Good news for India that the globally renowned JP Morgan group has announced to incorporate the bonds of the Indian government into its esteemed Global Bond Index. However, the impact of this announcement will be visible only after June 2024. It’s important to note that governments often borrow from the market to bridge financial gaps, and these borrowings are facilitated through government bonds. Financial deficits occur when expenses exceed revenue in any economy. In the present context of the Indian economy, the government proposed a financial borrowing of 15.43 trillion rupees under the budget for the fiscal year 2023-24. This borrowing aims to address the financial deficit or fiscal deficit in the economy. Government bonds can have both short-term and long-term durations, although they are generally proposed for the long term by governments. The Modi government has now set a maximum tenure of 50 years for these bonds.
It is also important to understand that “global bond index” of J P Morgan group lists government bonds only.This index is similar to what Sensex and Nifty are for equities in India. This index gives priority only to some of the fastest growing economies of the world. Hence, embracing this strategy could prove highly lucrative for India on the global stage. It offers the prospect of attracting capital from diverse foreign investors through government bonds in the near future. Currently, foreign investments in Indian government bonds are just over 2%, which does not effectively contribute to India’s financial stability globally. The responsibility for investments under bonds for government loans since independence has largely been shouldered by Indian banks and the insurance sector.At present, banks invest more than 60 per cent in them. Due to this, financial facilities given by banks to other sectors in Indian society, including MSMEs, are comparatively very low. Consequently,the small and micro industries are able to get their financial facilities and loans only through the informal sector at very high interest rates. These high financial costs always hamper the financial efficiency of Indian MSMEs and small and medium industries. This commitment on Indian banks remains due to the Statutory Liquidity Ratio ( SLR) rate of the Reserve Bank. It is noteworthy that in the 80’s the SLR used to be 40 percent. That is, during that time, Indian banks had to invest about 40 percent of their financial liquidity in government bonds. As a result, the Indian economy could not expand much at that time and later in the recommendations of various financial committees, a demand was made to reduce the SLR, but even today this rate remains at 19 percent.Similarly, the insurance sector in India primarily invests in various “Triple A-rated” government bonds, limiting the expansion of insurance companies into sectors beyond life insurance, creating challenges in customer-centricity and profitability.
What future benefits this accomplishment of the Modi government will have for the Indian economy and society is currently a topic of discussion.One thing is certain that the commitment to invest in government bonds will give some relief to Indian banks in the future. The Reserve Bank of India (RBI) will likely reduce the Statutory Liquidity Ratio (SLR) in the future, due to the increased flow of foreign investments into government bonds listed in J.P. Morgan’s index after June 2024. Consequently, in the upcoming years, Indian banks will be able to obtain loans easily for their financial needs, especially in sectors like MSMEs, enhancing their profitability. Another potential benefit lies in the current high-interest rates on bonds, which impose a significant financial burden on the government. Data indicates that the interest rate on government bonds has remained around 10% since 2000. Although it briefly dropped to around 5% in 2005-06, but it is presently over 7%. With the anticipated increase in foreign investments following J.P. Morgan’s listing, these costs are likely to decrease. As a result, the government can allocate its financial funds towards infrastructure development and various social welfare schemes, focusing mainly on education and healthcare.
However, this path won’t be so easy because there are two main issues at the global level with investing in government bonds in India: one is tax benefits and the other is payment in foreign currency outside India. We also need to understand that despite being listed on JP Morgan, government bonds will be issued in Indian Rupees, and foreign investors will be attracted to invest at the maximum interest rate due to the exchange rate impact on the global level compared to the dollar. It’s essential to note that when the flow of foreign investors increases, the demand for Indian Rupee will rise significantly, making it stronger against the dollar. However, it remains to be seen whether the Indian export lobby will accept this situation as it might impact their profits. Another significant concern is how the Reserve Bank of India will control inflation in the domestic market due to the increased demand or supply of Rupee. Undoubtedly, when there will be a reduction in the cost of government bonds through foreign investors, there will be a change in the tax rates in the domestic market, which will ultimately benefit the Indian.
Dr P S Vohra is Writer, columnist and financial thinker, View are personal
