New ‘Modinomics’: Grab surpluses to fill deficit well

A finance minister’s success is measured by the way he or she tackles burgeoning deficits and judiciously uses taxation as an instrument to mobilise resources to fund capital and development expenditures. On both these fronts, Finance Minister Nirmala Sitharaman — and by extension, the Narendra Modi government — seems to have floundered in the first Budget of their second term in office.

Sitharaman seems to have devised distinct strategies in deficit management by making an attempt to tap into new sources of fund flows to cover the budget expenses, estimated at Rs 27.86 lakh crore in 2019-20. Tapping the RBI’s surplus, the surplus of the Securities Exchange Board of India, and proposing to take recourse to a foreign currency-denominated sovereign bond issue to bridge the deficit.

All three sources of funds are new and have raked up controversies. The tussle over the RBI’s Rs 9.6 lakh crore surplus, which the government had been eyeing, peaked late last year, resulting in RBI governor Urjit Patel resigning “for personal reasons”. To resolve the differences, a six-member panel headed by former RBI governor Bimal Jalan was constituted to evolve a more enduring economic capital framework (ECF).

The Jalan panel is reported to have agreed that the surplus reserves maybe transferred to the government over 3-5 years. If the RBI is to be left with just a 14% surplus, as against the 28% that it maintains today, then a whopping Rs 8.26 lakh crore will flow into the government’s coffers. Even if just 20% of it gets into the Consolidated Fund of India this fiscal, then the finance minister gets a Rs 1.65 lakh crore bounty.

There’s a raging debate on the kind of surplus the RBI should hold, given the specific macro-economic issues faced by India that may not exist elsewhere. Once the RBI surplus is tapped into, there may be no end to drawdowns on these reserves. At the conceptual level, even if surpluses were to be tapped, it should be towards investing in productive capital assets and not to bridge widening deficits.

The second till the government is dipping its hands into is the SEBI’s much smaller corpus of Rs 3,170 crore. Regulatory fees collected over the years from market participants is the source of this neat pile. While SEBI Chairman Ajay Tyagi resisted the Budget proposal seeking transfer of 75% of this reserve from its coffers to government accounts. But the government went ahead with getting the Finance Bill passed anyway, leaving Tyagi with no option but to comply.

Tyagi, a no-nonsense regulator, also pointed to the loss of independence of SEBI, the market regulator, as the board now has to seek finance ministry clearance for its annual expenses. It all fell on deaf ears. In a way, a new chapter has begun for SEBI, which hitherto boasted of unfettered freedom in managing its funds, regulating the markets and ensuring hassle-free settlements for investors.

Instead of pouring the SEBI surplus also into the Rs 7.03 lakh crore fiscal deficit well, the government should have allowed deployment of these resources for regulatory research into ways of modern market-making, curbing activities of manipulators, expansion and deepening of the market, apart from investor education and creating institutions of excellence in markets management. Alternatively, SEBI should have voluntarily lowered regulatory fees, thereby making the Indian market more attractive to foreign equity and debt paper investors. If the government has its way with the RBI and SEBI, then next may be the turn of surpluses with insurance regulator IRDAI and the Pension Fund Regulatory Development Authority of India!

The third way of mobilising non-tax resources and keeping the fiscal deficit under check was the announcement of floating a sovereign bond issue in foreign currencies. Economists of repute have divergent opinions on the decision to mobilise about Rs 1 lakh crore to part-finance domestic deficit. Cost and interest arbitrage, coupled with low inflation, could possibly be the reasons for such a decision.

If the government goes ahead with it, it will be the first time India will be borrowing in the market globally to finance its regular revenue expenses. Barring concessional funding from the World Bank for development and infrastructure projects, India has never ever gone to foreign markets to keep its balance sheet intact. Cost effective funds could be a big temptation for the government to go ahead with a foreign debt paper, leaving the domestic market for Indian companies seeking debt funds.

Pragmatic policymaking

All these arguments may be fine in free-market economics. But pragmatic economic policymaking demands that the Modi government desist from the plan to tap foreign debt markets to mobilise non-tax resources. Instead, India’s standing in external financial markets should effectively be leveraged to channelise capital for private and foreign investments. Secondly, government should deepen and widen the debt market back home, with participation from private and foreign players, before going ahead with a sovereign debt issue. Thirdly, calibrating economic policies to strengthen the macro-economic picture further is a pre-requisite for a foreign issue.

Like fiscal prudence and rectitude is an art, managing foreign debt needs specialised skills. Having retired high-cost foreign debt over the years even from institutional sources to reduce debt liability and insulate the economy from global volatility, sovereign debt issue should not be a priority for the government. Undertaking currency reforms before attempting to internationalise the rupee through the debt issue should be the focus. A better policy option would be to allow blue chip state-run and private companies to seek foreign currency debt, rather than the Government of India making a sovereign move.

The External Commercial Borrowing window could be widened to allow more Indian companies take exposure in global debt markets. ‘Masala bonds’ floated in Hong Kong, Singapore, New York and London by Indian companies could be expanded and innovated to take advantage of the low inflation and interest arbitrage internationally. The Modi government will have rethink on mobilising non-tax resources through new instruments and means to manage deficits.

(The writer is a senior journalist and economic analyst based in New Delhi)