Plan to tap global mkts for govt borrowing added at last minute in Budget

One of the most significant decisions of Budget FY20, the plan to tap markets abroad for government borrowing, surfaced only in the last week of Budget preparations. Once operational, it would make the finance ministry the actual debt manager for the country at the expense of the Reserve Bank of India (RBI), a turf that has often been contested between the two. 

An informed source in the government said, “The proposal came formally from the RBI and not from the finance ministry.” But he did not elaborate on the reasons as to why the central bank had softened its reservations on this matter.

In her maiden Budget speech, Finance Minister Nirmala Sitharaman announced: “The government would start raising a part of its gross borrowing programme in external markets in external currencies. This will also have a beneficial impact on demand situation for the government securities in domestic market.” 

However, there is concern in the RBI over the government’s move to float a sovereign bond. Former RBI governor C Rangarajan, and former Deputy governor and current member of the Bimal Jalan Committee on RBI’s economic capital, Rakesh Mohan, also feel that the float of a sovereign bond is unnecessary.

The plan was finally stitched together by the Economic Division of the Finance Ministry for inclusion in the minister’s speech. The details will be worked out later in consultation with Mint Road. Finance Secretary Subash Chandra Garg said in the post-Budget press conference that the timing and quantum of the borrowing will be decided, going ahead. 

This is the reason why no figures for this segment of external borrowing is captured in any of the Budget documents like the Receipts Budget or even the Budget at a Glance, which often incorporates last-minute changes in numbers. 

Consequently, the statement of Fiscal Policy, which the government tables in Parliament under the Fiscal Responsibility and Budget Management Act along with the Budget documents, is also silent on the move.  While there are concerns about whether India, which has a low investment grade from international credit rating agencies, should take the plunge, the plan has been in the works for some years. “The timing for this year was the surprise,” said the source.

Former finance minister P Chidambaram’s Budget FY14 had mentioned the plan to tap external markets in the Fiscal Strategy Statement. “With gradual decline in net inflow from Multilateral Institutions in the coming years, government would have the option of exploring other sources of external debt, for example, in the form of sovereign bond issuance to maintain a reasonable mix of domestic and external debt in its portfolio,” the statement had said. As reported by Business Standard earlier, when Indian government emissaries had met foreign investors before the Budget, they had been advised to ensure that the Budget priorities do not adversely impact the value of the Indian rupee, which meant keeping a leash on the fiscal deficit.

The investors said that this was necessary for India to push for more foreign investors to pick up stakes in the bankruptcy-hit companies. Finance minister Sitharaman has kept to her part of the bargain by ensuring that the fiscal deficit will not only be contained, but improved to 3.3 per cent of the GDP in FY20 as opposed to the 3.4 per cent projected in the interim Budget. 

RBI mandarins are concerned that once the finance ministry begins to manage a sovereign bond, the current middle office for debt management run by the latter will supersede the role of the RBI as internal debt manager too. The argument is that there cannot be two debt managers for the government. 

The debate has been going on since 2008 when the Jahangir Aziz (then principal economic adviser to the Department of Economic Affairs) Committee on ‘establishing a national treasury management agency’ had argued that being the banking regulator, the RBI should not force them to buy bonds managed by the central bank. It was a conflict of interest, the committee noted in its pitch for an eventual shift to the raising of external debt. The RBI had contested the claim at the time. According to Ananth Narayanan, associate professor at SP Jain Institute of Management Studies, sovereign bonds create a credit default swap curve in the overseas markets, which can be attacked by speculators. This could impact yields in domestic markets too. 

RBI, according to experts, is in a better position to tamp down on such attacks with its forex reserves and ability to manage local banks. Once the debt management responsibilities disappear, the central bank’s other roles too could get circumscribed. For instance, bond yields play an important part in RBI’s policy making to keep the markets liquid. The RBI uses liquidity as a policy tool. It not only offers a liquidity adjustment facility to banks, the government bond market yields are also controlled by open market operations under which the central bank infuses or sucks out liquidity from the system. 

With inputs from Anup Roy