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CONSOL BOND

  • IASbaba
  • May 7, 2020
  • 0
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ECONOMY/ GOVERNANCE 

Topic: General Studies 2 & 3:

  • Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 
  • Government policies and interventions for development in various sectors 

CONSOL BOND

Context: As COVID-19 curve stretches further, there is a call for a large stimulus to pull the economy back from recession.

What were the concerns with India’s fiscal situation in pre-COVID time period?

  • In the Budget before the pandemic, India projected a deficit of ₹7.96-lakh crore
  • There were concerns about off-balance sheet borrowings of 1% of GDP 
  • Excessive target of ₹2.1 lakh crore through disinvestments
  • In recent times, both Union government and RBI have tried several times to nudge banks into lending to below investment grade MSMEs, but have not been successful.

What will be the challenges with India’s fiscal situation in post-COVID time period?

  • In addition to the expenditure that was planned, the government has to spend between ₹5-lakh crore and ₹6-lakh crore as stimulus.
  • The financial deficit number is set to grow by a wide margin due to revenue shortage caused due to lockdown
  • There is lack of appetite for disinvestment.
  • Even though RBI has increased the limit on ways and means for States by 60%, many of them have asked to double the limits. This is due to the shortages faced by States in indirect taxation collections from GST, fuel and liquor. 

What are the avenues for government to raise finances in post-COVID times?

  • Firstly, there is a traditional option of monetising the deficit by having the RBI buy government bonds
  • Relaxing FDI norm to attract foreign investment. However, this is not promising given the rise in Nationalistic sentiment during COVID crisis
  • The other alternative suggested is Consol Bonds 

Consol Bond- A Brief History 

  • This has been used as early as the First World War (WWI)
  • The bonds, which paid out an interest of 5%, were issued in 1917 by UK government to raise more money to finance the ongoing cost of war 
  • Citizens were asked to invest in these bonds with a message that their investment will help fight the country, akin to a soldier’s fight but with no risk to their lives.
  • As a result, most of the Consol bonds in the UK were owned by small investors, with over 70% holding less than £1,000 
  • In 2014, the British government, a century after the start of the WWI, paid out 10% of the total outstanding Consol bond debt

Why Consol Bond is a better option?

  • An attractive coupon rate for the bond or tax rebates could also be an incentive for investors, who are looking for avenues to invest.
  • Participative: It makes citizens active participants in the fight against slowdown caused by pandemic
  • Attractive: With the fall of real estate and given the lack of profitable alternatives, the bond would offer a dual benefit as a risk free investment for retail investors.
  • Guaranteed: It would be issued by the central government on a perpetual basis with a right to call it back when it seems fit
  • Flexibility: The government can consider a phased redemption of these bonds after the economy is put back on a path of high growth
  • Welfare Oriented: Unlike PM-CARES, the proceeds of the bonds could be used for everything — from Personal Protective Equipment for doctors to a stimulus for MSMEs

Conclusion

  • With the pandemic’s shadow over the economy, a Consol Bond issue seems like a compelling solution for the government

Connecting the dots:

  • Impact of WWI on global economy
  • Measures adopted in the wake of 2008 financial crisis

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