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Journalism of Courage
There were market expectations of fiscal stimulus in this budget given the economic slowdown. But the government stuck to fiscal consolidation. What was the thinking behind the budget, does the growth take a backseat?
No. Growth doesn’t take a backseat at all. It’s a growth oriented budget. In fact, the basic theme, the main goal of the budget is to set the target for the nation for a $5 trillion economy, it’s all growth. It cannot happen unless we have a high growth. Therefore, when you are setting the target in the beginning, you cannot be sort of not taking care of the growth aspect.
So the entire package that you see whether it is capital market related, enabling the private enterprises to raise more money from capital markets, whether it’s the FDI proposals to make more money flow into Indian economy, there is a large pool of savings abroad which can come in, or government asset monetisation programme of raising investible resources to invest, or raising more money in the PPP mode across different sectors, or dealing with the reforms in critical sectors like power and others — everything is about growth.
Stimulus is a palliative, short term measures, it’s not a long term strategy. And what has been done in Budget is long term.
There is a perception that the budget has tried to promote foreign equity capital into India but hasn’t done much to galvanise domestic industry.
It’s the corporates which need to make the investments, and I just described all the measures that have been taken to boost domestic investment. Whether it’s PPP, or monetisation of the domestic assets — it’s all helping the domestic investors. Foreign investors bring two good things: first they bring investments, second they bring in lot of competition, which make the Indian economy more competitive which should be fine.
What will be the mechanism and the quantum of loans that the government plans to raise in international markets?
Mechanism is standard, many sovereigns raise funds abroad by listing bonds or sometimes doing private placements. So there are standard methods, there is a process which needs to worked upon, that we will now take up. And after sometime, when things are in place, we need complex contractual arrangements.
We need to make arrangements for flow of money, payment of interest, tax issue — all of that will be sorted out in the next couple weeks or so and then we will be in position to say when the issue will be launched.
Does the government bear the currency risk on these bonds?
So it’s the interplay. When we allow foreigners to invest in rupee securities we pay them higher rate of interest, as compared to what the rate of interest they earn (outside). The differential in rate of interest is in a way towards the foreign currency risk. So in this case, you are taking a call on the foreign exchange risk for future, but our experience suggests very clearly that the differential that is there between the rupee interest rate and the foreign currency interest rate, is actually higher than the depreciation in the domestic currency. So hopefully the same trend will continue. And I think we will make provisions for the differential also so that we don’t have asset liability mismatches and the budget takes into account the real expected cost of money.
Is there any ballpark figure, let’s say a percentage of the total debt, that the government plans to raise overseas?
We will be prudential with kind of foreign denominated bonds that will we issue. Not done that exercise yet. Depending upon a very detailed exercise, I think this limit will be issued.
The Budget has provided Rs 70,000 crore of equity infusion in public sector banks through issuance of recapitalisation bonds. This will take the total outstanding recap bond issuance to Rs 2.56 lakh crore by the year-end. When this instrument was first announced, it was indicated that Rs 1.35 lakh crore of recap bonds will be a one time issuance to help state-owned banks. But this route of fund raising is now becoming routine.
We expect this to be the last instalment. Much of the recapitalisation work is done, is complete. There are a few banks which are still under the PCA (Prompt Corrective Action framework of the RBI), they need to be brought out of it and some growth capital is needed. I believe that this is the last instalment.
While the interest costs for the government has come down as reflected in lower bond yields, but retail and commercial borrowers continue to pay high interest rates as banks have not passed on the lower rates.
There are two additional factors which influence this: one, what is the cost of deposits of the banks and whether it has come down, and second is the risk premium which they attach to the borrower. So it has to happen that deposit rates have also may be not come down and the risk perception on the borrowers has actually gone up slightly and we have seen this in the NBFC space.
It’s possibly to my mind the reason why the spread has not come down. Overall the rates for them (retail, commercial borrowers) have also come down and spread has more or less been very stable and started showing some signs of declining after the initial months of the IL&FS crisis. Once these issues are addressed and the risk perception of the borrowers also (improves), then possibly we might actually see transmission.
Are you not being over optimistic in expecting Rs 90,000 crore of dividend or surplus transfer from the RBI?
This is based on what the RBI’s profits have been in the year which is gone. At the interim stage certain kind of estimate was made…and I don’t think it is optimistic.
