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'Several problems about India borrowing overseas'

July 17, 2019 09:44 IST

'The most important thing is that the psychological signal it is giving to the markets and international markets,' says former finance secretary Arvind Mayaram.

IMAGE: India's ministry of finance in New Delhi. Photograph: ANI Photo

One of the most significant policy decisions announced by Finance Minister Nirmala Sitharaman in her Budget 2019 speech was that the Government of India was planning to raise a portion of its gross borrowings from overseas markets.

Accordingly, the sovereign bonds to be issued will be decided by the government and the Reserve Bank of India by September. The plan is to borrow around $10 billion from overseas.

If it goes through, it will be the first time that the GoI will issue bonds in overseas markets.

The government no doubt is emboldened to go in for the move by what Sitharaman said was India having the lowest ratio in the world of sovereign external debt to GDP -- less than 5%.

Many economists believe it is not a good move. Among the sceptics is former RBI governor Dr Raghuram Rajan.

Even as the jury is out over the move, former finance secretary Arvind Mayaram, below, tells's Syed Firdaus Ashraf, "The signal that goes is there is some kind of brewing crisis, therefore the government is resorting to such a measure."


This will be the first time that the Government of India will borrow from overseas. How do you see this move?

Obviously, the government will have its own reasons.

The issue is that sovereign bonds are generally not resorted to by any government unless... we have to make a caveat here. One is if your currency is convertible, then whether you borrow in the domestic market or foreign market, it is the same because the currency is convertible.

For example, if you are an Euro zone country and you went and borrowed, say, in dollars, then it will not make any difference because dollars and euros are freely traded. Therefore, it has no impact on either the domestic foreign exchange reserves or requirement to be able to finance your current account deficit. Those issues do not exist in those countries.

There are some examples like New Zealand going in for a 1% coupon rate for 100 years, but the fact is these all are convertible currencies and therefore it really does not impact their fiscal (deficit) if they borrow domestically or go overseas to borrow money.

What happens to a country like India when we borrow from abroad?

There are several problems about sovereign borrowing overseas. The most important thing is that the psychological signal it is giving to the markets and international markets.

The signal it gives to the international market is that domestically the central government is not being able to borrow the money so it is resorting to going out and getting the money.

Or it has run into some sort of difficulty which has resulted in sovereign borrowing from abroad which could be, for instance, a very severe current account crisis or exports not picking up at all.

Your import bills are rising so there is a fear on foreign exchange reserves.

There are paper tantrums issues as suddenly FIIs (foreign institutional investors) will start withdrawing from the country.

So the signal that goes is there is some kind of brewing crisis, therefore the government is resorting to such a measure.

But the government says its external debt is only 5% of GDP which is very low and so there is no harm in borrowing from outside.

We must remember that the external debt of the country -- which means all kinds of external liabilities of the country which includes the FDI which has been invested, etc -- is close to 22% to 23% of GDP.

And this means the country's liabilities in foreign exchange is close to 22% of GDP which is fairly high. That is the reason why we are constrained to keep very high foreign exchange reserves, to be able to service that demand.

So it is not simply what the government is borrowing, which I agree at 5% is not very high. If they marginally borrow from abroad -- say, half percent or 1% of GDP -- in addition to what they already hold -- 5% -- it will not be catastrophic purely in terms of numbers.

But we have to see it in a larger perspective, that the charge on the foreign exchange reserve is more than the 5% which the government stated in terms of external liability.

Therefore, when you go and start borrowing from abroad, this becomes an issue.

Another point is that it becomes an open-ended contingent liability on the risk.

The reason is, if you have dated bonds, say, for 10 years or 15 years, you don't know how the rupee will depreciate or behave over a period of next 10 to 15 years. So you don't know what the ultimate liability of the government would be even in terms of rupees.

If you borrow say $5 billion from abroad through sovereign bonds, then in 10 years time for repaying that $5 billion, the amount in rupees we won't know what it would be.

So it will have an impact on your fiscal deficit issue, as to how you will balance your fiscal deficit and repayment liability to come.

Some people say you can hedge it. One is, of course, you cannot have a long term hedge on the rupee.

Now even if you say for a minute that you have a long term hedge on the rupee, it has other disastrous consequences.

When a sovereign begins to hedge against its own currency, then it gives the signal that the government actually expects the rupee to go that way (down).

So you have determined the depreciation part of the rupee right in the beginning for how it will depreciate in the next 10 years, by hedging against that depreciation which then has a disastrous impact because the market then factors that in terms of dealing with the rupee and the rupee comes under pressure.

So sovereigns generally would never hedge against their own currency which they have issued.

Will you not say that the government is only testing the waters now? It is borrowing $10 billion which is only 10% of its gross market borrowing. One can always say it is not borrowing too heavily from overseas.

That's what I am saying. Testing waters means how it behaves and how can we go in for larger borrowing subsequently. That is what it means, isn't it?

When you put your foot in the swimming pool, you want to see how cold the water is and whether you should get into the water or not.

Testing waters here means purely we will go in for $10 billion borrowing and see if we get a good rate of interest, which obviously they will as it is a sovereign guaranteed bond.

That could be the dollar rate of interest of 2.5% which is not cheap if you look into the hedging cost.

The Government of India will not hedge, but even hedging, if we take it as a charge on earnings of foreign exchange reserves, it will be close to 5% to 6% per annum. So you are actually borrowing 7.5% to 8% in rupee terms.

It is not going to be cheap in that sense.

The fact also remains once you borrow $10 billion (from abroad), what stops you from borrowing $20 billion and then $30 billion?

And especially in a situation where repayment is not likely to be done by this generation of the government.

I am not talking of this party or that party as 15 years later those who are committing this liability to the country shall not be the people to be called upon to repay it.

The future generation is going to be committed to repay what we are doing today.