Sale of government bonds in the overseas market would mark a big step towards opening up of Indias capital account. Analysts say the move would be both beneficial to the nation even as it is also fraught with macroeconomic risks.
The proposal (to sell sovereign bonds abroad) is in the form of a debate being raised within the finance ministry, a senior official told FE, asking not to be named. No decision has been taken on it as yet but we have said that such a bond issue can be considered. It has been put forth in the FRBM (Fiscal Responsibility and Budget Management) statement for the first time perhaps, the official said.
Since the proportion of external debt used to finance the countrys fiscal deficit has fallen over the years, the ministry feels overseas bond sale can be considered to bridge the deficit. External debt as a proportion to overall government debt has declined consistently from 10% in 2005-06 to 7.9% in 2010-11. The fiscal deficit has been estimated at 5.9% in 2011-12 and at 5.1% in 2012-13. The government is borrowing Rs 5.7 lakh crore in 2012-13 the highest level of borrowings so far to finance the deficit, 93.3% of which will be financed domestically.
Para 42 of the Fiscal Policy Strategy Statement, tabled along with the Budget papers by Mukherjee in Parliament on March 16, says the government can explore selling its bonds abroad. With a gradual decline in net inflow from multilateral institutions in the coming years, government would have the option of exploring other sources of external debt in the form of sovereign bond issuance, says the strategy statement.
This would help maintain a reasonable mix of domestic and external debt in its portfolio, it said. The finance ministry has been opening up the government securities (G-sec) market to foreign investors.
Foreign institutional investors (FIIs) are now allowed to buy up to $15 billion of G-sec papers and $45 billion of corporate bonds. Active participation by foreign investors is expected to bring in global trading strategies in the local G-sec market and impart liquidity in this segment. At the same time, it will expose the economy to heightened volatility in interest rates and exchange rates.
Union Budget 2012-13 announced several proposals that can be a seen as a strategic move towards greater capital account convertibility. The government has allowed foreigners to almost freely buy local stocks and corporate bonds. Besides domestic corporations, individuals can move money abroad, with great flexibility. A possible sale of G-sec papers overseas, when it happens, would nearly complete the process of opening the capital account.
The finance ministrys chief economic adviser Kaushik Basu has strongly favoured India further opening up its capital account. I believe that the time has come for greater capital account convertibility. We have to be careful in doing this because of its implications on the exchange rate. But the direction is clear," Basu said at a Ficci seminar on March 23.
Selling rupee-denominated sovereign bonds overseas could further open up a window for corporate India to sell debt papers to foreign investors. So far, large corporates such as Reliance Industries have raised money in overseas market largely by selling dollar bonds.
There are officials, however, in the government who are fiercely opposing such a move, as it is seen as exposing the country to greater uncertainties. You see what happened in the developed economies. How can we pursue it The risks are tremendous, said a secretary-level official, when asked whether the time had come for fuller capital account convertibility.