Sovereign external borrowing: A tightrope walk for Narendra Modi govt amid debate on its efficacy

New Delhi: The government’s plan to mobilise funds through overseas sovereign bonds has triggered a debate on its efficacy. The decision to take up this route for raising capital was announced in the Budget 2019-20 and the proposal has received both bouquets and brickbats. It is also considered as one of the reasons for shifting finance secretary Subhash Chandra Garg to Ministry of Power. Although, the exact reason for the high-profile transfer is unknown, officials in hushed voice say the government developed cold feet after criticism over the plan of borrowing from overseas market. Finance Minister Nirmala Sitharaman in Budget 2019-20 announced that the government would start raising a part of its gross borrowing programme from external markets in foreign currencies. She added that India’s sovereign external debt-to-GDP level is among the lowest globally at less than 5 percent. [caption id=“attachment_4292949” align=“alignleft” width=“380”] Representational image. News 18.[/caption] People in favour of the issuance of overseas sovereign bonds termed it the boldest move of the Budget 2019-20. The programme is aimed at diversifying the government’s borrowing programme. So far, the government has been borrowing from the domestic market in the local currency – Rupee. Issuance of government bonds overseas in foreign currency would significantly reduce dependence on the domestic market leaving room for the private sector to raise capital for investment as crowding out will be checked to some extent. The government intends to borrow Rs 7.1 lakh crore from the market to meet its fiscal deficit, the shortfall between revenue and expenditure. If 10 percent of the borrowing is done from the overseas market, it will leave about Rs 70,000 crore for the private sector. This will increase the supply of money in the domestic market, and give more investible resources in the hands of the private sector which has not been making an investment in the economy for the last few years due to various reasons. Sovereign external borrowing is also considered a cheap source of raising money by the government as interest rates in advanced countries are very low. According to experts, given the country’s high growth, many investors including pension funds would like to park their funds in the securities issued by the Indian government in their currency. Many countries including Indonesia, Turkey, many African and Latin American nations resort to this tool for meeting their deficit. Experts say that over the last 25 years, the rupee has been fairly stable against the US dollar so the exchange risk is minimum. Also there are several long-term implications. It may facilitate the inclusion of India’s government bonds in the global debt indices. India’s representation in the global debt market indices is small compared to other emerging markets. This may lead to higher foreign inflows into India. On the other hand, the critics of this move say it would expose the country to the forex risks. The government has never issued sovereign bonds overseas. The last time the government actively considered issuing sovereign bonds overseas was in 2013, when the rupee took a severe beating in the aftermath of taper tantrums. The idea of offshore sovereign bonds was then opposed by RBI, which was of the opinion that such a move should be from a position of strength, rather than a point of weakness. “In Reserve Bank’s view, the costs of the sovereign bond issue, especially in the current juncture, outweigh the benefits,” the then RBI governor D Subbarao had said. “We should be doing a sovereign bond issue, if at all, from a position of strength - when we are much less vulnerable than at this time,” Subbarao said. Experts point to the bitter experience of countries including Mexico, Thailand, South Korea and Russia and desist from going forward with plans of issuance of such securities. They say rather than going abroad, the country should increase participation of the foreign investor in the government securities which does not have any forex risk. At present, that limit is set at 6 percent of the outstanding stock, one of the lowest globally. RBI, which issues bonds on behalf of the government has been conservative in this regard. This nature of RBI, according to experts, had insulated the country from external shocks including the Asian currency crisis and global financial crisis of 2008. The announcement made in the Budget, now ratified by both Houses of Parliament, has set the ball rolling for issuance of the overseas sovereign bond. As the decision has been taken at the highest level, now the question remains when and how much to be issued during the current fiscal.