CHENNAI: India’s substantial foreign exchange (forex) reserves could be the answer to the Centre’s conundrum on how to maintain fiscal discipline while keeping up public sector investment vital for GDP growth.
With the rise in crude prices reducing space to support public sector investment when GDP growth desperately needs a shot in the arm, India’s $ 400.72 billion forex reserves could be a source of capital, according to Deutche Bank research note.
“If $15 billion worth of forex reserves were channelled toward public investment in infrastructure, this would reduce total reserves by only 3.5 per cent but would add about 0.6 per cent to GDP, which could help to support growth in the near term,” Deutsche Bank said.
The rationale for the move is based on the strength of India’s reserves adequacy, which is much higher than prescribed. Using some of these reserves for GDP growth could be done while hardly changing the reserves adequacy position, which would remain above the comfort range as prescribed by the International Monetary Fund.
Deutsche Bank added that this should be seriously debated, considering “backdrop of low inflation, positive real rates, commitment towards fiscal consolidation and strong external position”. Moreover, traditional monetary and fiscal policy measures are also constrained by medium-term sustainability considerations and thus the non-traditional ways of freeing up resources for supporting growth should be considered.