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The federal structure of India’s democracy is threatened with violence and obliteration!
No, this is not the usual hyperbole peddled under our now-obliterated news ethics. It’s the scary truth, unless the Modi government and Opposition-ruled states can strike an equitable compromise on Monday, 12 October 2020. With less than 72 hours to go, the clock is ticking ominously, and India’s federalism is hinged on a ventilator.
C’mon, you would say, stop exaggerating, it can’t be Armageddon. But it is.
Let me explain as simply as I can.
At the stroke of the midnight hour, on 1 July 2017, Prime Minister Narendra Modi emulated Jawaharlal Nehru’s iconic Parliament moment to launch a “second Indian Independence”, ie, freedom for a nation divided into fragments by myriad, cascading taxes. His government enacted a Treaty of Faith with the states:
In theory and spirit, the structure was perfect, holding fine through the honeymoon years, the good and easy times (GST!). But sooner or later, every good intention must confront an ugly moment of adversity. Does it then still hold good? Or crumble? Or worse, become dishonest, deny, repudiate?
For the GST regime, COVID-19 became that cruel moment – the virus stalled the economy, emptied the central government’s coffers, but could do little to avert its Rs 2.35 lakh crore liability towards the states under the Treaty of Faith.
Instead of squaring up to its obligation, the central government shrank in fear:
To be fair to the Modi government, these fears are legitimate, but the prescription, of denying its constitutional obligation, is a cop-out for democracy.
Yes, an option is hiding in plain sight, if only Prime Minister Modi’s economic advisors have the intellectual chutzpah to think beyond old and tired policies.
Just imagine if they resurrect the shelved plan of raising dollar bonds for this commitment...
I know I will be pilloried for re-re-re-raising the efficacy of floating a sovereign Indian dollar bond in overseas debt markets, but what the heck – if you are convinced of its merit, why slink into the shadows just because you will be criticised? So, check out this plan/structure:
Unfortunately, I can already hear the naysayers, but let’s debunk each objection one-by-one:
Objection: Volatile dollar/rupee rates will create “unquantifiable” costs in the long term
Counter: Wrong. By paying a premium of 5-odd percent to hedge against future dollar rates, our costs will forever be controlled and quantifiable. While the hedged interest rate would be a few basis points higher than what the government could borrow at, in local markets, these shall get compensated by the several positives that accrue on venturing overseas, including the fact that private borrowers get more cash in domestic bond markets
Objection: Why go overseas when you can ask FPIs (foreign portfolio investors) to lend more in the domestic market, ie, sell them more rupee bonds
Counter: This one is specious. Because when you float a sovereign bond overseas, you access an entirely new category of lenders, over and above FPIs that are authorised to invest in India
Objection: Foreign investors could indiscriminately dump our bonds, creating a run on the rupee and “importing” contagion
Counter: False. Since the bonds will be denominated in dollars and traded on overseas exchanges, any “dumping” would not directly impact the rupee or domestic markets. In fact, the alternative being advocated above, of increased FPI exposure to rupee bonds, creates exactly the “dumping risk” that is being wrongly attributed to dollar bonds
Objection: India could stare at an international default in frightful, flight-ful times
Counter: This fear is not even worth a soiled one-dollar bill. India gets an annuity of nearly $70 billion from its hard-working sons and daughters living overseas, who willingly repatriate to their loved ones left behind. NRIs have also kept an unflinching $100 billion in term deposits in their motherland. Finally, India’s forex reserves are nearly 18 times $30 billion (and growing). If we can’t have the stomach for this much risk, let’s just quit (or take voluntary retirement).
So c’mon ye noble women and men of the GST Council – take a little dollar ‘risk’, be bold, and salute the Constitution of India.
(At The Quint, we question everything. Play an active role in shaping our journalism by becoming a member today.)
Published: 09 Oct 2020,08:54 PM IST