Raising The Cap

In fairness, the decision to raise the cap seems to be driven by a more limited motive in that there has been some spillover from clearances given last year. That apart, the ceiling of $7 billion is clearly unrealistic if there is a demand through FIIs operating dedicated debt funds. For example, without the anticipated FII demand, ECB proposals amounting to $4 billion have already been cleared. Another $4 billion of applications have been rejected. But these are likely to be resubmitted and at least some of them are bound to be cleared. If 50 per cent of the resubmitted ones are cleared, ECBs will reach $6 billion. That leaves little room for borrowings through FII investments in debt instruments. Such investments in debt instruments effectively cause a limited transformation of domestic debt into external debt. Since the finance ministry is feeling more comfortable on external debt, more room is going to be available for such transformations. This would make sense only if the domestic economy the fiscal deficit, interest rates, inflation and the taxation system has been set in order. On reducing domestic debt, the government has done precious little. The danger is that if FII investments are allowed for government debt which would follow logically from the steps already taken the government will convert the problem of internal debt into one of external debt.