The ex-RBI chair questioned the government’s argument that raising part of its gross borrowing from overseas markets would ensure enough domestic credit for the private sector.
Former Reserve Bank of India governor Raghuram Rajan is the latest to join the chorus of opposition to the government’s recently-proposed overseas debt plan. In a recent column in The Times of India, Rajan raised doubts the government’s argument that raising part of its gross borrowing from overseas markets would ensure enough domestic credit for the private sector.
The government has said the portion that it borrows from within the domestic market is essentially ‘crowding out’ the private sector. However, the former RBI governor has said that the proposed plan has no real benefit even as it is loaded with risks.
In the budget announced earlier this month, Finance Minister Nirmala Sitharaman put forth the government’s plan to raise funds via the overseas issue of sovereign bonds. This proposal would be discussed further and finalised by the government and the RBI by September. The finance minister has cited India’s low external debt to GDP ratio (which is among the lowest in the world) as a conducive condition for the move.
The plan, however, comes at a time when a slowing Indian economy is left with limited fundraising options and shrinking tax revenues. India’s fairly large budget deficit (pegged at 3.3 percent for FY20, down from the interim budget projection of 3.4 percent) has also been flagged by three former central bank officials, who have said that this further makes the timing an unsuitable one.
Another point that Rajan emphasised was the impact of such transactions on the domestic government securities market. "Could the resulting volatility in India’s debt traded on foreign exchanges then transmit to our domestic G-Sec market? Would the foreign tail wag the domestic dog?" he said.
Seeing how India has always been conservative on the external commercial borrowing (ECB) front, the move would mean a departure from its traditional approach. "A small issuance will likely not be problematic," Raghuram Rajan added while cautioning that the problem would arise once the government opens such a door and is unable to resist the temptation to borrow more, thereby exposing itself to inestimable risks.
Former RBI Deputy Governor Rakesh Mohan was another such name to join the band. He told CNBC-TV18 that the proposed foreign bond sale was a 'dangerous move', even as the government is pressing on its positives.
Even noted economist and former head of the Planning Commission Montek Singh Ahluwalia advised the Modi government against its plan. He told news agency PTI that in the past too, governments had contemplated a similar plan but dropped it as the negatives far outweighed the positives.
“If all you want is to bring in more foreign money, why do you want to borrow in foreign currency? Let them bring in more money and buy the debt over here,” the economist added.
