oppn parties External Commercial Borrowings: Good Route If Used Wisely

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  • Crude prices fall sharply as Saudi Arabia assures normal production in a few weeks. Prices fall by 5.4% to $65.30 per barrel
  • Sensex tumbles 700 points over fears that rising crude prices will deal a body blow to the tottering Indian economy
  • As Rajeev Kumar fails to appear before the CBI despite several notices, the agency forms a special team to locate and apprehend him
  • S Jaishankar says Pakistan is not a normal neighbour and its behaviour is a "set of aberrations"
  • External Affairs Minister S Jaishankar says PoK in Indian territory and the country hopes to have physical jurisdiction over it one day
  • Barasat Sessions court near Kolkata rejects Rajeev Kumar anticipatory bail application citing lack of jurisdiction as the reason
  • PM Modi celebrates his birthday with Narmada aarti and later has lunch with his mother.
  • All 6 Bahujan Samaj Party MLAs merge with the Congress in Rajasthan
  • Bengal CM Mamata Banerjee to meet PM Modi on Wednesday, state issues on the agenda
  • Pakistan to open Kartarpur corridor on Nov 9
  • Rajeev Kumar, ex-police commissioner of Kolkata and wanted for questioning in the Sarada scam does not appear before the CBI despite the state administration requesting him to do so
  • Supreme Court asks the Centre to restore normalcy in J&K but keeping national interest in mind
  • As Trump accepts the invitation to attend a programme in Houston with PM Modi, India rushes to settle trade issues with US
  • After drone attack on Aramco's Suadi Arabia facility, oil prices jump 19% in intra-day trading causing worries for India
  • Imran Khan raises nuclear war bogey again, says if Pakistan loses a conventional war, it might fight till the end with its nuclear arsenal
Sunni Wakf Board and Nirvani Akhara write to the Supreme Court for a negotiated settlement to the Ayodhya dispute
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External Commercial Borrowings: Good Route If Used Wisely

By Sunil Garodia

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator. Writes for a number of publications.

The government, as announced in the budget, has decided to float sovereign bonds and borrow in the international markets. This is both good and bad. It is good because it will free up resources for private players, allow the government to borrow at a much cheaper rate, will bring stability to the Indian rupee and will make the government more responsible in its fiscal policies as overseas bond markets will look more closely at figures such as fiscal deficit. It is bad because by borrowing in external markets, India will expose itself to speculators who can short sell the bonds to create panic. But most experts agree that given India’s strong macroeconomic fundamentals, if external borrowing is done in moderation, the chances of speculation mischief are negligible.

The Indian government is the biggest borrower in the domestic financial market. Since government paper is backed by the sovereign and chances of default are non-existent, lenders prefer to invest in it even though the rates of interest are low. Banks have to put a major part of their funds in government papers as the RBI mandates it. This obviously means that banks and other financial institutions have lower resources for private players. Once the government starts borrowing a part of its requirement in the overseas market, it will free up some resources with banks which they can use to service private borrowers. If the government borrows 10-11 percent of its requirements overseas, as is being indicated, it means around Rs 71000 crore will be freed.

India has one of the lowest GDP to external commercial borrowing (ECB) ratio in the world among the fast developing nations. Lately, the government has further reduced external borrowings. India’s external borrowings dipped by 9% in February this year and over 20% in April compared to corresponding months last year. Since India uses the ECB route for less 3% of its total borrowing, there is immense scope to tap this route. Funds acquired through ECB will come in foreign currency, will be a lot cheaper and there is no liquidity problem in the overseas financial markets. But care must be taken to maintain a healthy ECB to GDP ratio which must not shoot beyond 20%. We have the example of some Latin American countries that were brought to their knees after their ECB shot up to 50% of their gross borrowings. But India has strong fundamentals and is likely to be very prudent in its ECB policies, negating such risks.

pic courtesy:ipleaders blog