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Economy

Podcast: Should The Indian Government Borrow From Abroad? (Episode-9)

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‘About 40% of all the of money that you’re paying as tax is going not to build infrastructure, not to feed the hungry, not to pay farmers for food! It’s going towards interest payments on the debt the government has borrowed in the past. Why would this be a problem? Because we borrow debt at extremely high rates’- Deepak Shenoy

Host Deepak Shenoy (CEO) and Aditya Jaiswal discuss about Nirmala Sitharaman’s controversial decision to raise $10 billion by issuing India’s first overseas sovereign bond.

We discussed five broad topics:

1) Should India borrow abroad, if yes, then why? (10 mins)

2) Domestic liquidity issues and crowding out effect (8 minutes)

3) Why are experts (Ex- RBI governors) against this move? (3 mins)

4) What are risks of going overboard with overseas borrowing? (4 mins)

5) Risks of borrowing abroad and final thoughts (15 mins)

Here’s the podcast: (See more episodes at The Capitalmind Podcast.)

Below is an excerpt of the podcast with time stamps of important sections!

1.Should India borrow abroad, if yes, then why? (2:00)

The government borrows roughly INR 5 lakh crores net per year. In the next year, the estimate of tax revenue that government will collect is about 16 lakh crore, out of which the government will pay 6.5 lakh crores in debt interest payment.

About 40% percent of all of money that you’re paying as a tax, is going not to build infrastructure, not to feed the hungry, not to pay farmers for food. It’s going towards interest payments on the debt they borrowed in the past.

Why would this be a problem? Because we borrow debt at extremely high rates. Domestically. And here’s the important thing, India’s own companies that borrow abroad (ONGC for an example) has a bond issued in euros and euro denominated debt…

2. Domestic liquidity issues and crowding out effect (10:40)

What some of the economists have put across is this, Indian Government is borrowing 3.3% of gross financial savings and 2.2% is by states and some 4% is something else. And therefore, India’s gross financial savings is about 10% of GDP. Out of which about 8% of GDP is borrowed by the government, my answer to that is that’s not true!

3. Why are experts (Ex- RBI governors) against this move? (18:00)

About 1% of GDP is about 2 lakh crores. How much are we suggesting they borrow? About 75,000 cr. That’s just 0.4% of GDP. I think it’s too small. I think in any given year, you can say don’t borrow more than 1% of GDP. That’s fine.

I don’t think India will see appetite for more than 10 billion euros at this point, which is about 70-75,000 crores thousand crores. I don’t think any more appetite exists right now because everybody wants to wait and watch. And I think this is a good start. If there is an appetite, of course, we can look at more, I think you know, go and give more and buy a lot more, especially if they’re going to give it to you at negative rates, just go and borrow as much as you can, up to say 10% of the total debt…

4. What are risks of going overboard with overseas borrowing? (21:00)

The problem is that, what if another government is in power, right?. What if the same government is in power?

Your problem is this, you’re creating debt, it could be a poison- poisoning the well phenomenon. And the idea is that poisoning the well is like, when people used to attack another country which had a fort, the idea was to throw poisoned frogs, rags, with darts and arrows. Some of them could fall inside a well which would then get poisoned, then nobody would have any source of water and everybody would die.

Poisoning the well is to say to the next person that comes here, he will not enjoy that place because the water will be poisoned, they won’t be able to drink the water. If you poison a well, you too can’t come back!

5. Risks of borrowing abroad (24:50)

I think the point is if we borrow $100 at 70 rupees, we get INR7,000. We may get it at 0.45%, but three years later rupees or 100. And then we return the hundred dollars and we return 10,000 rupees.

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