Bond with USD liabilities, not necessarily with the bond

By Taponeel Mukherjee

The Budget 2019 announcement regarding a potential USD bond issuance by India has been in the news of late with opinions divided amongst market experts. Given the two distinct components of the USD bond issuance, of increased debt and higher USD liabilities, a look at the second component in detail is well worth our time. While the government will have to borrow to fund specific components of its expenditure, the question is whether the USD bond issuance route is the optimal strategy to utilise for increasing USD liabilities for India. Alternatively, are there alternative avenues to boost the economy by increasing USD liabilities.

 

India, by virtue of its energy dependence on imports, has a structural USD liability that must be taken care of. According to data from the Petroleum Planning and Analysis Cell (PPAC), the value of crude oil imports for fiscal 2019-20 is estimated at approximately $112 billion. The biggest takeaway from this number is that if India were to add to this USD liability, then it must be for reasons that help drive substantial growth in the economy and keeping in mind specific issues.

The specific areas that deserve focus in terms of increasing USD liabilities are mission-critical investment sectors in India that need a boost. There are three broad aspects of utilising USD liabilities to boost investment. The three strategies can be classified into sectoral, investor and risk-stage perspective. The sectoral strategy relates to boosting crucial sectors such as waste-to-energy that the government deems essential, and sectors that might find attracting capital challenging due to low financial returns.

The government could identify investment sectors and regions within the country that are relatively more challenging from investors' perspective, or for other reasons haven't attracted large pools of capital. These sectors and regions can be boosted by strategically providing USD denominated contracts for investors. For instance, if the government wants to promote investments in waste-to-energy projects or the export of financial services, then the government can offer investors USD denominated cashflows to boost such sectors. Such usage of "increased USD liabilities" may provide significant impetus to the investment climate in the country.

An investor focused strategy is the second area of focus for India within which to increase USD liabilities. Essentially, the government's bandwidth of prudently creating more USD liabilities is basically to encourage a more extensive and more diverse pool of investors into India. Given the focus the government has on boosting Foreign Direct Investment (FDI), a focus on a more diverse investor pool is a must.

India has attracted some significant investments in the last few years, but by and large, the foreign investors have been large diversified funds which are better equipped to manage emerging market cashflows by virtue of a more diversified cross-country investment portfolio. That said, not all investors have a global investment portfolio. A lot of institutions in the US and Europe are essentially raising and investing money in their home currency. Persuading such institutions in the US and Europe to invest in Indian assets that generate INR returns can be challenging given the foreign exchange volatility embedded in the currency conversion.

Potential access to a larger pool of capital is precisely where the government can step in, to not only boost investments in mission-critical sectors but also to enable new investors to invest into Indian assets by providing them with USD denominated returns. Essentially, broadening the investment pool looking at India assets is an aim worthy of consideration.

Now we come to "Risk stage perspective". The third design for utilising an increasing profile of USD liabilities for India could be for the government to provide USD hedges, not from a sectoral or investor perspective, but a risk-stage perspective. A risk-stage view would imply that investors who undertake greenfield risk in projects may get USD denominated cashflows for that component of the investment, with the asset turning into a standard INR cashflow generating asset once it turns into an operating asset.

It is essential to realise that utilising the above-stated strategies would be for USD denominated cashflows to act as a catalyst to boost investment flow in India. Increasing USD liabilities can serve India well with a strategic focus to boost investments and growth. All options must be weighed and discussed to decide on the most optimal path forward.

(The views expressed in this article are personal and that of the author. The author heads Development Tracks, an infrastructure advisory firm. You can contact him at taponeel.mukherjee@development-tracks.com or @Taponeel on Twitter)