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India’s Sovereign Bond Debate: Jumping to a ruinous conclusion
Shantanu Basu
Late last week, Govt. of India transferred its Secretary, Economic Affairs (Finance Ministry)
to the Power Ministry, perceived to be substantially lower in social standing. If media reports
were to be believed his transfer owed to a rosy picture of GOI Sovereign Bonds (maiden
stance expected at an affordable $10 billion) having been given to the PMO. When public
disapproval, including from institutions within GOI (like Rathin Roy, Director, NIPFP and
Viral Acharya, ex-Dy. Governor, RBI), broke into the public sphere, the above Secretary
seemed to have become the convenient scapegoat, though not the Union Finance Minister
who had obtained Cabinet approval for her maiden Budget 2019-20. Why did this debate
arise, in the first place?
The combined domestic indebtedness of the GOI and states in March, 2019 is in the range of
Rs. 350-400 lakh crore. At a conservative coupon rate of 9%, this translates to Rs. 32-36 lakh
crore per annum plus another Rs. 24-26 lakh crore per annum on repayment of principal, i.e.
a total of Rs. 56-62 lakh crore per annum (assuming 9% coupon rate on maturity of 15 years).
Overall, such high levels of domestic debt could translate to 45-50% of a government’s
budget; the Union budget is no different. If one were to consider politically-motivated cash
handouts, rapidly escalating establishment costs, staggered liabilities (such as reimbursement
of scheme implementation costs to CPSUs like CIL and FCI), and the balance 50-55% is
grossly inadequate to fund Capex, even current liabilities, that may cause appreciable rises in
GDP. Given the tenuous link in India between GDP and government indebtedness
(repayment capacity), it is safer to adhere to the revenue-debt relation, instead of GDP-debt
(whose figures are no less dubious). In the last few years, the profile of public debt too now
relies, up to more than 90%, on small savings, your savings and mine. Every percentage
decline owing to a severe economic downturn will rapidly reduce governments’ domestic
borrowing sources.
Likewise, every attempt to print more currency to overcome the deficit will cause
proportionate rise in inflation. Therefore, governments continue to borrow to pay outstanding
debt, akin to robbing Peter to pay Paul. Rathin Roy and Viral Acharya’s critiques of the fiscal
deficit (notably government borrowing crowding out private borrowing) are based on these
facts, something I have repeatedly published upon in this column for the last five years and
more. Another major constraint on raising finances by governments is the giant horde of Rs.
15-16 lakh crore of NPAs. While writing-off of NPAs has halved the amounts shown on
banks’ accounts is only an stop-gap measure to reassure investors, foreign and domestic,
remain apprehensive on investing, banks as co-partners having been the primary shield
against default. Gory details of siphoning of funds by promoters, frauds, etc. have not only
undermined the loaning capacity of banks but also engendered a marked reticence to
sanctioning new loans. Compounding these is the looming crisis in the NBFC sector, DHFL’s
recent plight being a case in point. Even if sovereign guarantees by the GOI were to be issued
for each major investment, say of Rs. 500 crore in each case, that would be received with due
degree of skepticism by investors once they scrutinize the income and liabilities of the
government, akin to a blank cheque on a zero-balance account.
A sovereign bond is issued by a national government, generally with a promise to pay
periodic interest called coupon (interest) payments and to repay the face value on the maturity
date. These bonds are usually denominated in the country's own currency, in which case the
government cannot be forced to default (called sovereign debt crisis). However, India now

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proposes to issue Sovereign Bonds denominated in US dollars, as the Budget documents
2019-20 show. First, India’s credit rating, given the size of its economy, shows signs of
perceived stress by investors with Moody’s Fitch and S&P assigning ratings of Baa2 and
BBB-1, in the same league as Bulgaria, Colombia , Croatia, Hungary and Indonesia, to name
a few (all lower medium grade). Associated with ratings is the troika of concepts of interest
rate, inflation and currency risks. Fluctuation of exchange rates determines currency risk that
would have to be borne wholly by the GOI. Inflation risk is the risk that the value of the
currency a bond pays out will decline over time. Since inflation is bound to head northward
in the long run in India, investors may expect GOI’s Bonds to be inflation-indexed ones
linked to a consumer price index (in UK these are called Index-linked bonds), that will only
add to the debt burden of GOI.
Bonds are also subject to market risk that ties back to international credit ratings. Lower
fixed-rate bond coupon rates imply higher interest rate risk and higher fixed-rate bond
coupon rates pointing to lower interest rate risk. Maturity of a bond also has an impact on the
interest rate risk. Longer maturity implies higher interest rate risk and shorter maturity lowers
interest rate risk. Aggregated, this troika has a single underlying unity; viz. lower medium
grade credit rating will cause higher inflation-indexed interest expectations and lower
maturity periods. Conversely, these will require deployment of funds by GOI only on quick
and high revenue-yielding Capex, instead of upon unremunerative cash handouts.
