26 July 2019
New Delhi: The Prime Minister's Office (PMO) wants the Finance Ministry to re-look the idea of issuing foreign currency overseas sovereign bonds and critically examine issues raised by former bankers and economists before taking any call on implementing the budget proposal.
The PMO has asked the ministry to seek more consultation from stake-holders before proceeding with any plans. Finance Ministry officials had said the government could raise about 10-15 per cent of the proposed Rs 7.1 lakh crore government borrowings this fiscal through sovereign bonds.
The chief architect of the proposed bond was the former Finance Secretary Subhash Chandra Garg and he had a lone supporter in this campaign. Chief Economic Adviser Krishnamurthy Subramanian had said this is the right opportunity for India to raise funds through overseas sovereign bonds at a much cheaper rate, compared with those in the domestic market.
Garg has since been moved to the Power Ministry and the sudden move just after the Budget presentation and its approval by Parliament is being seen by many paying the price for pushing the idea of foreign money into India by a government led by a largely nationalist, right-wing party where the 'swadeshi' card evokes sentiments. The former Finance Secretary is being seen as hurting such sentiments, while former RBI Governors and other experts shot down the idea as risky.
The opposition to the proposed bond is widespread. The government should not issue foreign sovereign debt without getting into larger public consultations, and the many arguments it has given in favour of issuing such securities do not hold, Rathin Roy, member of the Economic Advisory Council to the Prime Minister, had recently said.
He said government should pay attention to what several former Governors of the Reserve Bank of India are saying, the sovereign liabilities are in perpetuity.
Roy also dismissed the contention that such bonds are cheaper after the hedging costs are added. Noting there was a reason why the country hadn't issued overseas debt for 70 years, he had said that Brazil, Argentina, Turkey, Greece, and Indonesia had all paid a price for foreign currency sovereign borrowings.
"I have grave concerns about this proposal on grounds of economic sovereignty, and about the macroeconomic consequences... the government should instead look at relaxing the rupee bond limits for foreign portfolio investors," Roy said.
Former RBI Governors Raghuram Rajan, C. Rangarajan and Y.V. Redy and former Chief Statistician Pronab Sen had also raised concerns over the Finance Ministry's proposal.
Rajan has said that any plan to issue foreign currency debt has no real benefit and is fraught with risks. A global bond sale won't reduce the amount of domestic government bonds the local market has to absorb and the country should worry about short-term "faddish investors buying when India is hot, and dumping us when it is not", he had written in a newspaper column.
Rangarajan has said that borrowing in foreign currencies may expose the economy to risks as the rupee's depreciation or current account deficit cannot be contained in the long run. Former Finance Minister Yashwant Sinha has said that even in the face of the 1991 balance of payment crisis, the government did not go for sovereign bonds.
The main fear is as they argued it could create long-term economic risks by exposing the government's liabilities to currency fluctuations.
All of these experts had suggested issuing rupee bonds instead of foreign currency bonds.
In an interaction with IANS, Ashiwini Mahajan, the co-convenor of the RSS-affiliated Swadeshi Jagran Manch (SJM), said: "About 95 per cent of the experts are saying the move is risky. The average depreciation in the rupee is 6.23 per cent in the last few years. The overseas rates of interest is 3.25 per cent, so together it makes 9.5 per cent.
"In India, the government borrows at 6-7 per cent. So how the foreign currency bonds are cheap? The whole idea of a sovereign bonds is bad idea for any other country, not just for India. Everywhere the sovereign borrowing has led these countries into the debt trap, into the vortex of debt. It is a risk not worth taking. It is a foolish idea."
The benchmark 10-year bond yield rose as much as 11 basis points to 6.55 per cent after the news of a rethink of the proposal, as market participants fear this may boost government borrowing in the domestic market.
Finance Minister Nirmala Sitharaman, in her maiden Budget speech on July 5, had announced: "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."
Garg had told Indian business leaders last week that the overseas debt move was part of efforts to bring down real interest rates for Indian firms, and to help the economy grow faster.