A ‘war-chest’ of foreign exchange reserves worth up to $1 trillion in the long run can help India bolster its geo-political influence in an increasingly inter-connected economic world, says the Economic Survey.
"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 on Friday.
"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.
Since acquisition of reserves ‘is not costless’, the survey said there is also a need to undertake a cost-benefit analysis.
Touching upon 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.
At the end of January this year, India's foreign exchange reserves stood at $328.7 billion.
"The acquisition of reserves is not costless because it requires a policy of mercantilism and consequential distortion of financial and exchange markets. But there is a cost-benefit analysis that needs to be undertaken," the survey said.
Noting that today China has de-facto become one of the lenders of last resort to governments experiencing financial troubles, the report said the country has also become one of the bigger providers of development assistance.
Image: Us dollars; Photograph: Reuters