Should India Use Foreign Exchange Reserves for Financing Infrastructure?

The unprecedented rise in Foreign Exchange Reserves (FER) in some of the Asian countries raises a concern about their optimal size and appropriate utilization. In India too, in recent months, different ways to utilize FER, in particular, to finance infrastructure, have been debated. The Government of India intends to use a part of its FER for infrastructure financing and has announced a scheme — yet to be implemented — in its annual Budget in February 2005. There is no evidence that any other country has used FER to finance infrastructure. The amount of FER in India is modest when compared to some of the other countries in the region, and it can be argued that the proposed plan may lead to more economic difficulties than anticipated benefits.