With rising COVID-19 cases, urgent attention needs to be paid to the economy that is on a weakening trend.
In this context, a Consol Bond issue is a more convincing solution for the government, to go beyond current revenue receipts to fund the complete stimulus.
What is the deficit scenario?
In the Budget (2020) before the pandemic, India projected a deficit of Rs.7.96-lakh crore.
However, even then there were concerns around -
off balance sheet borrowings of 1% of GDP
an overly excessive target of Rs. 2.1 lakh crore through disinvestments
The financial deficit number is set to grow by a wide margin due to revenue shrinkage from the coming depression.
This will most certainly be accompanied by a lack of appetite for disinvestment.
Is the stimulus announced so far sufficient?
In addition to the expenditure that was planned, the government has to spend Rs. 5-6 lakh crore as stimulus.
The Finance Ministry is optimistic at this front and has suggested that the government will not exceed the borrowing limits indicated in the Budget.
However, the stimulus provided so far and recent announcements by the RBI leave much to be desired given the ground reality.
All the RBI’s schemes are dependent on the availability of risk capital, the market for which has completely collapsed.
RBI has been encouraging banks to lend to below investment grade micro, small and medium enterprises, but the results are not welcoming.
The 60% increase in ways and means limits for States is a welcome move.
But many States have already asked for double the limits due to the shortages in indirect taxation collections from GST, fuel and liquor.
The government and the RBI need to understand that half measures will do more harm than good, giving a false sense of security.
What is the Consol Bond?
The COVID-19-led condition is termed as a war-like condition.
Given this, it is fitting to look at war-time methods of raising finance.
One such method that has been used as early as the First World War is the Consol Bond.
Consol bond is a form of British government bond that has no maturity and that pays a fixed coupon.
The value of a console bond was equivalent to its face value.
The bonds, which paid out an interest of 5%, were issued in 1917 to raise more money to finance the ongoing cost of the First World War.
The British government, in 2014, a century after the start of the First World War, paid out just 10% of the total outstanding Consol bond debt.
How will such a bond help India?
For India, such bonds now would be a better option than the donations to PM-CARES Fund.
Unlike PM-CARES, the proceeds of the bonds could be used for everything from PPE for doctors to a stimulus for small and medium-sized enterprises.
Furthermore, with the fall of real estate and the lack of safe havens outside of gold, the bond would offer a dual benefit.
It would be a risk-free investment for retail investors.
Notably, most of the Consol bonds in the UK are owned by small investors, with over 70% holding less than £1,000.
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.
