India’s plan to use a slice of its huge foreign exchange reserves to improve its creaking infrastructure is widely seen as a stealthy move to increase an already high fiscal deficit and could stoke inflation.

Inspired by similar moves in China and Taiwan, India's communist-backed Congress government is toying with the idea of using part of its foreign exchange reserves to upgrade transport, power and communications networks in Asia's fourth-largest economy.

The reserves, which in 1991 were barely enough for three weeks of imports, are now at a record $121.2 billion; the world's fifth-largest total and enough to finance 17 months of imports.

That prompted Montek Singh Ahluwalia, the powerful deputy chief of India’s planning commission, to argue that reserves were "more than required" and that $5 billion a year could be used to fund infrastructure development over the

India’s plan to spend forex reserves may fuel deficit next three years.

His proposal comes eight years after the planning commission proposed that reserves be spent on restructuring state firms. That plan was scuttled, but the latest one may have more life.

Ahluwalia's is a powerful member of the government and is known to have the prime minister's ear. Despite the chorus of protest, he may yet get his way, analysts say.

His plan looks disarmingly simple, but closer inspection reveals a host of problems, economists say. The central bank is up in arms about it

The Reserve Bank, and not the government, owns the reserves, central bank officials say, adding that the government would have to pay for them by issuing securities to the central bank — in effect swelling the fiscal deficit, which currently stands at around five percent of gross domestic product.

As well, the plan would push billions of rupees into the economy, fuelling money supply growth and

inflation.

"The plan will have significant inflationary consequences," said Shankar Acharya, former chief economic advisor to the federal government.

"Public investment in infrastructure should be increased, but through the normal methods of raising more tax and non-tax revenue resources and by containing low-priority expenditure."

The plan is one of many dilemmas facing Prime Minister Manmohan Singh's new government, which took power in May.

In a country with a public debt of over $500 billion and a stubbornly high fiscal deficit, how can Singh find the money to finance the infrastructure investment the economy desperately needs -- especially when his Communist allies are wary about throwing open the doors to foreign investors?

Annual borrowing by India's central and state governments amounts to around 10 percent of gross domestic product.