Forex and infrastructure: Comprehensive policy needed
Using forex for infrastructure is a complex decision and the government should go in for wide consultation with domestic and global experts
Thirty years ago, India’s foreign exchange reserves dipped to such dangerous levels – it could cover less than five weeks of imports – that it triggered economic reforms that have changed the world’s largest democracy for good. In 2021, the forex reserves have ballooned to more than $620 billion, which is more than the cushion that the country needs. It has also triggered discussions on whether the money can be used for financing infrastructure projects which is one of the dire needs of the nation trying to catapult itself into an economic superpower.
Nitin Gadkari, one of the most influential ministers who is in charge of the highway infrastructure of the country, has publicly said that he wants discussion with the Reserve Bank governor to find out a way so that the huge forex reserves can be used to finance infrastructure, more specifically highways. This is certainly one of the possibilities, especially because financing infrastructure on a large-scale is a persistent headache of any government. Infrastructure such as roads, port, airport, water, power are elements that drive the economic growth of any nation.
However, utilising forex reserves for infrastructure financing is a complex issue that involves government debt and monetary management and needs more than adhoc approach and deep and wide consultation among experts. Moreover, there are issues of autonomy of the central bank involved with it. Instead of different ministries attempting this question from its own perspective, the government could consider consultation with experts, both domestic and global, to find out its feasibility and how to go about it. If the issue progresses and experts are consulted, the government should ensure that there should be fair share of perspective from outside the corridors of government too.
The ramifications of utilising foreign exchange for such purposes can be significant and any approach cannot be for the short term. Caution is a necessary ingredient to arrive at a long-term policy.