Prospects of flat issuance is bad news for government’s efforts to revive sagging growth – Chunumunu
Financing the fiscal deficit will not be a problem as the government can resort to monetisation of the deficit through several innovative options, including issuing sovereign perpetuity bonds, zero coupon bonds, and tax-free bonds, State Bank of India (SBI) said in its economic research report, Ecowrap.
Monetisation of fiscal deficit, entailing financing of the government’s extra expenses, could be done either through newly created money issued by the central bank and transferred to the government or the government issuing bonds. “We still believe financing the fiscal deficit will not be a problem as the government can resort to monetisation of deficit through several innovative options. One such option is issue of sovereign perpetuity bonds,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.
The rationale for a perpetual sovereign bond is quite simple – the principal amount will never have to be repaid, he added.
According to the report, sovereign perpetuity bonds have been used by the UK and the US in the 18th and 19th centuries to finance war mobilisation. But long-term government bonds, going up to even 100 years (the Austrian government issued a 100- year bond last year) are common enough.
The report suggested another option – issue of zero coupon bonds (ZCBs) – to monetise the fiscal deficit. ZCBs are issued at a discount and redeemed at their full face value.
“Both these bonds could be issued by the sovereign and privately placed with the RBI or could be incentivised for larger participation by banks and even retail market participants.
“The other option is issue of tax-free bonds, for which there could be a huge market appetite in the current market environment,” the report said.
Referring to the Centre announcing higher borrowing of around ₹4-lakh crore, taking into account the shortfall on account of disinvestment and tax and non-tax revenues, the report said: “RBI would have to monetise or do OMO (open market operation) purchases or through some other method (tax free bonds) to the tune of at least ₹4-lakh crore to fulfill the demand supply gap.”