Amid an alarming projection of debt-to-GDP ratio rising up to 87.6 percent from 72.2 percent in the last fiscal, the government must use options such as COVID PERPETUAL BONDS for direct monetisation.
As India walks extra mile to increase expenditure to fight back the coronavirus pandemic, the government may leverage banks’ excess liquidity to offset its debt. Amid an alarming projection of debt-to-GDP ratio rising up to 87.6 percent from 72.2 percent in the last fiscal, the government must use options such as COVID PERPETUAL BONDS for direct monetisation, SBI Research said in its Ecowrap report. Now, the government can take advantage of issuing long-term papers at lower interest rates as rates will fall further, it added. The collapse of the economy is pushing up the debt-to-GDP ratio by at least 4 per cent, implying that growth rather than continued fiscal conservatism is the only mantra to get the economy back on track, the SBI report further said.
How bank holdings can be mobilised
Given the high liquidity surplus with India’s commercial banks, it is noted that the banks should liquidate a significant part of excess SLR holdings which are at 28.5 percent of NDTL (net demand and time liabilities) now, and bring it down to at least 24.5 percent. This is if RBI does only open market operations as strategically, the central bank is comfortable with a lower level of liquidity. The research report by SBI also emphasized that the direct monetisation is both a mathematical and a preferred policy option that could help the government with a cheaper borrowing, and cushion the short-term inflation risks.
With countries making extra efforts to enhance healthcare facilities and push economic activities around the globe, the rising debt is a common problem being faced by most nations in these challenging times. The increase in debt, coupled with a fall in nominal GDP may together shoot up India’s gross debt to nearly Rs 170 lakh crore in the current fiscal.
Nothing to fear for India; White Knight on standby
Meanwhile, India needs not fear about the rising debt, as the current level of foreign exchange reserves are sufficient to meet any external debt obligations; further, since most of the debt is domestically owned, the debt servicing of the internal debt is also not an issue. However, the report suggested that in the current situation, India’s nominal GDP growth is likely to contract significantly and thus the interest-growth differential will turn positive in FY21, raising serious questions on debt sustainability.