{"id":50056,"date":"2019-07-17T19:00:44","date_gmt":"2019-07-17T13:30:44","guid":{"rendered":"https:\/\/blogadmin.forumias.com\/?p=50056"},"modified":"2019-07-17T16:05:57","modified_gmt":"2019-07-17T10:35:57","slug":"7-pm-time-ripe-for-sovereign-external-borrowing-17th-july-2019","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/7-pm-time-ripe-for-sovereign-external-borrowing-17th-july-2019\/","title":{"rendered":"7 PM | Time ripe for sovereign external borrowing | 17th July, 2019"},"content":{"rendered":"\n<p><strong>Context:<\/strong>\nsovereign borrowing and its impact on Indian economy<\/p>\n\n\n\n<p>Sovereign borrowing means raising the money from foreign\nmarkets by issuing government bonds by the government\/central bank of a country. A sovereign debt or sovereign loan is not owed by a\ncountry\u2019s citizens, but by its government. It is not considered a national debt\nand the money obtained is used at the discretion of the borrowing government.\nIt can be given to banks or private companies or used to pay for infrastructure\nprojects. The government doing the borrowing may adapt different solutions to\nguarantee the repayment of the loan, such as by printing money or increasing\ntaxes. Sovereign debts can differ in terms of the currency used upon issuance,\nmaturity and interest rates.<\/p>\n\n\n\n<p><strong>Need for sovereign external borrowing in India:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Infrastructure needs:<\/strong> India\nhas a requirement of investment worth Rs 50 trillion (US$ 777.73 billion) in\ninfrastructure by 2022 to have sustainable development in the country. India is\nwitnessing significant interest from international investors in the\ninfrastructure space.&nbsp;Global\nexperience is that most of this investment would need to come directly or\nindirectly from government. Private enterprise can play only a marginal role,\nin view of the higher risks, lower returns and longer gestation periods of the\nunderlying investment.<\/li><li><strong>Interest\nrates:<\/strong> India with a deficit of savings over investment,\nat the same time global interest rates are at historic lows, so the government\nshould tap the potential and allocate needed money for country\u2019s growth and\ndevelopment. Direct borrowing by the sovereign is always cheaper than for any\nother entity, it will be a net welfare gains for the economy.<\/li><li><strong>Favorable internal climate:<\/strong> the sovereign\u2019s debt as a\npercentage of GDP stood at 3.8%. The current account deficit (CAD) as a\npercentage to GDP was 2.1% in 2018-19, which can be financed by capital flows.\nThough economic growth has slowed down, it is highest in the global context and\nis accompanied by a benign inflation outlook.<\/li><\/ul>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Savings:<\/strong> India\u2019s overall savings rate has declined to 30% from 34.6% over five years, ending FY2016-17. The worst dip was seen in the household sector, the largest contributor to savings in the economy, dropping to 16.3% from 23.6% over the period. So with decline in savings and costly external commercial borrowings, sovereign borrowings look promising. <\/li><\/ul>\n\n\n\n<figure class=\"wp-block-image\"><img data-recalc-dims=\"1\" loading=\"lazy\" decoding=\"async\" width=\"409\" height=\"293\" src=\"https:\/\/i0.wp.com\/blogadmin.forumias.com\/wp-content\/uploads\/2019\/07\/saving.jpg?resize=409%2C293&#038;ssl=1\" alt=\"\" class=\"wp-image-50057\"\/><\/figure>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Foreign reserves<\/strong>: the robust forex reserves of around $428 billion as on June 28, 2019, global investors will draw enough confidence to invest. So the risk of default is less.<\/li><li><strong>Integration: <\/strong>According to economic survey 2018-19, Indian economy is the sixth largest economy in the world, but the economy is less integrated with respect to developed countries. So by sovereign borrowing Indian economy will be integrated more with the world economy.<\/li><li><strong>Currency swap agreements:<\/strong> the government of India has currency swap agreement for $ 75 billion. Moreover huge NRIs and other high net worth individuals of Indian origin will give hedge for low cost sovereign borrowing.<\/li><\/ul>\n\n\n\n<p><strong>Challenges to sovereign external\nborrowing for India:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Never borrowed:<\/strong> The\nidea of borrowing by issuing bonds is being shelved by experts, who believe\nthere is reason India never resorted to such a move despite staring at a\nslowdown in the economy during 1990-91, 2007-08 and 2013.<\/li><li><strong>Rupee\nappreciation:<\/strong> Indian rupee is appreciating\nslowly after reaching 75rs per $. Present Indian rupee exchange with dollar is\napproximately 70rs. With foreign borrowing rupee will appreciate and will have\nmultiplier effects on Indian economy.<\/li><li><strong>Exports<\/strong>:\nThe government unveiled its first foreign trade\npolicy for 2015-2020 in April, setting a merchandise and services export target\nof $900 billion by 2020, almost double the $465.9 billion achieved in 2013-14.