Context: With the pandemic’s shadow over the economy, issuing a Consol Bond is a more compelling solution for the government.
More on news:
- The 3rd phase of lockdown has made it imperative for India to devote extra attention to the economy that is teetering on the edge.
- Experts have called for a large stimulus package to pull back the economy which will require to go beyond the current revenue receipts of the government.
Why Current Revenues wouldn’t be sufficient?
- In the Budget before the pandemic, India projected a deficit of 7.96-lakh crore rupees. However, even then there were concerns around off balance sheet borrowings of 1% of GDP and an overly excessive target of ₹2.1 lakh crore through disinvestments.
- The financial deficit number is set to grow by a wide margin due to revenue shrinkage from the coming depression that will most certainly be accompanied by a lack of appetite for disinvestment.
- In addition to the expenditure that was planned, the government has to spend anywhere between 5-lakh crore and 6-lakh crore as stimulus.
- However announcing a stimulus package beyond the current 1.7 lakh crore is a challenging task for the finance ministry.
- Further all the RBI’s schemes are contingent on the availability of risk capital, the market for which has completely collapsed.
- Both the RBI and Government have tried several times over the last year to nudge banks into lending to below investment grade micro, small and medium enterprises, but have come up short each time.
- Furthermore, while the 60% increase in ways and means limits for States is a welcome move, many States have already asked for double the limits due to the shortages in indirect taxation collections from Goods and Services Tax, fuel and liquor.
- Consol bond is a form of British government bond that has no maturity and that pays a fixed coupon.
- The value of a consol bond was equivalent to its face value.
- Its origin can be traced back to the 18th century. The first consol bond was originally issued in 1751.
- As we wage a united war against this virus, it would be interesting for us to look at war-time methods of raising financing as consol bonds were issued by Britain during world war 1.
Efficacy of Consol Bond:
- Flexibility to Repay: They may be redeemed at the discretion of Government as and when it wants depending on its financial situation.
- In 2014, the British government, a century after the start of the First World War, paid out 10% of the total outstanding Consol bond debt.
- The bonds, which paid out an interest of 5%, were issued in 1917 as the government sought to raise more money to finance the ongoing cost of the First World War.
- Attractiveness for Investor: A regular investor is attracted towards it as it is government backed and pays a decent coupon rate.
- Large Participation: As it is issued in very small denominations as well , hence small investors can also easily invest in it.
- After all, most of the Consol bonds in the United Kingdom are owned by small investors, with over 70% holding less than £1,000.
- No restriction over its usage: The proceeds of the bonds could be used for everything — from Personal Protective Equipment for doctors to a stimulus for small and medium-sized enterprises.
- There is no denying the fact that the traditional option of monetising the deficit by having the central bank buy government bonds is one worth pursuing.
- However given the benefits associated with Consol Bond, it appears a compelling alternative.
- Furthermore, with the fall of real estate and given the lack of safe havens outside of gold, the bond would offer a dual benefit to investors i.e low risk and good return.
- When instrumented, it would be issued by the central government on a perpetual basis with a right to call it back when it seems fit.
- The government can consider a phased redemption of these bonds after the economy is put back on a path of high growth — a process that might take that much longer for every day we extend this lockdown.
- The bond is a debt security, under which the issuer owes the holders a debt and (depending on the terms of the bond) is obliged to pay them interest (the coupon) or to repay the principal at a later date, termed the maturity date.
Image Source: The Hindu