EDITORIAL 71:“A war-like state and a bond to the rescue“
It does not matter how slowly you go as long as you do not stop.– Confucius
SOURCES: THE HINDU EDITORIAL/EDITORIALS FOR UPSC CSE MAINS 2020
Rangarajan Mohan Kumaramangalam
Rangarajan Mohan Kumaramangalam is an Angel Investor and Working President of the Tamilnadu Congress Committee
A war-like state and a bond to the rescue
With the pandemic’s shadow over the economy, a Consol Bond issue is a more compelling solution for the government
SYLLABUS COVERED: GS 3:Bond Markets
What are Consol Bonds ? Discuss how these bonds can elevate India from the present crisis. -(GS 3)
You will learn what are Consol Bonds .
- How they are used to raise the money ?
- How can they reduce the current fiscal deficit ?
- There are a few who seem to believe that there are ways and means to provide this stimulus without breaking the bank as it were.
- As we spend more time in a national lockdown or quasi-lockdown situation, I believe that austerity measures and reallocations notwithstanding, we will definitely need to go beyond current revenue receipts to fund the complete stimulus.
A GATHERING FINANCIAL STORM
- BALANCE SHEET :In the Budget before the pandemic, India projected a deficit of ₹7.96-lakh crore. However, even then there were concerns around off balance sheet borrowings of 1% of GDP and an overly excessive target of ₹2.1 lakh crore through disinvestments.
- REVENUE SHRINKAGE : The financial deficit number is set to grow by a wide margin due to revenue shrinkage from the coming depression that will most certainly be accompanied by a lack of appetite for disinvestment.
- In addition to the expenditure that was planned, the government has to spend anywhere between ₹5-lakh crore and ₹6-lakh crore as stimulus.
- States have already asked for double the limits due to the shortages in indirect taxation collections from Goods and Services Tax, fuel and liquor.
ECHO FROM THE PAST :
- Politicians and epidemiologists across the world have used the word “war” to describe the situation the world is currently in.
- As we wage a united war against this virus, it would be interesting for us to look at war-time methods of raising financing.
- One such method that has been used as early as the First World War is the Consol Bond.
- In 2014, the British government, a century after the start of the First World War, paid out 10% of the total outstanding Consol bond debt.
- ADVERTISEMENT : Citizens were asked to invest with the advertising messaging: “If you cannot fight, you can help your country by investing all you can in 5 per cent Exchequer Bonds.
- RISK ASSESSMENT : Unlike the soldier, the investor runs no risk.”
- SMALL FUNDS : After all, most of the Consol bonds in the United Kingdom are owned by small investors, with over 70% holding less than £1,000.
WHY IT IS A BETTER OPTION
- There is no denying the fact that the traditional option of monetising the deficit by having the central bank buy government bonds is one worth pursuing.
- When instrumented, it would be issued by the central government on a perpetual basis with a right to call it back when it seems fit.
- An attractive coupon rate for the bond or tax rebates could also be an incentive for investors.
- The government can consider a phased redemption of these bonds after the economy is put back on a path of high growth — a process that might take that much longer for every day we extend this lockdown.