Business Today – August 25, 2019

at the SJM’s RK Puram headquarters. Subsequently, the PMO convened

a meeting with a group of economists. The government has now asked

the Reserve Bank of India (RBI) – India’s sovereign’s debt manager – to

review the proposal. The RBI’s 21-member board will meet on August

16 to find alternatives to the risky proposition. There is talk that the gov-

ernment may go for such borrowings in small tranches.

But whichever way the wind blows, there is every chance that the

government’s fiscal woes will worsen in the coming quarters considering

the slowing economy (GDP growth fell from 7.2 per cent in 2017/18 to

6.8 per cent in 2018/19), which is already leading to a revenue short-

fall (2018/19 GST collections were short by `1 lakh crore-plus), tanking

stock markets (which will hit disinvestment plans), its commitment to

massive welfare programmes and, most of all, its lack of initiative to sell

or shut loss-making PSUs in which it keeps pumping in huge amounts

year after year. The government has few options left to fund itself.

The Alternative Medicine

The government needs more funds to supplement the shrinking domes-

tic savings. Gross domestic savings fell from 33.8 per cent of GDP in

March 2012 to 30.5 per cent in March 2018. In the long term, a country

can raise money to stabilise its fiscal situation in many ways – expendi-

ture reforms, lowering inflation/interest rates, deepening bond markets

and boosting consumption. But in the short run, India has three options

• issue more rupee bonds instead of foreign currency bonds; use RBI
  surplus to capitalise public sector banks; and lower the capital adequacy
  ratio (CAR) of banks.
  Former Deputy Chairman of the erstwhile Planning Commission,
  Montek Singh Ahluwalia, says if the government wants to bring in more
  money, the best option is sell Indian rupee bonds. RBI rules cap foreign
  portfolio investor investment in government securities. The effect of is-
  suing more rupee bonds will be the same as what will happen if foreign
  currency bonds are issued – more foreign money inflows, pressure on

August 25I 2019 I BUSINESS TODAYI 43

RBI OPENS ECB
WINDOW FURTHER

T

o ease liquidity in the domestic
market, the Reserve Bank of India
has allowed companies to raise
external commercial borrowings (ECBs)
to pay bank dues categorised as NPAs.
The RBI has said that NPAs, or loans
that are expected to become NPAs,
can also be sold by banks to recover
domestic rupee loans. However, there is
a restriction on the rate at which these
firms can provide loans. This has been
kept at LIBOR 400-450 basis points. It
roughly comes to 6-6.5 per cent.
The RBI has also relaxed norms on
use of funds via ECBs. It has allowed the
use of these funds for working capital
requirements and general corporate
purposes too. "Borrowing for on-lending
by NBFCs for the above maturity and
end-uses is also permitted," it added.

THE RATIONALE

FOR DOLLAR

BONDS

AND THE

DANGERS

OF DOING SO

The move will

decongest the local

debt market for

indigenous players

It will reduce the

government’s

debt servicing

cost and diversify

sources of debt

May increase

demand for

government

securities in the

domestic market

Repayment of dollar

debt when your

currency usually

depreciates against

other major currencies

can trigger a crisis

The will expose

the government

to exchange rate

volatility

The rupee will

have to be made

fully convertible

and so may start

depreciating at a

faster pace

such as the Swadeshi Jagran Manch (SJM).

“There are reasons that the successive gov-

ernment didn’t opt for these options earlier,

despite the temptations. The debt in foreign

currency is like a drug. You like it at first, but

when it becomes a habit, it destroys you,”

says Roy. He teamed up with SJM National

Co-convener Ashwani Mahajan and met the

RSS number two, Suresh ‘Bhayiya ji’ Joshi,

“The government can use
this money (RBI surplus) to
capitalise banks and
improve liquidity”

ASHWANI MAHAJAN
National Co-Convener
Swadeshi Jagran Manch

POLICY>GOVERNMENT FINANCES