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India's plan to float foreign-currency bonds stalls

Experts warn of debt 'addiction' and fault lack of clear policy framework

Indian Finance Minister Nirmala Sitharaman enters parliament on July 5 to present the government's 2019 budget, which included a proposal to issue foreign-currency debt.   © Reuters

NEW DELHI -- The Indian government's plans for its first foreign-currency bonds appear to have run aground in the face of criticism from economists and a lack of clarity about how much borrowing will take place.

"Nothing more has been done," on the issuance of foreign currency-denominated sovereign bonds beyond the initial proposal made during the annual budget presentation in July, Finance Minister Nirmala Sitharaman said earlier this month. "And that's where it is," she said, adding that she would not speculate on the size of the issue, whether it will happen in tranches or when it will start.

In the budget speech, Sitharaman announced that the government would begin conducting part of its gross borrowing program "in external markets, in external currencies." But just a few weeks later the government says it has yet to work out the details amid concerns raised by many experts, including Raghuram Rajan, a former governor of India's central bank. Rajan predicted the 2008 financial crisis while working as an economist at the International Monetary Fund.

"If the government wants to attract more foreign money,... it does not need to issue a [foreign-currency] sovereign bond. All it needs to do is to increase current ceilings on foreign portfolio investment into government rupee bonds," Rajan wrote in a recent column published in an Indian newspaper. He said the government plan to issue foreign-currency bonds might lead to "more, much more, with attendant risks -- after all, all addictions start small."

Concerns have also been raised by the economic wing of the Rashtriya Swayamsevak Sanghand, a social organization that is the ideological parent of the ruling Bharatiya Janata Party. The wing's chief, Ashwani Mahajan, warned in a blog post of a possible debt trap, saying, "Can the present government put a cap on foreign loans which no future government can breach?"

In the fiscal year ended March, India's external debt stood at around 20% of gross domestic product, versus 38% for Indonesia, 59% for Argentina and 55% for Turkey in 2019, according to the IMF. Mahajan said the decisions of these countries to take foreign loans "have trapped them in such a vortex that now they are raising even more loans to avoid sovereign default."

The government, which budgeted its gross market borrowing this financial year at 7.1 trillion rupees ($103 billion), was initially expected to sell around 700 billion rupees of foreign currency-denominated sovereign bonds, equal to 2.3% of India's foreign reserves and 29% of net foreign direct investment flows in the last financial year.

According to a research note by the State Bank of India, borrowing through foreign-currency bonds has both positive and negative implications. "Though overseas borrowing may help the Indian government to borrow at a lower costs, since interest rates abroad are generally lower than in India, at the same time India's future loan repayments would be subject to exchange rate fluctuations," it said. "Any significant depreciation in the rupee will further increase the repayment cost."

Some analysts argue the government must make the plan part of a broader policy framework so that foreign borrowing does not get out of hand.

"It is like a Pandora's box. So long as it is closed, it is fine. Right now you are saying you only want to borrow $10 billion, which is like peanuts in terms of the total borrowing. But we have seen in the past [that] it'll keep on rising," said Sunil Kumar Sinha, principal economist at India Ratings and Research, a unit of Fitch. "Unless and until there's a policy framework in place, such borrowing may be extremely risky."

Apart from these objections, several other developments appear to have stalled the proposed foreign-currency debt sale, including the transfer of the bureaucrat spearheading the plan to another department, and the Prime Minister's Office reportedly asking the Finance Ministry to review the proposal. Local reports earlier speculated that the government would issue the foreign-currency bonds in tranches in the second half of the fiscal year, which begins in October.

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