Deutsche Bank advocates using a part of country’s foreign exchange reserves, which recently topped USD 400 billion for the first time ever, for funding growth-critical public infrastructure projects
India’s GDP numbers have hit a three-year low and the government is reportedly planning to loosen the fiscal deficit target, but Deutsche Bank has a different solution: Use forex reserves to boost growth. Deutsche Bank advocates using a part of country’s foreign exchange reserves, which recently topped USD 400 billion for the first time ever, for funding growth-critical public infrastructure projects to support the GST numbers. It says channeling just 3% of India’s forex reserves can add about 0.6% to GDP.
Forex reserves, as on September 8, stood at USD 400.73 billion. The reserve on the balance of payment basis jumped by USD 11.4 billion April-June quarter of fiscal 2017-2018, which was a whopping 62% rise as compared to the same period last year. Last year, the jump for the same period was USD 7 billion.
“If USD 15 billion worth of forex reserves were channeled toward public investment in infrastructure, this would reduce total reserves by only 3.5% but would add about 0.6% to GDP, which could help to support growth in the near term,” Deutsche Bank said in a research note.
The bank says the country lacks considerable space both on the monetary and fiscal front to support economic growth, and in this case, a small portion of the surplus forex reserves can be prescribed for public investment, which in turn would help to support growth. The report further noted that even if this transfer were to be made, the reserves adequacy position would hardly change and would remain significantly above the comfort range as prescribed by the International Monetary Fund (IMF).
The bank says, in the backdrop of low inflation, positive real rates, commitment towards fiscal consolidation and strong external position, “Merit is a serious debate.” As India’s traditional policies are constrained by short-term and medium-term sustainability considerations, the non-traditional way of freeing up resources for supporting growth should be considered, the report said.
India’s current account deficit increased sharply to 2.4% of GDP in the first quarter, from 0.1 percent a year ago. In the first quarter of the last financial year, the current account deficit was 0.1 percent or $401 million. This is the highest level since the June quarter of 2013.