Should India Use Foreign Exchange Reserves for Financing Infrastructure?

India's foreign exchange reserves have increased from US $5.8 billion at end-March 1991 to US $140.1 billion at end-March 2005 as a result of measures introduced to liberalize capital inflows under the financial sector reforms undertaken since 1991. The Reserve Bank of India, in consultation with the government, currently manages foreign exchange reserves. As the objectives of reserve management are liquidity and safety, attention is paid to the currency composition and duration of investment so that a significant proportion can be converted into cash at short notice. The Government of India intends to use a part of its foreign exchange reserves to finance infrastructure. Infrastructure projects in India yield low or negative returns due to difficulties;political and economic;especially in adjusting the tariff structure, introducing labor reforms and upgrading technology. There is no evidence that any other country has used foreign exchange reserves to finance infrastructure. The amount of foreign exchange reserves 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.