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Unconfirmed reports now suggest that the issue of sovereign bonds is not certain. Unfortunately, ever since the Budget announced the launch of sovereign bonds, there has been a plethora of debates espousing no real benefit and enormous risks. The moot point of whether India needs a sovereign bond should ideally start by accepting the fact that it has historically been a capital-starved country.
So, how do we raise such capital in such fragile global growth conditions Should we continue to allow ourselves to stay in a low-equilibrium trap Its a chicken-and-egg situation should we import capital with more vigour, but simultaneously not deviate from the core fiscal discipline Or should we wait for growth to self-generate the requisite capital requirement
But, first, let's consider the enormous risks some commentators are warning us of. First, while it is true that 3.8% of GDP of sovereign debt reflects the conscious policy decision of successive past governments, it is equally perplexing why India could not forcefully take advantage of such afavourable disposition. Notwithstanding the discussion on India's fisc, its journey on the fiscal front towards 3% is laudable. We may debate upon the quality and quasi borrowings, but that doesn't explode the stock of debt.
The Fiscal Responsibility and Budget Management Act possibly missed out including offshore borrowing as a separate chapter. This can be done at a future date. Additionally, a comparison with South American and Asian countries, as some commentators are making, is unjust. India's relevant macro numbers are 3-13 times lower than in these countries on an average.
Second, the critics argue that dollar borrowings are cheaper than rupee borrowings. This is a bogus argument given the exchange rate factor. The direct benefit of a lower cost of borrowing may not be significant because of swap cost. However, the indirect benefit is significant, since with the bond yields softening, it will help banks to increase their bottomline through treasury profits. This will have a positive impact on the provisioning ratio of the banks to navigate through a credit cycle that has already elapsed eight years now.