VALUE FOR MONEY. Does India need a foreign bond issue?

The government announced in the Budget its decision to raise a part of its gross borrowing in foreign markets; a foreign currency denominated bond issue is planned in a few months. A successful bond issue always reflects well on the issuer and there will be some satisfaction from knowing that there are ready takers globally for Indian government paper.

But a question arises: what is the need for going in for this and is there a downside to it? India first went in for what can be called quasi sovereign borrowing in 1991 when it was in the throes of the most serious payments crisis in its history by getting the State Bank of India to issue the India Development Bonds totalling $1.6 billion. But today the situation could not be more different with foreign exchange reserves exceeding $400 billion.

If you do not need the hard currency but still go in for a bit of borrowing in it then the main reason (after all, a bigger hard currency raising can only result in having to bear a larger exchange rate risk) must be to test the water. It will discover how fine (low) a rate at which the country can borrow and implicitly the country risk that the global financial markets attach to it. The finer the rate the lower the perceived country risk.

But there is a catch. The interest rate that a bond issue bears is determined by both global supply and demand. Right now the global markets are flush with funds and so issue managers will be hard selling to potential borrowers.

Latin American experience

Take the case of Latin American countries. In the aftermath of the oil price hikes in the seventies when the global markets were awash with Petro dollars, they borrowed cheap and wide. But then the chickens came home to roost when the global financial crisis broke in the late eighties and it was followed by a string of Latin American defaults. So being able to borrow cheap is certainly indicative of investors’ low risk perception, but that is not the entire story.

One likely consequence of a successful international bond issue will be a quicker accretion to reserves which will inevitably make the rupee stronger when it is already in the process of appreciating against the US dollar. Is this desirable at this juncture?

India’s exports have again started picking up after several years of stagnation, so what is needed is a favourable exchange rate, that is a slightly depreciating rupee.

Also an appreciating rupee will make imports cheaper. This will be desirable if India seeks to follow the trade expansion path to growth. Under such a scenario cheaper imported inputs, along with efficient value addition at home, will enable the country to achieve a rapid growth in exports, thus adopting the East Asian path of export led growth. The measures taken to promote “make in India” are in line with this.

But after balancing out the pluses and minuses in the new tariff rates announced, the tariff barrier around India appears to have gone up marginally.

So will we be working at cross purposes if on one hand we make imports dearer by raising tariffs and on the other make them cheaper by allowing the rupee to appreciate?

In fact, if the country goes in for anything near to a significant and continued policy of sovereign foreign bond issues then there must be a firm regime in place to ensure that exports do well and adequate reserves are built up when the time comes to redeem the bonds issued.

After the payments crisis of the early nineties, India was able to rebuild its reserves on the back of rapidly rising exports and thus be in a comfortable position to not just redeem the bonds but repay the large loans taken from the multilateral financial institutions.

One of the conditionalities the global institutions invariably impose while giving a large loan is sharp devaluation. A bond issue of the sort being contemplated will naturally not involve such conditionalities but its overall impact will be indisputable. It will set in motion a process which will integrate the Indian economy more closely with the global scenario. Since there is currently some disenchantment with globalisation, the correct intellectual approach should be to wait and watch.

The government claims the bond issue decision has been taken after a long internal debate.

One of its pluses is it will enable the government to draw less on the domestic financial savings pool and allow corporates to raise resources at lower rates. But the government can just as easily place rupee bonds with the RBI and draw against them.

It seems politics eventually got the better of economics. What won was the desire to project a muscular India on the global stage, one which can make a successful bond issue at an extremely fine coupon rate, “comparable to top economies”, and take the credit for it domestically.

The writer is a senior journalist

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