CAN IN­DIA DOLLARISE THE DI­AS­PORA BOND?

Sunday Express - - OPINION - SHANKKAR AI­YAR Au­thor of and

Iam not wor­ried about the deficit,” Ron­ald Rea­gan once quipped on the cam­paign trail, “It is big enough to take care of it­self.” That is a unique priv­i­lege en­joyed by United States – its trade deficit may breach the 2017 wa­ter­mark of $552 bil­lion, fis­cal deficit is at over $800 bil­lion and to­tal debt is over $21 tril­lion. Thanks to the sta­tus of the dol­lar as the cur­rency of last re­sort, it can fund and thrive de­spite the deficits and debt.

In­dia, like other coun­tries, must shape up or slip into con­ta­gion and cri­sis. This Thurs­day, mar­kets shrugged off op­ti­mism and em­braced fear. Mer­ci­fully the price of Brent crude dipped from $86 per bar­rel to around $80, al­low­ing the cur­rency a breather rally to end the week around `73.50 for a dol­lar.

The ru­pee’s week­end level, how­ever, is scarcely sta­ble and vul­ner­a­ble to the petro puz­zle. The tra­jec­tory of crude prices de­pends on geopol­i­tics, con­jec­ture about the im­pact of sanc­tions on Iran, and the eco­nom­ics of global growth, which de­ter­mine the level of de­mand and thus pric­ing. Again, oil is just one of the threat fac­tors. In­dia’s cur­rent ac­count deficit is also the re­sult of earn­ing in ru­pees and spend­ing in dol­lars—of fall­ing forex in­flows and ris­ing de­mand for dol­lars.

Crit­i­cally, the fu­ture course of the ru­pee’s value de­pends on how the trade tar­iff war plays out, the ris­ing in­ter­est rates in the US, and the shift in pref­er­ences of in­vestors. For In­dia, as with any emerg­ing econ­omy, the slide in the value of the cur­rency is a cas­cade of cause and con­se­quence—in the fi­nan­cial mar­kets and the broader real econ­omy. The fall of the ru­pee trig­gers a flight to safety by in­vestors, and this ex­o­dus ex­ac­er­bates the slide in the value of the cur­rency.

Thanks to the tur­moil, the Nifty50 has erased the gains of this cal­en­dar year. Bloomberg data es­ti­mates sug­gest for­eign funds have taken out over `80,000 crore. In­deed, in the cur­rent cal­en­dar year, for­eign port­fo­lio in­vest­ment has been neg­a­tive in six of ten months. Data from NSDL shows FIIs brought over `2 lakh crore to in­vest in debt and eq­uity in 2017. In 2018, the flow has re­versed, lead­ing to a net out­flow of dol­lars.

Mean­while, there is no let-up in the need to pay for im­port of con­sum­able goods, par­tic­u­larly elec­tron­ics. This week the govern­ment hiked du­ties across a range of elec­tronic and elec­tri­cal items. At one level there is the fear of the im­pact on growth and em­ploy­ment, and at an­other level a ris­ing anx­i­ety about the ad­e­quacy of re­serves to meet obli­ga­tions to in­vestors and for im­ports.

The mud­dled nar­ra­tive crafted by man­darins and de­ployed by politi­cos sug­gests In­dia has ad­e­quate re­serves. Tech­ni­cally In­dia has re­serves to cover im­ports for 10 months, which could be a com­fort­ing thought ex­cept that the road ahead is pot­holed with un­cer­tainty. Data shows that be­tween April and Oc­to­ber, In­dia has ex­hausted nearly $25 bil­lion of its re­serves even as the cost of the dol­lar rose from `65 to `74. Re­cent ex­pe­ri­ences of coun­tries us­ing re­serves to de­fend cur­rency have not ended well.

The tech­ni­cal charts at the cur­rency fu­tures mar­ket re­veal the cur­rency slid­ing past `75 per dol­lar and the Bri­tish Pound seems set to score a cen­tury. Ev­i­dently there is lit­tle po­lit­i­cal el­bow room given the election sea­son and scant fi­nan­cial head­room in the re­serves to at­tempt to de­fend the cur­rency.

The govern­ment could sit tight and hope for the Iran barter deal to come through and trade wars to abate, but hope is scarcely a strat­egy. His­tory re­veals that twice in two decades In­dia has raised dol­lars, once through a sov­er­eign bond dur­ing NDA I and once through a scheme for NRIs which raised $34 bil­lion to boost the re­serves. Un­sur­pris­ingly, there is spec­u­la­tion about the govern­ment tap­ping NRIs to raise dol­lars through a sov­er­eign bond or de­sign­ing yet an­other scheme to woo NRIs and over­seas In­di­ans to in­vest in a sov­er­eign bond.

In the post-war era, the Bri­tish Na­tional Sav­ings Banks Ac­count tapped into pub­lic sen­ti­ment with a dis­tinctly Amer­i­can catch­phrase—Put your money where your mouth is. It has been fre­quently ar­gued that the view on In­dia is now “mod­i­fied”. Prime Min­is­ter Naren­dra Modi has been wel­comed by rousing ral­lies at Wem­b­ley, Madi­son Square Gar­den, San Jose, MCG Mel­bourne, Shang­hai and Dubai.

Ar­guably, the di­as­pora could (as evan­ge­lists did in 1880s) be asked to put their money where their faith is, where their heart is and in­vest in the pride of In­dia. For some years now, In­di­ans’ af­fec­tions for achiev­ers of In­dian ori­gin have rested on a kind of Pareto-op­ti­mal­ity. Their suc­cess is ap­pro­pri­ated for free in ex­change for mass adu­la­tion. Per­haps it is time to ap­proach the mar­quee of high-fliers for a re­turn on emo­tional eq­uity.

The bond would need to be smartly de­signed. Con­text is crit­i­cal and 2018 is not 2013. Then the world was awash with money, in­ter­est rates were neg­a­tive or barely above zero. The with­drawal of money by cen­tral bankers af­fects sup­ply, and the mar­ket con­di­tions daunt de­mand for such a bond. The terms of en­dear­ment will need to be much more at­trac­tive and the costs will be higher.

The 2013 ef­fort was de­scribed as an NRI scheme but was es­sen­tially a lever­age op­por­tu­nity for banks. This must change. Why not ex­pand the am­bit to of­fer the op­por­tu­nity to of­fer an open-ended bond that can be listed and is trade­able af­ter three years? It makes sense to ex­pand the foot­print across the 21 mil­lion-strong di­as­pora, al­low a kind of SIP for those toil­ing abroad, those will­ing to lend to rel­a­tives in In­dia—for mar­riage, prop­erty or ed­u­cat­ing a sib­ling or a rel­a­tive.

In or­der to align with new re­al­i­ties, in­vestors could be al­lowed to in­vest for three years, the re­demp­tion could be in dol­lars and ru­pees. The govern­ment could also is­sue ad­di­tional pa­per an­nu­ally to prop liq­uid­ity for trad­ing or for re­demp­tion.

The cur­rency cri­sis af­fords an op­por­tu­nity to dollarise desi pride for di­as­pora div­i­dends.

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