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NEW DELHI: A proposal to go for sovereign borrowing overseas, that first found mention in the 2019 Budget, is back on the table at the finance ministry and could again figure in the government’s annual accounts statement next year, according to two sources familiar with the development. The idea is being revived to lower government’s borrowing costs by tapping cheaper overseas money to ensure the government's large debt raising doesn't harden the rates here.

The Indian government borrows heavily in the domestic market, largely to fund its social sector and infrastructure schemes. The heavy borrowing crowds out private sector which then is forced to raised 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," an official familiar with the development told Mint.

India’s sovereign external debt to 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 came at a life’s high of $555.12 billion as of 16 October, according to RBI data. The draft 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 coronavirus among its 1.3 billion people.

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

While no number was frozen in the 2019-20 Budget, the idea then was to do a sovereign borrowing worth 10 billion in USD. The idea was quickly buried after the proposal got mired in controversy including questions over the need to do such a borrowing and expose the country to exchange risks when it did not have the systems to manage it. The issue had 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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