India’s $693 billion illusion: Why our foreign exchange reserves are built on debt, not strength

By Hemantkumar Shah*

India’s foreign exchange reserves have touched a staggering $693 billion, of which $586 billion is in the form of foreign currencies—primarily U.S. dollars—and the rest in gold. The government and many economists tout this as a sign of economic strength. But is this truly a matter of national pride, or should it raise concerns?

Back in December 2003, when India's forex reserves crossed the $100 billion mark for the first time, the government launched a flashy “India Shining” campaign. Today, with reserves nearing $700 billion, similar celebratory claims are being made. Yet, the key question remains unanswered: how exactly have we accumulated these dollars?

Contrary to popular belief, India has not earned these reserves primarily through exports. In fact, the country’s imports have consistently outstripped exports. The balance of trade has been negative for decades—with only two exceptions in the early 1970s. Even as of April 2025, India’s imports outpace exports, and this trend is expected to continue through 2025–26.

So where do these dollars come from? The answer lies in foreign borrowing and investment, reflected in India’s Balance of Payments (BoP). Here’s how the reserves are actually built:

1. NRI Deposits: Non-resident Indians deposit billions of dollars in Indian banks. These are not acts of patriotism, but interest-bearing investments. India is obligated to repay them with interest.

2. Foreign Direct Investment (FDI): Multinational corporations invest in Indian industries not to serve the Indian population, but to earn profits, which they later repatriate. These investments are rising, but so are the profits leaving the country.

3. Foreign Institutional Investment (FII): Global investors pour money into Indian stock markets. These are volatile “flying capital” inflows that can leave the country overnight, often destabilizing the economy.

4. Sovereign Borrowing: Both the central and state governments borrow from foreign institutions like the IMF, World Bank, and ADB for various infrastructure and social projects.

5. Corporate External Borrowings: Indian companies raise capital from international markets via bonds, loans, and equity, all of which need to be repaid with dividends or interest.

The bulk of our foreign reserves is a result of such inflows. This isn't national income—it's national liability. These dollars are borrowed, not earned, and they must be returned. This turns the celebrated figure of $693 billion into a mirage, since nearly the same amount—$664 billion—is India’s external debt.

India is inviting foreign investors with open arms, deregulating labor laws, and relaxing environmental norms to lure them in the name of development. But how can a country become self-reliant (Atmanirbhar) while increasingly dependent on foreign capital? The very idea is paradoxical.

Moreover, foreign companies often extract more wealth from India than they invest. Studies show that the returns they repatriate far exceed their initial investments. This not only undermines national economic sovereignty but also raises doubts about the real benefit of such capital inflows.

Let’s be clear: foreign investments—whether through FDI or FII—are effectively debts with different names. Sooner or later, these need to be serviced or repaid. The interest payments, repatriated profits, and capital flight associated with these “investments” erode national wealth over time.

Given this reality, the idea of using our reserves to pay off external debt is misleading. Most of the reserves are already liabilities. We are caught in a cycle where borrowing funds the reserves, and the reserves serve to reassure further borrowing. This is neither sustainable nor desirable.

India’s current foreign exchange reserve levels may look impressive on paper, but they rest on a foundation of mounting debt and financial dependency. Celebrating these figures without acknowledging their origins and consequences is not just naive—it is dangerous. Instead of flaunting dollar figures, we must ask ourselves whether we are building an economy that is truly independent, productive, and just.

Until then, India’s foreign exchange reserves will remain less a symbol of strength and more a mask for its increasing economic vulnerability.

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*Senior economist based in Ahmedabad

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