Context: India might have a window abroad for raising funds to tackle its COVID-19 crisis. An open economy with low external debt can possibly bear the extra burden.

COVID-19 and need for raising funds from outside

  • India could do with a stimulus shot against the ravages of coronavirus pandemic that is both sharper and bigger, and central finances can be stretched a bit considering the nature of the threat.
  • The worst of this CoVID-19 crisis is still ahead of us. That means we are at a critical juncture in our response, and no window of funds should be left out of the reckoning, especially not a capital market abroad that could snap up Indian corona bonds issued in dollars.

Background of India’s capital inflows

  • Servicing debt in US currency has not been detrimental to India since 1991.
    • During 1991 India was on the verge of an external default. However, India opened its economy to the world, gave market forces some freedom, and achieved a turnaround. 
  • Cushion of Foreign Exchange reserve
    • If the scare of 1991 left us looking at our foreign exchange reserves as a capital cushion on the global front.
    • The Asian Crisis of 1997 positioned this buffer as a war-chest against the potential chaos of capital flight and a rupee crash.
  • Financial inflows
    • Financial inflows over the years have been robust in India. 
    • Currently, our central bank has over half a trillion dollars piled up.
      • RBI has recently mopped up billions more in an effort to reduce rupee volatility under a greenback insurge brought about by equity sales by companies such as Reliance.

Considering the existing scenario in India, barring a shock to our currency, various estimates suggest that India can afford the burden of at least $40 billion a neat ₹3 trillion in extra foreign debt.

Does the global market have an appetite for government bonds? 

  • With global demand for low-risk paper soaring and yields dipping below zero, safe bonds that pay well could attract investors. 
  • External debt of India:
    • India’s external debt so far has been modest. The country began 2020 with only about $564 billion of it, a little more than one-fifth of gross domestic product. 
      • Of this external debt, the government owed just $110 billion, with corporate loans and non-resident deposits making up the bulk. 
    • Given its spotless payback record, India just have to price these bonds appropriately, and maybe our diaspora alone could stump up $20 billion.


Way ahead

  • India’s exports have been weak, capital inflows could prove unreliable, and if the rupee happens to slide, the plan could turn out costlier than bargained for. 
  • However, a go-ahead for it should go by what exactly is envisaged as a self-reliant India. 
    • A reversal of our economy’s integration with the rest of the globe’s, if trade barriers or capital controls are imposed, would turn forecasts of our external balances worrisome
  • As we learned that before 1991, imports restricted to essentials are hard to pay for with the earnings of exports that are price-sensitive, and money that cannot exit easily tends not to come in. 
  • Ultimately as far as India does not plan to close itself off, the country can safely borrow in dollars. At the very least, India can keep this option open.


Image Source: Mint