Should the Indian government borrow abroad?

T. K. Arun makes a suggestion that Indian government should borrow abroad. He mentions a sizable sum of USD 20 billion.
The government should meet a part of its huge borrowing programme by issuing bonds abroad. Non-resident Indians would lap it up. So would a number of invitees to the forthcoming G20 summit: it shouldn’t take all that much of diplomacy to persuade them to park a tiny fraction of their multi-trillion dollar forex reserves in Indian bonds.
India can choose to be a little aggressive on interest rates, too. The rupee would appreciate from the present panicky levels, and soften the cost of external borrowings. Even $20 billion of such inflows would increase domestic credit flows, bring down yields and shore up the rupee. [More here]
I shall ignore his opening paragraph about whether we are too downbeat or too upbeat. He tones down and says that things are not wrong but not desperately wrong. Let us not quibble and leave the quibbling to him.
To the extent that India is interconnected with the world more than before via capital flows (incl. remittances which have multiplier effects), caution on the world economy does translate into caution for India. of course, it applies to many other developing countries too, including China.
But, his proposal for external commercial borrowing (ECB) by Government of India (GoI) is not a bad one. GoI can check out the likely market reaction by talking to potential lead managers. After all, Indonesia completed a USD 3 billion borrowing programme rather well just a month ago. The bonds are trading well above par.
As for his conclusions/forecasts in the last paragraph, he races into them too fast and without a proper framework. They too are best ignored.
Any thoughts on his suggestion?

One thought on “Should the Indian government borrow abroad?

  1. The government’s policy of forcing domestic financial intermediaries to eat up its debt has been catastrophic in terms of domestic investment. Despite a high savings rate, our domestic bond markets are in a mess and both public and private investment are low relative to Asian peers. This is behind low levels of social services, infrastructure, and private capital expenditures. Getting some of this money abroad–or better yet, curbing extravagant populist measures–would not crowd out private investment quite as much.

    However, now is definitely the wrong time to go ahead with this measure. With a deficit at 12% of GDP, India’s debt rating has been lowered to junk status. With pre-election give-aways, and post-election uncertainty, added to the general credit crunch, India is unlikely to find few buyers of debt worldwide–at least at interest rates prevailing domestically. Among those that do buy, the risk is that they will pull out and we have another 1991-like crisis.

    That India still faces this problem after almost two decades of reform and growth in the tax base reflects the total fiscal incompetence of the UPA regime. Even on rural infrastructure and development–the strongest part of policy–their record pales in comparison to the NDA, and the less said about the rest of their record the better.


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