Finance Minister Nirmala Sitharaman proposed an idea that Indian government would borrow some of its funds in overseas market in foreign currency citing the reason that India’s sovereign external debt to GDP level is among the lowest globally at less than 5%. It has attracted a lot of debate including economists as well as former Governor and Deputy Governors of Reserve Bank of India.
What are Sovereign Bonds?
Basically Sovereign bonds are the government debt securities issued in either domestic currency or foreign currency denominations such as dollars, euros and yen. Till now Government of India has only issued bonds in domestic market in rupees to finance the deficit between expenses and revenues.
Overseas Sovereign Bond: A bad idea
Even during the period of 1991 (Balance of Payment Crises), India has never resorted to large scale foreign currency borrowings. This is the reason why a sovereign bond issue is indicating a major shift in policy now. Former RBI Governors C.Rangarajan and Raghuram G Rajan are against the issuance of bonds. They argued that foreign currency debt has no real benefit and is fraught with risks. RSS affiliate and its economic think tank Swadeshi Jagran Manch has also opposed the decision for the issuance of bonds.
In the recent economic survey 2018-19, it has clearly indicated that there is lot of investment required ahead for achieving aspirational goal of the government. The huge amount of government borrowing has put the pressure on the local interest rates and availability of funds for the private sector. For the fiscal year 2019-20, the government plans to borrow at least ₹ 7 trillion. For this issuance of sovereign bonds in foreign currency to meet the deficit requirement partially is not the solution. We have live examples and experiences of Turkey, Indonesia and many Latin American countries who issued sovereign bonds and ended up creating liabilities.
This is a very dangerous idea for India because of foreign currency risks involved in it. That means, if rupee depreciates sharply (at present rate of rupee depreciation is 6.23%), the government ends up paying more. The rate of interest which government will be paying for bond funds will be 3.2%. The argument will be misleading that we are getting funds at cheaper rates as it not technically correct because we have to pay more than 9% for the funds as depreciation of domestic currency has to be taken into account. There is no doubt that fiscal deficit and current account deficit are high but it is a temporary concern and India does have a glide to resolve this issue.
The Alternative
The alternative to this concern is that we should rely on domestic tools and we can do it by printing more currency notes. Government should borrow form within the country at 0% rate of interest. On the other hand when we issue overseas sovereign bonds, we get dollars which are ultimately converted into rupees which cause inflation. Both of the above are parallel ideas of borrowing but the difference is at one hand the government has to pay more than 9% rate of interest and on the other hand 0% rate of interest against domestic borrowing.
But the big question remains whether government will choose domestic borrowing option or to get some theoretical benefits of bonds.
