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A proposal for sovereign foreign borrowing that first found mention in the 2019-20 budget is back on the table at the finance ministry, and could figure in the government’s annual accounts statement next year, two people familiar with the development said. A foreign borrowing will secure cheaper overseas money, and ensure that large government borrowing does not drive up domestic interest rates.

The Indian government borrows heavily in the domestic market, largely to fund its social sector and infrastructure schemes. The heavy borrowing crowds out the private sector, which is then forced to raise money at higher rates.

“It’s still in the initial stages. The proposal just doesn’t have economic but political aspects too. Hence, it will undergo close scrutiny before a decision to include it again in the budget is taken," one of the two people cited above said on condition of anonymity.

India’s sovereign external debt to gross domestic product (GDP) is at less than 5%, among the lowest globally, and thus, supporters of the plan argue, it would be easy for the government to service the borrowing.

The government’s present liabilities extend to debt that matures in 2055, and several of the long-term borrowings are at high interest rates. A reduction in the cost of this debt would significantly lower the interest burden.

India’s external debt at the end of March this year was $558.5 billion, dominated by long-term borrowings and short-term to finance imports, according to a 16 September status report issued by the finance ministry.

The country’s foreign exchange reserves hit a record $555.12 billion on 16 October, according to Reserve Bank of India (RBI) data. The draft of the proposal the finance ministry is considering argues that this is large enough to easily service a foreign borrowing of any modest size the government may have in mind.

The government plans to borrow 1.2 trillion in FY21, and this number could be significantly higher next year as it rolls out a massive immunization programme to contain the coronavirus pandemic among its 1.3 billion people.

The government’s 2019 plan had first talked about “raising a part of its gross borrowing programme in external markets in external currencies". This will also have a beneficial impact on demand situation for the government securities in the domestic market, the budget paper had said.

While no number was mentioned in the 2019-20 budget, the idea then in the government was to do a sovereign borrowing worth $10 billion. The idea was shelved after the proposal got mired in controversy, including questions over the need to do such borrowing and expose the country to exchange risks when it did not have the systems to manage it. The issue also got caught in the ‘Swadeshi’ debate as sections of the ruling party were unhappy with the idea of borrowing in foreign money.

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