India could do with a stimulus shot against the ravages of covid-19 that is both sharper and bigger, even if it stretches Central finances into a no-go zone flagged by fiscal hawks. The worst of this crisis is still ahead of us. As we are at a critical juncture in our response, 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. This idea has to satisfy two criteria. Can it be done? And, if so, should it be done? Note that servicing debt in US currency has not haunted us since 1991, when an India on the verge of an external default—thanks partly to autarky—opened its economy to the world, gave market forces some leeway, and achieved a turnaround. 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 over the years, thankfully, have been robust. Today, our central bank has over half a trillion dollars piled up, having 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. Should financial outflows weaken the rupee later as we go along, the central bank would have to sell dollars to support it. Barring a shock to our currency, estimates suggest that we can afford the burden of at least $40 billion—a neat ₹3 trillion—in extra foreign debt.
Does the global market have an appetite for government bonds? Yields on Indian paper are reported to be above pre-covid levels. A triumvirate of credit rating agencies has slotted our sovereign debt in the lowest bracket of investment grade, just a notch above junk. An economic contraction, fiscal expansion and a borrowing binge at home are seen to have raised risks. Yet, this only means that the interest premium on offer may have to be a tad higher. With global demand for low-risk paper soaring and yields dipping below zero, safe bonds that pay well could attract investors. India’s external debt so far has been modest. The country began 2020 with only about $564 billion of it, a bit more than one-fifth of gross domestic product. Of this, the government owed just $110 billion, with corporate loans and non-resident deposits making up the bulk. Given its spotless payback record, New Delhi just has to price these bonds appropriately, and maybe our diaspora alone could stump up $20 billion.
Whether it is prudent for India to raise money overseas would depend on the eventual cost of such a programme. Our 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. On a big-picture analysis, perhaps 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 foggy. As we saw 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. So long as India does not plan to close itself off, the country can safely borrow in dollars. At the very least, let’s keep the option open.