Context: The priority for India is to ensure that it overcomes the COVID-19 pandemic and kick-start GDP growth,rather than fixing the weaknesses in the macroeconomy: a high fiscal deficit of 7.49% and government indebtedness that was 69% of GDP in 2019.
What has been done so far?
- When COVID-19 cases began to increase, the Government of India (GoI) swung into action by announcing a 21-day national lockdown and a ₹1.7-lakh crore (approximately $22.59 billion) rescue package.
How much funds does the government need?
- The fund available in the state disaster relief fund is ₹60,000 crore, comprising ₹30,000 crore of outstanding balance and the Central government’s allocation of a similar amount for FY2021.
- Hence, the GoI needs to raise an additional ₹1.1-lakh crore, i.e., 65% of the rescue package outlay.
What should be the financing strategy?
The GoI may finance the COVID-19 rescue package by issuing GDP-linked bonds, tapping PSEs’ excess liquidity and monetising non-core assets. Further, it is in India’s self-interest to allow a robust and independent central bank to defend the financial sector’s stability.
- The GoI may issue listed, Indian rupee denominated, 25-year GDP-linked bonds that are callable from, say, the fifth year.
- The coupon (interest) on a GDP-linked bond is correlated to the GDP growth rate and is subject to a cap.
- The issuer, the GoI, is liable to pay a lower coupon during years of slower growth and vice-versa.
- The callable feature from the fifth year till maturity allows the GoI to effect partial repayments during high growth years and when it earns non-recurring revenues such as proceeds from disinvestment of public sector enterprises (PSEs). The listing of bonds provides investors an exit option.
- Publishing reliable and timely GDP data is a prerequisite for the successful issue of GDP-linked bonds, which the GoI may use to part-finance the COVID-19 rescue package and to diversify its borrowing sources.
- The non-core assets must be monetised to repay statutory dues and upstream dividends to GoI. Loans and excess cash and bank deposits may be monetised within three months.
- The ₹30,168 crore loans that CPSEs have extended to employees, vendors and associates may be securitised or refinanced, with CPSEs guaranteeing loans extended to weak counterparts.
- Maintain liquidity: However, the outstanding cash and bank deposits of the 15 CPSEs (₹64,253 crore) is in excess of their operating requirements. CPSEs must use the excess cash to repay statutory dues and upstream dividends to the GoI.
- Banks must extend to CPSEs committed lines of credit that the latter may draw down during exigencies.
- Streamlining investments and selling real estate assets: It is imperative for the GoI to form a PSE and public sector bank holding company (‘Holdco’) to enable PSEs to monetise their non-core assets at remunerative prices, maximise their enterprise value and focus on their core businesses.
- The 15 CPSEs have accumulated ₹93,562 crore financial investments comprising listed and unlisted debt, equity and mutual fund units.
- The CPSEs ought to transfer these investments to Holdco, which can manage the portfolio and transfer the returns to the original investors.
- The real estate holdings of PSEs: The GoI must mandate all PSEs and government departments to transfer their non-core properties to Holdco, which can opportunistically sell these properties and transfer the proceeds to the owners.
- The Reserve Bank of India (RBI) has allocated ₹1 lakh crore to carry out long-term repo operations in tranches and has reduced the repo rates by 75 basis points to 4.4% to help banks augment their liquidity in the wake of the pandemic.
- Implementing the Bimal Jalan panel report: Constituted in 2019 to review the RBI’s economic capital framework, the panel opined that the RBI may pay interim dividends only under exceptional circumstances and that unrealised gains in the valuation of RBI’s assets ought to be used as risk buffers against market risks and may not be paid as dividends.
Image Source: The Hindu