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Economy

We’ll do "Quasi”-Sovereign Bonds to “Quasi”-Close the Deficit

The Finance Minister has said that India will, in effect, try to close a large gaping hole in our current account using some sort of quick-drying glue.

According to Business Standard:

Measures to fetch an additional $11 bn to check the burgeoning CAD & arrest rupee fall

    • $4 bn IRFC, PFC and IIFCL to be allowed to raise together through quasi-sovereign bonds for infrastructure sector needs
    • $4 bn PSU oil companies to be allowed to raise external commercial borrowings
    • $2 bn Gains expected from liberalisation of ECB norms
    • $1 bn Gains expected from liberalisation of non-resident deposit schemes

(PSU oil companies! Yeah, right.)

The idea is to use “quasi” sovereign bonds, which means the debt is not being taken on government books, but if these companies were to default, the government will implicitly guarantee them.

Any drop in the dollar-rupee equation or the interest paid out on these quasi-sovereign bonds will have to be paid by these companies. However it is unclear what they will do with the money that will yield the kind of return these bonds will have to give to be attractive.

However, I would, rather than trying to borrow this money from abroad, simply have RBI lend them the money and replace the dollars with government securities. Why? Because it really *is* government debt – and the return from long term infrastructure financing is actually gained by the government (you may not pay for the road, but trucks and hotels and shops and real estate near the road will pay taxes)

Second, because the dollars on the RBI balance sheet finance the US, not India, and we could easily just use them instead. I know it’s considered a sin to have dollar reserves depleted, but I ask you to stop and think for a moment about why we even need dollar reserves – if we have a longer term goal to convert our trade to rupees instead, or to make the rupee fully convertible, these reserves are useless at this magnitude. We can easily cut them to half and be all right, especially if we could mark half of our gold and oil trade in rupees.

Third, think of $11 billion as a tiny tiny part of what the RBI holds – over $270 billion. Think of it in terms of trading volumes on the forex markets – which is probably $5bn in just markets in India, and there are non-deliverable forward markets outside the country. The $11 billion helps, but it’s a tiny amount, even if it is the maximum these steps can yield.

We are a large nation now, and thinking like 1992 will make us look really stupid, especially if we understand that we are, in reality, way too big for a “rescue” by the IMF or any such body. It is much better to simply forget the rupee, and instead, focus on things like infrastructure, labour reform and reducing government size. The step I recommend above (RBI selling dollars to buy government securities which are given for infrastructure only) is key to that thinking. The rupee-dollar rate does not, and should not, matter, even if it impacts us in the short run. What we want, if we’re thinking of our children, is a more competitive economy.