Context: India might have a window abroad for raising funds to tackle its COVID-19 crisis. An open economy with low external debt can possibly bear the extra burden.

Key Points

• India could do with a stimulus shot against the ravages of coronavirus pandemic that is both sharper and bigger, and central finances can be stretched a bit considering the nature of the threat.
• The worst of this CoVID-19 crisis is still ahead of us. That means we are at a critical juncture in our response, and no window of funds should be left out of the reckoning, especially not a capital market abroad that could snap up Indian corona bonds issued in dollars.

Background of India’s capital inflows

• Servicing debt in US currency has not been detrimental to India since 1991.
• During 1991 India was on the verge of an external default. However, India opened its economy to the world, gave market forces some freedom, and achieved a turnaround. 

Cushion of Foreign Exchange reserve

• If the scare of 1991 left us looking at our foreign exchange reserves as a capital cushion on the global front.
• The Asian Crisis of 1997 positioned this buffer as a war-chest against the potential chaos of capital flight and a rupee crash.

Financial inflows

• Financial inflows over the years have been robust in India. 
• Currently, our central bank has over half a trillion dollars piled up.
• RBI has recently mopped up billions more in an effort to reduce rupee volatility under a greenback insurge brought about by equity sales by companies such as Reliance.

Does the global market have an appetite for government bonds? 

• With global demand for low-risk paper soaring and yields dipping below zero, safe bonds that pay well could attract investors. 
• External debt of India:
• India’s external debt so far has been modest. The country began 2020 with only about $564 billion of it, a little more than one-fifth of gross domestic product. 
• Of this external debt, the government owed just $110 billion, with corporate loans and non-resident deposits making up the bulk. 
• Given its spotless payback record, India just have to price these bonds appropriately, and maybe our diaspora alone could stump up $20 billion.

Suggestion

• India’s exports have been weak, capital inflows could prove unreliable, and if the rupee happens to slide, the plan could turn out costlier than bargained for. 
• However, a go-ahead for it should go by what exactly is envisaged as a self-reliant India. 
• A reversal of our economy’s integration with the rest of the globe’s, if trade barriers or capital controls are imposed, would turn forecasts of our external balances worrisome. 
• As we learned that before 1991, imports restricted to essentials are hard to pay for with the earnings of exports that are price-sensitive, and money that cannot exit easily tends not to come in. 
• Ultimately as far as India does not plan to close itself off, the country can safely borrow in dollars. At the very least, India can keep this option open.