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Why is India opting for overseas bonds?

Topics covered:

  1. Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

 

Why is India opting for overseas bonds?

 

What to study?

For prelims and mains: Overseas bonds- uses, need, significance and challenges, what is crowding- out- effect?

 

Context: The government has announced its plans to raise a portion of its gross borrowing from overseas markets. The government and the Reserve Bank of India (RBI) will reportedly finalise the plans for the overseas issue of sovereign bonds by September. While several commentators have argued that this is a risky move, the government itself is convinced that it will help boost private investment in the country.

 

What is an overseas bond issue?

A government bond or sovereign bond is a form of debt that the government undertakes wherein it issues bonds with the promise to pay periodic interest payments and also repay the entire face value of the bond on the maturity date. So far, the government has only issued bonds in the domestic market.

 

What are the benefits of an overseas bond issue?

The government has been arguing that the quantum of its borrowing within India is ‘crowding out’ the private sector. In other words, it is saying that government borrowing is at such a level that there are not enough funds available for the private sector to adequately meet its credit and investment needs.

If the private sector cannot borrow adequately, then it cannot invest as it wants to, and that cripples one major engine of economic growth.

Therefore, borrowing overseas allows the government to raise funds in such a way that there is enough domestic credit available for the private sector.

 

What are the risks?

  1. With this, India might follow the path of some Central and South American countries such as Mexico and Brazil. In the 1970s, several of these countries borrowed heavily overseas when the global market was flush with liquidity. But then, when their currencies depreciated sharply a decade later, these countries were in big trouble as they could not repay their debt.
  2. India is not likely to be viewed as a risky proposition by the international market and so is likely to fetch an attractive rate for the bonds. Cheap and plentiful funds, however, should not encourage the government to borrow too heavily from abroad.
  3. This would also lead to a quicker increase to its foreign exchange reserves, which would lead to a stronger rupee at a time when it is already appreciating against the dollar. A stronger rupee would encourage imports at a time when the government is trying to curb them, and discourage exports at a time when they are being encouraged.
  4. On the other hand, a rupee depreciation for whatever external reason would prove even more disastrous as it would make it far more expensive for India to repay its external debt.
  5. Another problem with an overseas bond issue is that the government would not be able to inflate itself out of trouble. That is, in the domestic market, if the government does ever reach the stage where it is finding it difficult to repay its debt, it can simply print more money, let inflation rise quickly and repay its debt. This is not an option in an overseas bond issue. The Indian government cannot print foreign currency to repay its debt.

 

Sources: the Hindu.

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