In her presentation of the Union Budget 2019, Finance Minister Nirmala Sitharaman proposed the idea of selling the country’s sovereign bonds in the international market. Sovereign bonds are specific debt instruments that are issued by the government of a particular country. Those who buy the bond are paid a certain amount of interest for a stipulated period of time, usually a couple of years and repaid the face value on the maturity of the bond. Based on the government’s choice, these instruments can then be denominated in either foreign or domestic currency (The Economic Times 2019). India has chosen to sell its sovereign bond in dollar denominations. Selling of sovereign bonds serves a variety of functions. For instance, it is a way for governments to raise capital in order to finance projects without increasing tax rates further or to repay old debts (Kuepper 2019).
The selling of sovereign bonds in the international market in international currency has invited widespread debate. Those in support argue that historically, India has been a country starved for capital and considering the fragile state of global growth in contemporary times, selling of sovereign bonds is the right move at the right time (The Economic Times,2019). Selling of bonds is a convenient method to gain capital and help India finance ambitious infrastructural and social development projects, thereby increasing the pace of India’s trajectory into a superpower (The Hindu 2019). Voices in favour of selling these bonds also proclaim that greater integration into the foreign markets would make the Indian economy more disciplined in various ways like easing the burden on Indian institutions (Roy 2019).
In terms of its impact on the corporate sector, in an interview to Forbes India, Apoorva Javadekar, who is currently serving as the assistant professor of finance at the prestigious Indian School of Business, outlined the positive and negative implications of such a move. He said that on one end issuing sovereign bonds in denomination of dollar at the global market would help facilitate the creation of a pricing reference for corporates in India. However, on the other end, such a move also places these corporates at risk of being crowded-out from the external debt market (Balachandran 2019). The risks of placing an unstable economy like India at the behest of world market should not be disregarded.
While the selling of sovereign bonds might seem like a feasible solution to fast-track economic development, the decision to sell in dollar denomination is fraught with risks.
The government’s decision to sell these bonds in dollar denominations has come under scrutiny from various sectors including prominent economists as well as political allies. Joining the chorus of opposition is an esteemed economist and former Reserve Bank of India(RBI) Governor, Raghuram Rajan. In an editorial, he penned for Times of India, Rajan laid out the risks involved in this proposal of selling sovereign bonds in dollar denominations. He declared the argument presented by foreign bankers that borrowing in dollars would be cheaper due to its lower interest rates as “bogus”(Rajan 2019). Calling it as a frequently employed persuasion tactic to convince India to sell foreign bonds, Rajan pointed out that in the long run as the value of rupee depreciates against that of the dollar, the lower interest rate would be offset by higher repayments of the principal amount. He also warned against those times during which the value of rupee could depreciate considerably, like the Taper Tantrum, stating that it would cause a detrimental effect on India’s image amongst its international investors, leading to a requirement of higher debt repayment, causing even greater turmoil in the market (Rajan 2019).
Thus, going forth with this proposal would not only increase India’s dependence on the international market, but also its vulnerability to volatility within foreign countries. It is important for the government to devise a safety net in case of an economic crisis abroad.
Issuing debt bonds in dollar denominations has also been contested by Rathin Roy. Roy declared that after the end of world war, all countries that partook in selling their debt in a foreign currency faced severe setbacks (CNBC 2019). The government needs to analyse the failures of these economies and either craft a sale strategy that can circumvent these failures or abandon this idea altogether. Roy also questioned the need for such a move at a time when the country was not undergoing a crisis in its foreign exchange reserves. He asserted that since India was not undergoing depletion in its foreign reserves it could easily sell the bonds in denominations of the rupee. (CNBC 2019).
Another reason for its opposition emerges from the concern that it is likely to become an addiction. According to Rajan, while small issuances were unlikely to cause problems, the temptation to borrow might become challenging to satisfy over time (2019). Rajan’s argument was contended by Subrahmanyam(2019) who said there was no precedent for such an argument as it was India’s first time in issuing a foreign sovereign bond. However, I would like to contend that India needs to extra cautious precisely because it would be our first time in issuing a sovereign bond in international markets. There is no experience to learn from. For this purpose, the government could set a limit on the amount of debt that they will sell in the international market. It is essential to ensure that both present and future governments would stay well within the imposed limit.
Another reason behind the outcry against the proposed selling of bonds is that it is likely to become a hindrance in India’s objective to internationalise our currency. In the past, India has proposed its intention to make the rupee into a currency that will be used by other countries. (Rajan 2019). Thus, if India sells sovereign bonds, that too in dollar denominations then its increased vulnerability to fluctuations in the global market wouldn’t allow the rupee to be considered as a valuable alternative as its already existing parlous position within international economy would only compound further.
