Strategic Depth of Borrowing

Context: Both the Union and the states are in need of greater debt on account of lower tax collections. There is a need to create an institutional infrastructure which allows expansion in government borrowings.

Factors necessitating large borrowing 

• Decrease in tax collection: 

• Due to profit loss to corporations and job losses of salaried workers

• Union government tax receipts were down 32.65% , on a year-on-year basis, for April-May-June 2020.

• Limitations in Stop-gap solutions, like taxing petroleum products despite a decline in the crude oil prices worldwide.

• Centre’s obligation:

• Promise of Goods and Services Tax (GST) compensation to states.

• Providing subsidies and keep up expenditures on core public goods.

• To assist short term business cycle.

• Weak borrowing institutional mechanisms: 

• There is no unified database about the borrowing and contingent liabilities of the Indian state. 
• A system of financial repression where bonds are forcibly put down into about 100 entities.

Way Forward: Creating an institutional arrangement for borrowing requires following 3 elements - 

• Professional arms-length institution: in the form of a  “Public Debt Management Agency”.

• To assist finance ministries (Union and states)
• To engage with bond investors and bring their concerns into the budget process
• To possess integrated databases about all the borrowing and contingent liabilities of the Indian state and the skill to find optimal methods for borrowing.

• A broad pool of voluntary lenders to the government

• Large quantity of financial firms and bidders should be active in the bond-currency-derivatives nexus, which will get large borrowings with small increase in interest rates.
• E.g. Voluntary lenders to the government were the economic foundation of Britain’s ability to wage wars.

• Financial Prudence:  For E.g. The ratio of debt to annual income should be allowed to increase once during a cycle of decade. Such prudence would reassure voluntary lenders of lower interest rates.

Conclusion: A greater institutionalised capacity for borrowing by the Union and the states is necessary to assist the economy when there is a decline in gross domestic product (GDP).