the fastest growing economies of the world. This is in turn, shifting the global economic centre of gravity towards India. But much dust has also been put under the carpet. The term which is mostly used for infrastructure in the country is dismal. This raises a major question - Will India's growth momentum come to a halt in the long run, infrastructure being the main culprit? The infrastructure (both physical and human) is the backbone of a country. Although it is necessary for India to meet global standards if it wants more of foreign investments, little has been done about it. Instead of raising funds in the domestic sector through the introduction of taxes, surcharges and cesses for the cause, our argument is: Why can't we utilize a part of the huge foreign reserves which we have amassed over the years? Studies show that the composition of our foreign reserves is quite comfortable. Even in times of dire necessities, we can still avoid situations like what the Asian Tigers have faced in late 1990s. The RBI's maintenance of its policy of safety, liquidity and returns (with respect to foreign reserves) will not be hampered if it lends a small portion to the real sector in the domestic economy. We can learn from the procedures followed by other Asian economies and modify them to meet our needs. Or we can formulate our own policies conducive to our environment. Infrastructure development will have both upstream and downstream effects and that is sure to wipe off that nagging question: Can India continue?