At a time when economic prosperity is going to be defined more and more by a country’s international standing and economic growth of a country is bound to be determined as a function of its foreign policy and domestic reforms, reduced imports during the ongoing Pandemic have further strengthened India’s Foreign Exchange Reserves.
With sizeable Foreign Exchange Reserves, the Modi government finds a free hand when it comes to expanding its regional, global, and military influence. The government can invest a lot more freely in overseas military projects and defence imports, apart from investing in regional and global infrastructure projects, and raising a wider diplomatic corp.
According to recent reports, India’s Forex Reserves have leapfrogged to 501.7 billion US dollars, touching the half a trillion-dollar mark. India has the third-highest Forex Reserves in Asia after China and Japan. The Reserve Bank of India (RBI) is said to have brought in #9 billion in the four weeks ended May 29.
India’s economic foundations have therefore become very strong with huge Forex Reserves. High level of Forex Reserves means that India is insulated from a 1991-type Balance of Payment crisis, and also sets off a situation of high Current Account Deficit, viz. excess of imports over exports.
Presently, the Modi government has also managed a low Current Account Deficit which stands at 1 per cent of the GDP.
Higher Forex Reserves are crucial if India wants to punch above its weight. China, for example, has 3.06 trillion Foreign Exchange Reserves which helps it finance the most ambitious Inter-continental project in the world, that is, the Belt and Road Initiative (BRI) which is not only an economic programme, but also a foreign policy tool.
Beijing gains a firm grip on leaders like Imran Khan and Nepal PM KP Sharma Oli through the BRI in order to advance its strategic interests. Similarly, a small island like Taiwan boasts of a massive 481.78 billion dollars in Foreign Exchange Reserves, which makes it an Asian tiger.
For India, the pattern has been particularly encouraging ever since the Modi government stormed to power in the year 2014. During the policy paralysis era of the UPA, India’s Forex Reserves had hit an embarrassing low of 259 billion dollars.
In 2014, India’s Forex Reserves stood at 304.2 billion US dollars and in the last six years, the Forex Reserves have increased manifold to around 500 billion US Dollars. Now, the Coronavirus Pandemic and its geopolitical implications are likely to alter supply chains. Prime Minister Modi’s push for an Atmanirbhar (self-reliant) India is itself going to reduce imports which means that Forex Reserves could increase even more quickly.
It is likely that India hits the one trillion-dollar mark in the next five-six years, and this is going to be India’s shortcut towards becoming a global power from a strong regional player. Within the Indian Ocean Region (IOR), India could enhance itself into a hegemon.
India has several ambitions going ahead- it plans One Sun, One World, One Grid (OSOWOG) to counter China’s BRI which has gone wrong for many reasons including the “debt-trap diplomacy”.
By providing cost-effective solar electricity to power deficit parts of the world, such as Africa, New Delhi wants to increase its soft power. Similarly, within the Indian Ocean Region and the Sub-continent, India might want to play the role of a net security provider. This could as well be India’s own Marshall Plan in the twenty-first century.
The revival of India-Sri Lanka-Maldives NSA dialogue is, for example, an expression of New Delhi’s aspiration to play the role of a net security provider in the Region. Moreover, India has to play a bigger role in Afghanistan after the withdrawal of US troops sooner or later, as the withdrawal is going to create ungoverned spaces in the war-scarred country that could hamper India’s interests.
This requires extensive investments which can be financed by India’s increasing Forex Reserves.
Another area where India can now use its greater Forex Reserves is to compete for influence in strategic regions such as the Himalayas. India cannot afford to lose friends in the Region amidst its rivalry with China. Therefore, India can invest in countries like Nepal and Myanmar to ensure that another KP Sharma Oli doesn’t get compromised to Beijing’s influence.
India’s Kaladan Multi-Modal Transit Transport Project in Myanmar, for example, hasn’t materialised quickly enough while China has started investing in a Special Economic Zone (SEZ) in the region. But with higher capacity to pump in investments, India can construct such projects in much lesser time.
Moreover, India will also need a bigger diplomatic network to pursue its interests abroad. Currently, New Delhi has the third biggest network with 123 Embassies and High Commissions, and 54 Consulates globally.
In this sense, India lags far behind China, something that doesn’t augur well for PM Modi’s foreign policy blitz and New Delhi’s ability to take more Article 370 abrogation-like decisions without having too much to worry about international public opinion/manufactured outrage.
Expanding diplomatic network would require recruitment of more diplomats, and as a corollary more Consulates, Embassies and houses to lodge the bigger diplomatic corps, all of which requires massive overseas investments.
Finally, reduced imports and increasing Forex Reserves gives Modi government the space to expand its military influence. India has signed logistics pacts with “like-minded” democracies- the US, Japan and South Korea in the Indo-Pacific.
India wants to play a bigger role in the Indo-Pacific primarily to challenge growing Chinese influence which will ultimately see India establishing overseas naval bases that could with the passage of time become tri-service military theatres/ commands like the one in Andaman and Nicobar Islands.
India will have to carry out a number of defence purchases like the Rafale deal, notwithstanding the increasing stress on indigenisation in military equipment. India is also looking at fulfilling gaps- need to induct more squadrons in the Indian Air Force (IAF) and a third aircraft carrier.
India wants to be a much bigger power than it already is, and this doesn’t happen for free. New Delhi has to show what it is capable of at the world stage which will require massive expenditure, formidable infrastructure, and more soft power. The growing Forex Reserves help India achieve all these ambitions.