Long term global retirement and pension funds will be interested in subscribing to sovereign bonds issued by the government in foreign currency in overseas markets, NITI Aayog Vice Chairman Rajiv Kumar said. The government is working on this proposal fully aware of the risks associated with such a move and how to manage these.
“FDI, FPI investment in equity is always better than the debt. But if there is a space provided by low external debt to GDP ratio and the cost of capital is so low abroad and the domestic investment has been declining — so where is the harm (in raising funds abroad),” Kumar said in a recent interview with The Indian Express.
“Fully aware of the risks, fully aware that there could be exchange rate volatility … the government is taking a conscious decision that given our current situation, in the light of a very weak investment scenario, and low cost capital being available abroad, where is the harm in raising these bonds,” he said.
Many economists, including former Reserve Bank of India Governor Raghuram Rajan, have highlighted the risks associated with issuance of such bonds. Rajan has argued that the Budget decision to issue foreign currency debt has no real benefit for India and poses enormous risks.
For nearly three decades, successive governments in India have baulked when it came to raising funds abroad through bond offerings by the sovereign even during periods of crisis. However, in the Union Budget 2019-20, the government announced raising a portion of its borrowings in the overseas markets.
The Centre plans to raise around $10 billion from global markets in the second half of FY20. When foreign portfolio investors (FPIs) buy government bonds in Indian debt markets, they bear the risk of any untoward movement in the Indian rupee.
However, when the government raises funds in foreign currency, it has to the bear the risk of currency movements.
Kumar said the government has taken the decision being cognisant of all the associated risks. Finance Ministry officials have argued that the government will be prudent in raising funds abroad and provision will be made in accounts to account for currency volatility.
“There can be major advantages in raising long term funds because many interested players in these will be long term pension funds, retirement funds. So government can, say, launch 20-year papers and that helps in building the yield curve.
“There are so many advantages at this point of time, this proposal was discussed for a long time in the government. But at this time, given the current situation, this decision has been taken after being cognisant of all the risks,” Kumar said.
This proposal, along with the government’s asset monetisation plan and the move to give up majority equity shareholding in state-owned companies, are aimed at freeing up resources for private investments, the NITI Aayog Vice Chairman said.
“Asset monetisation requires lot of preparation, doing it in a right manner. The government is working on it, the assets are being identified, the modalities are being worked out. Monetisation doesn’t mean outright sale.
“It could be like a TOT (toll-operate-transfer) for the highways, similarly you have given out the airports now. It could be handover of 100 railways stations and ask the private sector beautify them, modernise them, make money on them and also share some of that with the government,” he added.
If private sector companies can monetise their assets such as telecom towers and lease them out, the government can also do the same and this can raise a large amount of resources for the infrastructure, Kumar said.
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