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Charts & Analysis

Deficit funding – Using the PSU share pool

So Bond yields are at serious (recent) highs – 6.83% and counting. So the government is unlikely to get a huge bond sale through – but that is a problem everywhere, it seems, with the US government finding it tricky to push through a $34 bn two year issue.

Given reissuing longer term bonds is not quite an easy option, it may be simpler to think of other alternatives. My suggestion was to consider using the foreign exchange reserves and convert them to rupees (issue bonds against the sale proceeds). That might be viable, especially since it will bring the rupee under control too – at 51 we can’t be very happy. But there are FRBM limitations to it, which can only be overridden if the parliament calls a “crisis”. And, as we know, that ain’t happening till the elections are done and a new government is in – so not before June.

Next suggestion: We have a huge nationalised set of industries, including banks, refineries, electrical equipment manufacturers, energy financiers and so on. Some of these holdings are small, some very large. Yet, it is economic suicide to try and sell them in the market (not counting political suicide as well, as there is bound to be unrest and twitching in each such company).

So how about “pledging” the shares of these companies with the RBI? Just looking at the largest companies by market cap – the government owns substantial stakes in ONGC, SBI, BHEL, PNB, Maruti, GAIL, IOC, BPCL, HPCL, NTPC, Powergrid, MMTC, NMDC and SAIL. A portion of the stake can be transferred or pledged to the RBI, one thinks, effectively giving the government credit. The RBI will have to figure out how to pay – but it has the ability to print money or use its coffers from other sources.

Again, there are FRBM limitations because printing money will be considered as monetising the fiscal deficit – and therefore only possible after June. But given the bond markets are this fickle – some 20-30K cr. causing such jumps in the market shows the lack of depth – other options should be considered for the markets.

Having said that, if there’s another crisis, as is looming around the world right now, with an Indian institution or bank, it won’t take long for all institutions to rush into government bonds yet again, and push yields to further lows. Then, all these “funding the deficit” arguments are moot.