In the Union Budget presented on July 5, 2019, the government has come up with ‘overseas sovereign borrowing plan’ to meet the funding requirements of an ambitious investment program that involves a spend of Rs 100,00,000 crore [US$ 1.4 trillion] over the next 5 years to make India US$ 5 trillion economy by the year 2024-25. During the current year, it is aiming to raise US$ 10 billion from this source. For now, its intent is to go for US$ 3 – 4 billion the contours for which are expected to be finalized by September, 2019.
Currently, there is surplus liquidity and benign interest rate environment in the international market [courtesy, the Federal Reserve of the USA keeping interest rate steady with indication of future cut on the one hand and expansionary monetary policies followed by central banks of European Union [EU] and Japan on the other]. So, India has a good opportunity at hand.
From the demand perspective, the appetite for funds is huge. Even as the expenditure commitments of the union government have been kept high [in view of the heightened requirements for growth and ever expanding welfare schemes], the tax collections – both direct and indirect – are unlikely to be on the desired trajectory. In fact, given the disappointing results for 2018-19, the estimates/target for the current year have been scaled down from those set in the interim budget.
The revenue from non-tax sources such as proceeds of disinvestment of government’s shareholding in public sector undertakings [PSUs], sale of telecomm spectrum and dividend from the Reserve Bank of India [RBI] may fall short of the targets. For instance, the disinvestment proceeds of Rs 105,000 crore include Rs 35,000 crore from ‘strategic’ sale including from sale of Air India which is suspect. In regard to dividend from RBI, the centre was expecting the transfer of surplus from the former at one go but, the Dr Bimal Jalan committee is expected to recommend staggered transfer over 3-4 years.
The government is also deferring a major chunk of its liabilities especially on major subsidies such as food, fertilizers and petroleum to future years but there is a point beyond which it may not be sustainable. For instance, its dues to the Food Corporation of India [FCI] on account of food subsidy have already crossed Rs 200,000 crore forcing the latter to even dip into National Small Savings Fund [NSSF] which should normally not be touched for funding current expenditure.
The mandarins are also not particularly keen to increase domestic borrowings due the fear of reducing availability of funds for the private sector and increase in interest rates which could affect investment demand as well as private consumption [a slice of this is financed by retail loan which will also get impacted due to the crowding out effect] and growth. The sovereign borrowings from abroad will also help in easing the pressure.
It is a wonderful convergence of sorts. If, the circumstances are compelling India to go for borrowings abroad, there are opportunities galore too. The funds available on the international markets are very much in sync with our needs viz. over long tenure 25-30 years [those are the kind of requirements for investment in infrastructure such as roads, highways/expressways, ports, waterways etc].
But, as the adage goes, there are no free lunches. There is a heavy price to be paid for almost everything that looks so fascinating and may appear to be available on a platter on first sight.
This will require tremendous discipline in terms of the fiscal consolidation road-map and maintaining current account balance. In fact, the foreign lenders will insist on this condition to be incorporated in loan agreement as an essential pre-requisite. The covenants will include a provision for increasing interest rate in case of deviation from agreed path. If, this is not done then, and there is slippage in these two macro-economic parameters then, not only higher interest rate will be triggered but there will a collateral damage.
The Indian currency could come under pressure vis-à-vis other major currency dollar, yen, euro etc in which sovereign loans are denominated. The resulting depreciation of the Rupee will cause a surge in the loan repayment liabilities on government books.
Further, if these developments prompt international rating agencies to downgrade India’s sovereign bonds then, availability of fresh loans will be less besides whatever comes will be at higher interest rate to accommodate the higher risk. This scenario is pregnant with the possibility of India slipping into a vicious circle of unsustainable increase in external debt and debt servicing.
The finance minister opines that India’s sovereign external debt at less than 5% of the GDP is amongst the lowest globally. Therefore, a lot of head room is available. This line of argument is specious. Today’s situation [thus far, India has had no policy on sovereign borrowings abroad] can’t be compared with the scenario that will unfold when it actually takes a plunge. Once, things get going then, there is no going back esp. when demand for funds is escalating and supply is plenty [unlike domestic borrowings].
It can assume catastrophic dimensions if the government at the centre is profligate prone to spending far more than what it earns even as most of the money meant for welfare schemes gets leaked and productive expenditure is at bare minimum [e.g. under UPA – II fiscal deficit was 100% more than what it is today]. Then, any risk of default in India’s debt servicing obligations could plunge the economy into a major crisis.
India needs to tread cautiously. The government should avoid slipping in to a mindset whereby it starts believing that any amount of its savings-investment gap can be met by borrowing abroad. For now, it may limit the sovereign borrowings to US$ 3-4 billion and focus more on making its balance sheet more robust and improving the quality of fiscal discipline by pruning off-budget liabilities. It should also work on developing and deepening domestic bond market especially for long-term funds by winning the confidence of domestic pension funds, provident funds etc.
After achieving a good measure of success on these fronts, then only it should think of taking a plunge in to global waters via ‘external sovereign borrowings’ on a significant scale.