Given major roadblocks in land acquisition, contract, labor and IPR enforcement, rampant
corruption at all levels, poor or non-existent competent review monitoring mechanisms, high-
yielding short-term public projects are hardly an appetizing venture. At the same time, a
rapidly burgeoning government establishment would demand a lion’s share of the Bond issue
proceeds on revenue account without any worthwhile return. Last, but not the least,
influential sections of election-funding private businesses could demand their share of Bond
funds at the coupon rate at which GOI would be paying its investors, instead of far more
expensive bank finance in India. US Treasury Bonds on Jul. 25, 2019 were available at
2.13% (4 weeks) to 1.99% (for 52 weeks)2, up from 0.03-0.22% on Dec. 31, 2014. Assuming
that these rates were at least doubled owing to the troika of risks enumerated above, they
would still be half to a third of interest rates on loans in India. At the same time, repeated
interest rate cuts in India have brought down the differential, if any, between domestic and
Sovereign Bond coupon rates.
Again, assuming $10 billion (with ten-year assumed tenure) as the maiden Sovereign Bond
offer could potentially carry 4-4.5% interest, i.e. % $160-180 million per annum plus equated
repayment of another $ one billion in principal repayment, excluding inflation-indexed
coupon payments. If however, inflation-indexed coupon repayment, inflation and risk
perceptions and lower-medium sovereign credit rating are factored, the coupon rate may rise
by another 50% to 6-7%. Just which public or private project would yield this kind of return
in India? Such risk is akin to the Chinese model of business that is becoming increasingly
evident in its client states that are losing their ports, cities, railways, naval bases and much
more, being unable to repay their debt obligations. With a relatively dry domestic debt market
today, Sovereign Bonds may be GOI’s only bet to raise huge resources, multiple times over
$10 billion. With nothing else to back its sovereign guarantees, GOI has set in motion the
process to divest surplus land and buildings, shareholdings in blue-chip CPSUs and private
1 Country Economy: Sovereign Ratings List, 2019 extracted from https://countryeconomy.com/ratings on Jul.
26, 2019
2 US Dept. of the Treasury: Daily Treasury Bills Rates Data extracted from https://www.treasury.gov/resource-
center/data-chart-center/interest-rates/Pages/TextView.aspx?data=billrates on Jul. 26, 2019

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companies and much more. However, the question arises is for how long will India’s
domestic silver suffice to fuel rapacious sovereign borrowing? Debt has been a weapon for
domination and spoliation. Contrary to popular belief, peripheral indebted countries are not
responsible for sovereign debt crises, which most frequently have their origin in the most
powerful capitalist countries, and in turn result in large-scale crises in peripheral indebted
countries. It is not excessive public spending but rather the conditions enforced by creditors
that cause unsustainable debts. Debt crises and their outcomes are always monitored by the
major banks and the governments ruling over the most powerful economies that support
them.
So, where do quick solutions lie? First, the need to axe 50% of GOI’s Ministries/Depts. and
force the balance them to switch over to decentralized hiring/firing, accrual accounting and
double-accounting principles, reintroduce target and achievement based performance
appraisal for all personnel, outsource data and office management, create hundreds of fully-
empowered multi-disciplinary compliance and monitoring teams (with surplus HR) in diverse
sectors to speed up completion of ‘retarded’ projects and investments from funds released for
Sovereign Bond issues, and much more. Second, enhance the FPI ceiling for companies and
individuals to 49% from the existing 24% and 10% respectively3. SEBI’s recent proposal in
this regard certainly merits GOI’s immediate approval4. Third, foreclose all public projects
that are less than 60% complete for more than five years or 75% after 7 years after their
foundation stone-laying and auction these to private parties for completion on reverse-auction
basis. Fourth, declare select state-operated industrial parks as EPZs, e.g. Noida, Partapur,
Bhiwadi, Tirupur, I-T cities in Bengaluru, Kolkata, etc. etc. Fifth, permit private entities to
operate railway trains for lease rent charges on all high-density freight and luxury corridors.
Likewise, lease major railway stations inter-state bus stations and airports for 30-40 years on
BOLT basis, again on reverse-auction basis. Sixth, introduce discounted prepaid cards for
vehicle parking, highway tolls, public utility usage, e-vehicle charging, tax credits, VAT, 5%
discount on cashless transactions, delink borrowing interest rate from deposit-linked interest
rate (to save the fixed-income category of voters), and much more, depending upon the
residual grey matter in the minds of my fellow civil servants.
There is nothing principally wrong in issuing USD-denominated Sovereign Bonds. What is
problematic is India’s ability to discharge its obligations honorably without repudiating
domestic debt obligations. There is plenty of scope to raise resources in INR that must be
explored before ruinous Sovereign Bonds are contemplated. If for nothing else, the vacuous
Sovereign Bonds cheerleader in the erstwhile Secretary, Dept of Economic Affairs, has
usefully reignited the debate on this issue, even if that led to a voluntary premature eclipse of
his hitherto high-profile career graph, never mind his skewed understanding of this issue that
threatens India’s existence. His transfer and subsequent application for voluntary retirement
from the IAS from Oct. 31, 2019, also raises serious public reservations of the professional
competence of the Union Finance Ministry at all levels particularly when this Budget
provision was passed into law last week, evidently without much serious thought. (1812
words)
The author is a senior public policy analyst and commentator
3 Reserve Bank of India: Investment in Indian Companies by FIIs/NRIs /PIOs extracted from
https://www.rbi.org.in/advt/fiinri.html on Jul. 26, 2019
4 Upadhya, Jayashree P.: Liberalize investment cap, review restrictions for FPIs, says Sebi panel dated May 25,
2019, extracted from https://www.livemint.com/market/stock-market-news/sebi-to-consider-slew-of-changes-
for-fpis-1558715380594.html on Jul. 26, 2019