The budgetary announcement that raised some eyebrows was the $10 billion external sovereign borrowings the government is looking forward to. On one hand, the government's own ideological think tanks has turned against it; while on the other hand, some believe that it is an idea whose time has come.
While a large fraction of analysts have questioned if the government intended to ‘sell-off the country,' citing risks of exchange and defaults, there is a significant portion of voices that this could be a game-changer. Why and where will the Sovereign dollar bonds take us?
Why does the country need this external debt? Is it just the falling economy; or this should have been done long ago? Let us see why this becomes important. India needs debt to fulfill its growth requirements. The domestic debt market is not yet developed. Issuing sovereign bonds in dollars would ease the global trade and aid the exporters.
Is India ready for this? Yes, India presently has a forex reserve of around $440 billion, while its total debt is only 75% of it. Moreover, India has never seen a significant dip in its forex since 1991. Secondly, India's total current sovereign debt stands less than 4% of GDP. This is much better than nations of our league, like China, Indonesia, and Brazil.
The government needs money to function like corporates. While companies use their equity and take loans from banks and debt markets, the government does it in the form of EPFO, NSC, and other small savings schemes. Even banks have to lend a specific portion to the government forcibly. When the government offers a rate of 8.5% in EPFO, people tend to invest there. This leaves less money available to the corporates. This, in turn, increases the interest rates on bank loans. If the government moves out of this market, corporates would have affordable loans and both can benefit
The Interest(ing) Advantage
The interest rates in developing countries are very low, owing to their developed debt markets and stable inflation. So much so, those banks have started offering negative interest rate loans to people! This was once said to be impossible in monetary policy. The government would have to pay very low interest and this can compensate for the perceived dollar exchange rate risk.
The Opportunity of Transparency
The government, in recent times, is accused of misreporting and manipulating the data. This could affect India's prospectus when going out to borrow in a global market. However, this can be the next big opportunity for India. This will be the moment when India will be assessed on various parameters of revenue, expenditure and growth. The country will be given rating by credit rating agencies on the ability to repay.
At this time, India should come up clean with all its numbers and maintain the transparency with the citizens and the world. They will not only be assessed just on their profile, but also of the Indian states, the NPA of the banks, the loans on MSME, etc. This is one opportunity to clean all the books and welcome the change.
India, if does this, will do what Brazil, Thailand, Argentina, and Turkey failed to do.
The Fiscal Discipline
Indian governments have a tendency to control their deficits for 4 years and then spend extravagantly over populous schemes in the election year. Bond markets will forbid this practice. Debt markets are unforgiving. One breach of trust would lead to poor ratings. Poor rating would close the doors for debts, and make debts more expensive. The bond would trade on the market and will be under the continuous scrutiny of the investors. Trust is the only key.
India commands excellent trust in the global market. The amount of FDI and FPI entering India is almost double to that of the entire sovereign and corporate debt in India. India has an impressive debt profile. The fears are exaggerated if not unfounded.
However, these statements will stand in time only if the government does not lie and look forward to this opportunity will complete transparency. If India stays transparent and disciplined, irrespective of the initial rating, it will prosper. This is indeed a two-faced coin, only that the outcome is in the hand of the government.
Read: How government's overseas borrowing is a major concern