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THE GIST of Editorial for UPSC Exams : 08 May 2020 (A war-like state and a bond to the rescue (The Hindu))

A war-like state and a bond to the rescue (The Hindu)

Mains Paper 3: Economy
Prelims level: Consol bond
Mains level: Government budgeting system and raising funds

Context:

As India’s ominous COVID-19 curve stretches further, urgent attention needs to be paid to an economy that is teetering on the edge.
Several economists, former Finance Ministers and central bank Governors have made the clarion call for a large stimulus to pull the economy back from the brink.
There are a few who seem to believe that there are ways and means to provide this stimulus without breaking the bank as it were.
As we spend more time in a national lockdown or quasi-lockdown situation, we believe that austerity measures and reallocations notwithstanding.
We will definitely need to go beyond current revenue receipts to fund the complete stimulus.

A gathering financial storm:

In the Budget before the pandemic, India projected a deficit of ₹7.96-lakh crore.
However, even then there were concerns around off balance sheet borrowings of 1% of GDP and an overly excessive target of ₹2.1 lakh crore through disinvestments.

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Need for stimulus package and measures taken by the central bank:

In addition to the expenditure that was planned, the government has to spend anywhere between ₹5-lakh crore and ₹6-lakh crore as stimulus.
The insipid stimulus provided by the government so far and recent announcements by the Reserve Bank of India (RBI) only serve to highlight how out of touch with reality they are.
All the RBI’s schemes are contingent on the availability of risk capital, the market for which has completely collapsed.
The two have tried several times over the last year to nudge banks into lending to below investment grade micro, small and medium enterprises, but have come up short each time.
Furthermore, while the 60% increase in ways and means limits for States is a welcome move, many States have already asked for double the limits due to the shortages in indirect taxation collections from Goods and Services Tax, fuel and liquor.
The government and the central bank need to understand that half measures will do more harm than good.
It will only lull us into a false sense of security, much like a lockdown without adequate testing.

Echo from the past:

Politicians and epidemiologists across the world have used the word “war” to describe the situation the world is currently in.
As we wage a united war against this virus, it would be interesting for us to look at war-time methods of raising financing.
One such method that has been used as early as the First World War is the Consol Bond.
In 2014, the British government, a century after the start of the First World War, paid out 10% of the total outstanding Consol bond debt.

What is a consol bond?

A perpetual bond, also known as a "consol bond" or "prep," is a fixed income security with no maturity date.
This type of bond is often considered a type of equity, rather than debt. One major drawback to these types of bonds is that they are not redeemable.
However, the major benefit of them is that they pay a steady stream of interest payments forever.The bonds, which paid out an interest of 5%, were issued in 1917 as the government sought to raise more money to finance the ongoing cost of the First World War.

Why it is a better option?

There is no denying the fact that the traditional option of monetising the deficit by having the central bank buy government bonds is one worth pursuing.
However, given an as yet hesitant (to raise debt) Prime Minister’s penchant for making citizens active participants to his missions, he might view a Consol Bond as a more compelling alternative.
Furthermore, with the fall of real estate and given the lack of safe havens outside of gold, the bond would offer a dual benefit as a risk free investment for retail investors.
When instrumented, it would be issued by the central government on a perpetual basis with a right to call it back when it seems fit.
An attractive coupon rate for the bond or tax rebates could also be an incentive for investors.

Conclusion:

The government can consider a phased redemption of these bonds after the economy is put back on a path of high growth — a process that might take that much longer for every day we extend this lockdown.

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Prelims Questions:

Q.1) With reference to the ATULYA, consider the following statements:
1. It was developed by CSIR.
2. It is a microwave sterilizer which can be operated in portable or fixed installations and helps in disintegrating the virus by differential heating in the range of 56 to 60 Celsius temperatures.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2