Modi banks on households to rein in a Rs 29.6 lakh crore debt pile

By Bhaskar Dutta

Prime Minister Narendra Modi has a Rs 29.6 lakh crore debt problem that his administration wants help for from the nation’s households.

A record Rs 29.6 lakh crore ($346 billion) of sovereign bonds are due over the next five years, a result of pandemic-era borrowing and Modi’s infrastructure-spending binge. To tackle the burden, the Reserve Bank of India and the government are swapping maturing debt with longer-dated notes.

These refinancing debt auctions are gaining momentum thanks to an increasingly influential player: households. They’ve been pouring money into insurers, which in turn are buying heaps of long-dated sovereign bonds. The demand is so great that the head of Life Insurance Corp. of India, the nation’s largest, even floated the idea of issuing 100-year paper.

“Households are looking to deploy their savings pool in instruments that provide a longer-term investment horizon than the conventional banking system,” says Soumyajit Niyogi, director at India Ratings, a unit of Fitch Ratings. This shift is transforming India’s government securities market, he said.

The finance ministry has set a record target of 2.5 trillion rupees (Rs 2.5 lakh crore) of debt to be swapped for the fiscal year starting April 1. With the insurance sector expanding at 12 per cent-13 per cent annually, the goal is within reach, according to Vidya Iyer, head of fixed income at ICICI Prudential Life Insurance, which had 3.1 (Rs 3.1 lakh crore) trillion rupees in assets as of December.

The debt swap strategy paid off last year. In the September quarter, the average yield on new issuances eased by 20 basis points to 6.9 per cent, while their maturity stretched to 20.5 years, according to the latest government data.

Insurers, keen for longer-term assets to match their liabilities, have piled into these switch operations, said Ajit Banerjee, chief investment officer at Shriram Life Insurance Ltd. Given the dearth of quality long-term debt papers in the market, the demand for sovereign notes is here to stay, he said.

To cash in on this trend, the government has tilted its borrowing toward long-tenor paper. In the current fiscal year ending March 31, the government packed 38 per cent of its debt sales in bonds maturing in 30 years or more, up from 25 per cent four years ago. New Delhi is due to announce its borrowing plan for the April-September period this week.

Bond Vigilantes

For India’s public finance managers, this demand is a welcome shift from just a few years back, when bond vigilantes would quickly push up borrowing costs at the slightest hint of increased borrowings.

To be sure, the government’s switch strategy faces challenges. A sharp increase in provincial debt sales, driven by increased spending on welfare programs, may reduce the attractiveness for insurers. States typically offer higher yields.

The “real test of demand” will occur in the year that starts April 1 as provinces also step up longer-tenor debt sales, according to A. Prasanna, chief economist at ICICI Securities Primary Dealership.

Still, what gives policymakers confidence in debt switch auctions is the growth outlook for the insurance sector. Analysts at Swiss Re predict that India’s insurance market will be the fastest-growing in the Group-of-20 nations over the next five years, with 90 per cent of premiums flowing into investment products.

“Demand for long bonds is here to stay and insurance companies will remain the primary players in determining the shape of the yield curve at the long end,” ICICI Prudential’s Iyer said.