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Faced with criticism, Modi govt puts foreign borrowing plan on hold

Govt official says there is no traction on the proposal as of now. This comes after several economists, including PMEAC members, vociferously oppose move.

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New Delhi: The Narendra Modi government has put its plans to raise sovereign debt overseas in other currencies on hold after facing vociferous criticism from economists across the board for two months.

“As of now, there is no traction on the proposal,” a government official who did not wish to be named told ThePrint.

The government had announced its intent to raise funds through sovereign bond issuances in the current fiscal in the Union Budget on 5 July. Subsequently, it said it was looking to raise $10 billion from the issuance.

However, the Modi regime was forced to take a re-look at the proposal after it saw an unprecedented opposition from former Reserve Bank of India (RBI) governors as well as two members of the Prime Minister’s Economic Advisory Council (PMEAC).

With the idea staring at outright rejection, the Appointments Committee of the Cabinet headed by Prime Minister Modi transferred former finance secretary Subhash Chandra Garg — the person who spearheaded the proposal — to the power ministry. Consequently, he opted for voluntary retirement from service.

A sovereign bond issuance in external currencies will increase India’s vulnerability to international financial markets volatility and uncertainty. Talks of a sovereign bond issuance by India have taken place in the past as well, but such proposals never found favour with the RBI.

Also read: Modi govt’s dollar bond made too many enemies

“I don’t know how such proposal for sovereign bond issuances got into the budget documents and that too without any discussions. We have been avoiding it for 20-25 years so that we are not exposed to global volatility,” said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy.

“Sovereign bond was not a good idea as intrinsically it was looking to incentivise foreign savers and not domestic savers.”

Bhanumurthy added it is possible that the change in leadership in the ministry and a lack of clarity on the issues surrounding sovereign bonds could have been the reason behind its inclusion in the budget speech.

“The new finance minister didn’t have much time between government formation and the budget,” he said, pointing out that every former central banker — except Bimal Jalan — opposed the move.

“Many distinguished central bankers have opposed sovereign bonds. That must have tilted the decision of the government,” added Bhanumurthy.

How the idea came about & the opposition to it

Finance Minister Nirmala Sitharaman had announced the Modi government’s intent to borrow from overseas in her maiden budget speech earlier in July, citing the advantages of such a move.

“India’s sovereign external debt to GDP is among the lowest globally at less than 5 per cent. The government would start raising a part of its gross borrowing programme in external markets in external currencies. This will also have beneficial impact on demand situation for the government securities in domestic market,” she had said in her speech.

Further, the government had pointed out that the cost of borrowing overseas will be less due to adequate global liquidity.

The unilateral announcement caught many by surprise and led to vocal opposition from all quarters.

Former RBI governor Y.V. Reddy pointed out that such fundraising is a perpetual liability and when a country goes in for such issuances, it loses jurisdictional sovereignty, making itself vulnerable to hostile creditor-legal action.

Raghuram Rajan, another former RBI governor, said most countries issue bonds in foreign currency only when they are not able to issue them in their domestic currency, but this wasn’t the case for India. He argued that instead of issuing sovereign bonds, the government should look at easing restrictions on investments made by foreign portfolio investors in government bonds.

PMEAC member Rathin Roy called sovereign bonds a “dire addiction” and flagged the disastrous consequences witnessed by Latin American countries after such fundraising.

Shamika Ravi, a second PMEAC member, concurred with Roy and questioned why the government should undertake exchange rate risks through such issuances.

In a note last month, India Ratings also pointed out the risks behind such an issuance.

“In a scenario of depreciating currency, interest and debt obligations of foreign currency-denominated debts balloon and quite often make it unsustainable. Hedging currency risks carry significant costs and if opted, may make foreign currency-denominated debt less attractive compared with domestic debt,” the note said.

It added that allowing FPIs in the onshore market doesn’t carry the currency or refinance risk.

To be sure, the Modi government’s fiscal pressures are expected to ease with transfer of excess RBI surplus funds in the current fiscal following the recommendations of the Bimal Jalan committee. This will reduce its need to borrow more from the markets.

The central bank will transfer Rs 1.76 lakh crore to the government — Rs 1.23 lakh crore of surplus for 2018-19 and Rs 52,637 crore of excess provisions identified as per the Jalan panel report.

Also read: Amend the law to settle conflict over RBI’s surplus once and for all


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