Ironically, the government’s decision to sell the bonds in denominations of the dollar has also come under fire from its umbrella organization, Rashtriya Swayamsevak Sangh(RSS). Its economic wing has declared the move as unpatriotic, believing that it would lead to foreign countries and their financial institutions to dictate India’s policies (Reuters 2019). While terming the government’s decision as “anti-patriotic” is far-fetched, the underlying fear from which such a claim emerges requires careful deliberation. For a formerly colonised country, the ability to make its own decisions in political and economic matters is a source of pride. The ongoing trade wars between countries like United States of America and China, as well as Japan and South Korea, stands as an example to the extent with which economics and politics have become intertwined in the international arena. Such a relationship is likely to get entangled further in the future. Institutions owned by foreign countries that hold India’s bonds could be used by their countries to influence India’s internal policy matters, or even its international stance on specific issues. Verily, the government must reconsider its decision to sell its bonds in dollar denominations.
If, however, it chooses to proceed with it, then adequate safeguards must be established to ensure that in the long run, India’s economic and political interests are duly protected. Care must be taken to develop adequate safeguards to protect the economy from any potential dangers that can arise on both the political and economic front. Since this money is often used to finance development projects, policies pertaining to those must be planned in a manner that they yield quick and sustainable results that can lead to a stable and smooth polity. For this, greater efficacy is required for policy implementation as well.
Additionally, it is crucial to plan ahead regarding the allocation of the amount secured by selling of the bonds to ensure that India doesn’t fall behind in its re-payment of both the interests as well as the principal amount. Minimal risk and maximum safeguards must be India’s strategy before proceeding with such a move. As the age-old saying goes, it is better to be safe than sorry.
References
Balachandran, M. (2019). India’s $10 billion sovereign bond ambition | Forbes India. Retrieved August 31, 2019, from Forbes India website: http://www.forbesindia.com/article/leaderboard/India’s-$10-billion-sovereign-bond-ambition/54381/1
CNBC. (2019). PMEAC member Rathin Roy says govt should rethink the sovereign bond plan. Retrieved August 31, 2019, from cnbctv18.com website: https://www.cnbctv18.com/finance/pmeac-member-rathin-roy-says-government-should-rethink-sovereign-bond-plan-4034401.htm
Economic Times. (2019, July 31). Who’s afraid of Sovereign Bonds? Retrieved August 31, 2019, from Economic Times Blog website: https://economictimes.indiatimes.com/blogs/et-commentary/whos-afraid-of-sovereign-bonds/
Kuepper, J. (2019, June 25). What You Should Know About Sovereign Bonds. Retrieved from https://www.thebalance.com/what-are-sovereign-bonds-1979114
Raghuram Rajan. (2019, July 13). Dollar debt dangers: Budget decision to issue foreign currency debt has no real benefit and enormous risks. Retrieved August 31, 2019, from Times of India Blog website: https://timesofindia.indiatimes.com/blogs/toi-edit-page/dollar-debt-dangers-budget-decision-to-issue-foreign-currency-debt-has-no-real-benefit-and-enormous-risks/
Reuters. (2019, July 17). Modi govt’s decision on foreign currency bonds “anti-patriotic”; could create long-term risks: RSS economic wing. Retrieved August 31, 2019, from Businesstoday.in website: https://www.businesstoday.in/current/economy-politics/confident-that-govt-will-withdraw-its-decision-on-foreign-currency-bonds-says-rss-economic-wing/story/365003.html?utm_source=recengine&utm_medium=WEB&referral_sourceid=364078&referral_cat=Economy-Politics
Roy, A. (2019, July 5). Budget 2019: In a first, India to issue sovereign bonds in global market. Retrieved August 31, 2019, from @bsindia website: https://www.business-standard.com/budget/article/budget-2019-in-a-first-india-to-issue-sovereign-bonds-in-global-market-119070501565_1.html
Subrahmanyam, M. G. (2019, July 19). Defending dollar debt: FM Sitharaman’s proposal to issue foreign currency-denominated sovereign paper has merit. Retrieved August 31, 2019, from Times of India Blog website: https://timesofindia.indiatimes.com/blogs/toi-edit-page/defending-dollar-debt-fm-sitharamans-proposal-to-issue-foreign-currency-denominated-sovereign-paper-has-merit/
The Hindu. (2019, July 22). All you wanted to know about… Foreign sovereign bonds. Retrieved August 31, 2019, from @businessline website: https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-foreign-sovereign-bonds/article28657885.ece