Economic Survey: India needs a $1-trillion forex kitty to boost geo-political power

27 February 2015

India needs to substantially scale up its foreign exchange reserves to safeguard the economy against external vulnerabilities, the Economic Survey stated, adding that a ''war-chest'' of a minimum $1 trillion can help India bolster its geo-political influence in an increasingly inter-connected economic world.

''If power used to flow from the barrel of a gun, in an increasingly inter-dependent economic world, hard and soft power derive from a war-chest of foreign exchange reserves…China's abundant reserves have highlighted this fact,'' said the survey for 2014-15 tabled in Parliament today.

''China, in its own heterodox and multiple ways, is assuming the roles of both an International Monetary Fund and a World Bank as a result of its reserves,'' it added.

Chief Economic Advisor Arvind Subramanian in his maiden survey said a larger issue on the external front is geo-strategic.

The Survey noted that an increase in financial inflows has helped the country shore up foreign exchange reserves ($328.7 billion at the end of January 2015 against $292.0 billion at end-March 2014) and lessen the vulnerability concern that led to serious stress last year.

However, reconciling the benefits of the financial inflows with their impact on exports and the current account remains an important challenge going forward, the Survey pointed out.

Since acquisition of reserves ''is not costless'', the survey said there is also a need to undertake a cost-benefit analysis.

In the first half of 2014-15, India's foreign exchange reserves increased by $18.1 billion on BoP basis (that is excluding valuation effect).

The Survey says India is the second-largest foreign exchange reserve holder among major economies with current account deficit, after Brazil.

While a prudent external debt policy and management with a focus on sustainability, solvency and liquidity helped India contain the increase in size of external debt to moderate level, the country's total external debt stock at end-March 2014 stood at $442.3 billion (8.0 per cent) over the end-March 2013 level, according to the Survey.  

The rise in the external debt during the period was due to long term debt particularly NRI deposits and commercial borrowings.  

At the end of September, 2014, a long-term debt accounted for 81.1 per cent of the total external debt vis-a-vis 79.8 per cent at the end of March 2014 and short term debt accounted for 18.9 per cent of the total external debt vis-ŕ-vis 20.2 per cent at the end of March 2014.

The net external commercial borrowings also increased from $2.4 billion in 2013-14 to $3.4 billion in 2014-15.

As per the Economic Survey, the outlook for the external sector is perhaps the most favorable since the  2008 global financial crisis and especially compared to 2012-13, when elevated oil and gold imports fuelled a surge in the current account deficit.

The global economy is likely to gain strength if lower global crude petroleum prices drive demand recovery process in emerging markets and this looks certain to boost global aggregate demand.

On the issue of India's merchandise trade, the Survey noted that India's exports increased manifold over the last ten years - from $195.1 billion in 2004-05 to $764.6 billion in 2013-14 - helping to improving India's share in global exports from 0.8 per cent to 1.0 per cent, However, India's share of imports rose from 1.7 per cent in 2004-95 to 2.5 per cent in 2013-14. 

Emphasising the link between foreign exchange reserves and geo-political influence, the report said that China has de-facto become one of the lenders of last resort to governments experiencing financial troubles.

According to the survey, reserves provide a cushion against shocks, creating economic and financial resilience.

They also create geo-political influence.

''The question for India, as a rising economic and political power, is whether it too should consider a substantial addition to its reserves, preferably its own reserves acquired though running cumulative current account surpluses, possibly targeting a level of $750 billion-$1 trillion over the long run,'' it said.

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