Towards A Debt Trap?

Further, any large-scale attempt to liquidate investment in equity would lead to capital losses which would discourage further disinvestment. The loans taken by PSUs in the 1980s were non-marketable, and hence could not be prematurely liquidated. Debentures are marketable in theory, but the market in India is so thin that they are virtually indistinguishable from non-marketable loans. This may not continue; Tisco and Larsen and Toubro are floating debentures at the moment, the financial institutions have floated bonds on a large scale in the past two years, and the Bombay Stock Exchange has begun trading in debt instruments. Hence, there are good chances that a market in debt will develop. If it does, a sell-off in it will lead to capital losses as surely as it does in the equity market, and will discourage significant disinvestment.

 

Finally, there is a belief that equity investment is cheaper; this is an illusion. The time pattern of returns on equity and on debt is different; if this is ignored, equity yields significantly more than debt across the world.

Hence, the roof is not going to fall on India's balance of payments because of liberalisation of investment in debt instruments. But all liberalisation raises the minimum required standards of macro-economic management; the new measure is no exception. In particular, the present style of management of interest rates and the exchange rate, if continued, would be a sure recipe for disaster.