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The great dollar gamble

The Union Budget’s proposal to issue sovereign bonds is ill-thought out, will make Indian economy susceptible to global headwinds

Written by M Veerappa Moily |
Updated: July 17, 2019 12:56:54 am
union budget, budget 2019, nirmala sitharaman finance minister, budget fiscal deficit, sovereign bonds, Sitharaman asserted that India is set to be a trillion economy by 2024. Does the budget spell out the trajectory to this goal? (File/Express Photo by Neeraj Priyadarshi)

Finance Minister Nirmala Sitharaman’s maiden budget attempts to kick-start growth. But what will happen if this is at the cost of fiscal discipline? The government’s decision to opt for sovereign bonds or external borrowing is intended to one, lower the cost of interest and two, bring about fiscal discipline.

The government expects to keep fiscal deficit at 3.3 per cent of the GDP. This is because of the Rs 90,000 crore of excess capital expected to be transferred from the RBI, along with the higher cesses on petrol and diesel.

There is a total disconnect between the FM’s budget speech and ground realities. Sitharaman asserted that India is set to be a $5 trillion economy by 2024. Does the budget spell out the trajectory to this goal? There is neither any mention in the budget of public investment nor any steps to stimulate private investment.

Since 2014, the so-called “ease of doing business” has hardly garnered any private investment. In fact, private investment has declined between 2014-2019. Government finances have been over stretched.  Despite interest rate cuts, there has not been any significant improvement in the investment rate. The budget sets a target of Rs 100 lakh crore investments in infrastructure through the PPP mode.

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To achieve this, savings must be augmented and the savings rate should be higher than the investment rate. Budget 2019 has no specific proposals to incentivise savings.

The Bimal Jalan Committee is yet to give its report on the question of the transfer of the RBI’s excess capital to the Centre. This can, at best, be a window dressing in the name of fiscal management.

The economy grew at 5.8 per cent in the last quarter of 2018-19. Yet, Budget 2019 assumes that the economy will grow by 12 per cent this year in nominal terms and 7-8 per cent in real terms. To achieve the government’s ambition of a $5trillion economy by 2024, means that the $2.8 trillion economy will have to double in fiver years — this means the present trend of 5.8 to 6 per cent growth will have to grow by 10 to 11 per cent.


Globally, there is a slump in trade, rising protectionism, sanctions against Iran and others and the US-China trade conflict. Will the policies and schemes announced in the budget withstand these pressures?  External borrowings will amount to a gamble and open up the economy to volatility in the event of oil prices going up and a fall in the rupee. Further, we will fall into the trap of dollarising the Indian economy while the attempt should be to strengthen the rupee.

Many experts and former Indian central bank officials have opined against the government’s plan to sell sovereign bonds overseas. Former RBI Governor C Rangarajan has said that “the plan to borrow in foreign currency, to supplement domestic borrowings is a bad idea.

External borrowing also means contending with exchange rate risks, i.e. the uncertainties associated with the value of dollar versus rupee.” An analysis by Motilal Oswal had found that “India had the second worst debt-GDP ratio among emerging markets. India’s debt-GDP ratio stands at 68.4 per cent, next only to Brazil. India’s total debt has risen by almost 50 per cent under the Modi government since 2014”.


The fundamentals of our economy have always been sound and external upheavals have had a subdued impact. India has shied away from raising sovereign debt in global money markets and has shielded itself from being impacted by global financial crises even during the collapse of Lehman Brothers in 2008.

The current gamble may be one which the Indian economy cannot afford. Such a proposal can only be mooted by bureaucrats who intend to wash their hands of their responsibility to mobilise resources. The absence of economists and professional bankers like Raghuram Rajan and Urjit Patel is strongly felt when such ideas are coined to control the fiscal deficit.

Ideas like raising sovereign debt were mooted in 1997 and 2003 and also by the Planning Commission during UPA 1 and UPA 2 but were shot down. To raise funds, one of the first things the then RBI Governor Raghuram Rajan did was to launch a scheme for foreign currency non-resident (FCNR) deposits, which helped to raise $33 billion.

The government’s assumption that external borrowing will keep interest rates low may not be accurate. Despite lowering of interest rates by RBI, overall interest rates haven’t come down much. At less than 5 per cent, India’s sovereign external debt to GDP ratio is among the lowest globally.

This country has built its own capability in the private sector be it in power or infrastructure. Even 30 per cent of the installed capacity in the power sector has not been utilised. Many of the roads and infrastructure projects have been successfully built under PPP models by private entrepreneurs. But the collapse of term loan lenders like IL&FS has crippled them.


We had institutions like IDBI and NABARD and other excellent banking institutions to lend term capital. The country now does not have a single lending institution to sustain the private or public sector. The banks have been lending to retailers and the term loans have not been disbursed for completion of projects. The external borrowings will only bring in more chaos. When we do not trust our own capital, how can we trust the capital from abroad? The entire concept will have to be appropriately calibrated.

We have institutions like IMF, World Bank and others who have funded the state governments, like in Karnataka. While this author was the Finance Minister of Karnataka in the 1980s, we had to pay for escalating costs without spending even a single paisa on irrigation and power projects.


We strongly feel that the present Finance Minister of India has not been apprised of the havocs of external borrowing. It will be more appropriate for the FM to bring out a white paper on the nuances of external borrowing in this country.

The writer is a Congress leader and former Union minister

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First published on: 17-07-2019 at 12:56:53 am
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