How Offshoring is contributing to Indian foreign exchange?

Offshoring has emerged as a very powerful business helping the economy of many countries. Several countries are realizing its importance after the success of India and China and are developing infrastructure and technology to attract foreign investors. Offshoring is basically a relocation of business processes of a certain company from one country to another. Cost reduction is usually the primary objective but there can be other reasons also. After the liberalization and globalization polices adopted by India, it has seen major increase in foreign processes coming to the country. India has developed the trade services and infrastructure to meet the international market demands.

The question is: Why countries like India are so keen to promote the Offshoring? Actually there are many reasons for it. The relocation of a project or process in a country generates employment, growth opportunities and money. India is still a developing country and Offshoring provides some of the most important growth tools to the country. Money of course is the most important one. With foreign investments in the country from around the world, India earns valuable currencies which fuel the growth of economy. Undeniably, the foreign exchange reserves of a country reflect its trade stability and presence in the international market. Every country works to increase its foreign exchange reserves to support the domestic currency, the central banks even try to aggressively work out import and export methods of buying and selling to influence currency rates. Not to mention that currency reserves can generate huge gains and losses to a country. Hence these reserves are very important for a developing country like India to boost developing speed.

Offshoring in India has certainly lifted the foreign exchange reserves of FX reserves over the last few decades. According to data from the Reserve Bank of India, India had a FX reserve of USD 5.8 billion in the year 1991, it rose to USD 38 billion in the year 2000 and then to USD 197.8 billion in 2007. The phenomenal growth in FX reserves is evident by the RBI figures. Offshoring has played a huge role in this success and will continue to do in the coming years too. Moreover, it is also important for countries to secure as many currencies as they can from the international market, United States Dollars being the most preferable currency due to its stability. India has been able to reserve other currencies also through Offshoring which provides a greater support scenario to the home currency i.e. Indian Rupees or INR.

Currency crisis is also something that Offshoring can help with. Actually balance of payment deficit or BOP deficit in any country can destabilize the home currency and create major economic problems within the country. Examples of such crisis were seen in 1994 in Mexico, Russia in 1998 and in Argentina (1990-2002). However, by using the FX reserves, currency crisis can be handled. Therefore, the money earned from Off-shored projects in India help the foreign exchange in a huge way. The country not only gets valuable currencies but also makes sure that the economy stays strong.