\nHowever, with the fragile global economic recovery and increasing protectionist\neconomic policies, India is re-assessing the exports situation. At this\nsituation appreciating rupee will be disastrous effect on foreign trade.<\/li><li><strong>Imports:<\/strong>\ngovernment of India launched \u201cMake in India\u201d scheme to promote manufacturing in\nIndia and taking manufacturing contribution to GDP to 25% by 2022. But with the\nappreciation of rupee, imports will be cheaper and it will impact on make in\nIndia initiative.<\/li><li><strong>Policy\nuncertainty in western countries:<\/strong> after the\nglobal financial crisis in 2008, most of the developed countries followed the\neasy money policy and pumped huge money in the global market for recovery from\nthe crisis. With easy and cheap money flow into emerging markets like India had\npainful impact on Indian currency when fed reserve tried to raise interest\nrates in 2013. So there is no certainty in global currency market.<\/li><li><strong>Latin\nAmerican countries experience<\/strong>: Take the case of Latin American countries. In the\naftermath of the oil price hikes in the seventies when the global markets were\nawash with Petro dollars, they borrowed cheap and wide. But when the global\nfinancial crisis broke in the late eighties and it was followed by a string of\nLatin American defaults.<\/li><li><strong>Fragile\nglobal economy:<\/strong> Borrowing\nwill set in motion a process which will integrate the Indian economy more\nclosely with the global scenario. Since there is currently some disenchantment\nwith globalization, the correct intellectual approach should be to wait and\nwatch.<\/li><\/ul>\n\n\n\n<p><strong>Measures\nto improve the ecosystem for borrowing and capital inflows in India:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Currency\nswap agreement:<\/strong> India and Japan had agreement of $ 75 billion. The\nswap agreement is a risk free option and it is a win-win situation and promotes\nbilateral agreements with respected country. On the same lines government\nshould promote swap agreement with other countries. <\/li><li><strong>FDI\nand FPI liberalization:<\/strong>&nbsp; majority\nof the FDI investment comes through automatic route. But the realization of actual\nFDI is not up to the level of promise. Government should open the insurance\nsector and pension sector along with increase in limits of FPI investment in\ngovernment securities.<\/li><li><strong>Rupee\ndenominated bonds:<\/strong> Indian government should raise the\nrupee denominated bonds in foreign markets where repayment in rupees will be\nless risky.<\/li><\/ul>\n\n\n\n<p><strong>Way\nforward:<\/strong>\nWith reasonable economic growth, benign\ninflation outlook, a resilient external sector and, above all, political\nstability, it is an opportune time for the authorities to enter the global\nmarket with sovereign bond borrowing. Testing the market with a new approach to\nraise sovereign external debt is one thing, but falling into a trap by repeated\nfloating of bonds and unwarranted enthusiasm is quite another. So the\ngovernment should maintain the balance between capital flows and raising\nsovereign borrowings, for the growth of economy. \n\nSource:<a href=\"https:\/\/www.thehindubusinessline.com\/opinion\/time-ripe-for-sovereign-external-borrowing\/article28490230.ece\">https:\/\/www.thehindubusinessline.com\/opinion\/time-ripe-for-sovereign-external-borrowing\/article28490230.ece<\/a>.\n\n\n\n<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Context: sovereign borrowing and its impact on Indian economy Sovereign borrowing means raising the money from foreign markets by issuing government bonds by the government\/central bank of a country. A sovereign debt or sovereign loan is not owed by a country\u2019s citizens, but by its government. It is not considered a national debt and the&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/7-pm-time-ripe-for-sovereign-external-borrowing-17th-july-2019\/\">Continue reading <span class=\"screen-reader-text\">7 PM | Time ripe for sovereign external borrowing | 17th July, 2019<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":49370,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[130,9],"tags":[],"class_list":["post-50056","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-7-pm","category-public","entry"],"jetpack_featured_media_url":"https:\/\/i0.wp.com\/forumias.com\/blog\/wp-content\/uploads\/2019\/07\/7-PM.png?fit=1000%2C500&ssl=1","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/50056","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=50056"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/50056\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media\/49370"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=50056"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=50056"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=50056"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}