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How is Govt's overseas borrowing a major concern?

Created on 05 Oct 2019

Wraps up in 3 Min

Read by 2.1k people

Updated on 14 Jan 2023

Government's overseas borrowing analysis

The budget speech of the Finance Minister remained most talked about even after an entire quarter. From proposing new norms, the post-budget market debacle, and the 'debudgetization' in weekly press conferences caused the market to stir for long. However, another curiosity that engulfed the investors was the government's decision on going ahead with the external sovereign borrowing of $10 billion.

External borrowing is not new for India. India and its states have been borrowing from the World Bank, IMF, and ADB. Only this time, the government will release the Sovereign Bond assessing its reputation, and the debt taken will be in dollars and not rupees. Hence, the debt is a two-faced coin.

The decision has amassed much criticism from various quarters. Presumably, the CCEA Secretary was transferred to the Power Department for his disagreements with this proposal. The government does face some severe problems.

The Assessment

The government will have to become a debtor, just like a corporate company does. It will have to put its figures out regarding revenue, expenditure and growth. It will be assessed on various parameters.

What does the creditor see first when giving the debt? The trustworthiness of the debtor. More than his capacity to repay it, his intentions to repay, matter more. That cannot be done by fudging the data.

We have seen in the recent past the government's desperation to hide or manipulate the numbers and keep changing the parameters, especially for GDP. The MCA-21 companies, whose numbers are used to measure the GDP, saw 36% of companies inexistent in the next quarter. The government did not acknowledge the unemployment numbers until the end of elections.

If India keeps going the same way, how would be build trust before the global debt market?

The global market is unforgiving. Turkey, Argentina, Thailand, Greece, and Brazil are the examples before us. They failed because they lied to the world. The day they were unveiled, the investors took away their money. Not just that damaged the reputation; it also closed the doors for further debts.

The Million-Dollar Question

One new thing about the debt is that the debt is in dollars. Until now, Indian debt was in rupees. We loaned in rupees; we repaid in rupees. However, now we will loan in dollars and repay in dollars. This makes us prone against the exchange risk. Any depreciation of rupee against the dollar would only cost us more. This concern becomes grave when we see the rupee sliding way below 70 with that ease. Say India borrows $1 when 1$ = Rs. 60. The day it slides to Rs.70, we will have to pay them Rs.10 more. Until now, this exchange risk was borne by the other party.

Aversion

Some economists are of the view that India when releases its Sovereign bond, it would be under pressure from those institutions. This was something that was avoided since 1991. Even today, India’s sovereign debt to GDP ratio stands less than 4%.

They have the view that this step is avoidable. With improved FDI and FPI, and increased household savings, the government would have enough to borrow from the domestic market itself.

The Closing

Yes, it pays a price to debt from the global market in their currency. It also brings the risk of default because we do not produce dollars. However, this is a debate incomplete without the other side; who believe it to be a virtuous circle for an economy like India. No matter whose side one stands, it is inarguably as a two-faced coin. At the end of the road, we would be left with Batman- the dark knight or Bruce Wayne- the failed brat. The future has questions to answer.

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Vivek Tiwari

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Vivek Tiwari is a Software Engineer and a Data Scientist who hopelessly fell for Economics. His plans to move to Management might now save mankind from his IITJEE selection story.

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