Presenting the Union Budget 2019-20 last Friday, Finance Minister Nirmala Sitharaman proposed to raise a part of the government's gross borrowings from abroad.
The budget proposal is expected to free-up additional liquidity in the domestic market and lower interest rates. Consequently, it will provide consumers and industry with cheaper access to finance.
According to Edelweiss Securities Lead Economist Madhavi Arora, lower interest rates wil aid consumer driven sectors which have been bogged down due to subdued demand.
Currently, the economy suffers from rural distress, slow pace of private investment and high finance costs. These together have subdued consumer sentiment and further impacted everything from car sales to air passenger traffic. This in turn has impacted production levels and further stalled hiring and wage levels.
The slowdown has impacted the automobile sector the hardest. The off-take data for May showed that domestic passenger car sales were down 26.03 per cent to 147,546 units.
"Issuance of sovereign bonds should ideally free up resources available for production needs at a reduced cost," explained Grant Thornton India Partner Sridhar V.
"Government's move to issue sovereign bonds by itself is an indication of its confidence in the macro fundamentals and could boost economic activity."
However, Kavan Mukhtyar, Partner and Leader - Automotive, PwC India cited the need for further liquidity infusion.
"Cheaper interest rates (as an impact of government's external borrowings) will aid in lowering the ownership cost. However, the need of the hour is to increase the availability of liquidity through NBFCs (non-banking finance companies) and banks," Mukhtyar said.
"Sales might turn positive in August as the liquidity situation is expected to improve."
Off-loading sovereign bonds is a mechanism available to governments for raising cheaper funds from international markets.
A sovereign bond is a debt security issued by a national government and is either denominated in foreign or domestic currency.
"India's sovereign external debt to GDP is among the lowest globally at less than 5 per cent," Sitharaman said in her maiden Budget speech in Parliament.
"The government would start raising a part of its gross borrowing programme in external markets in external currencies. This will also have a beneficial impact on the demand situation for government securities in the domestic market," she added.
This will be a first such bond issuance. In 2013, the government had considered the idea, but never implemented it. At that time, the country was faced with major fiscal and current account deficits.
Instead, the Reserve Bank of India at that time announced a scheme to incentivise foreign currency non-resident (FCNR) deposits, which brought in nearly $34 billion. As a result, most of India's debt is rupee-denominated.
The government's latest move is being seen as prudent in the face of limited options to raise funds as a slowing economy curtails tax revenue, while the borrowing target of a record Rs 7.1 trillion ($104 billion) this fiscal year remains a tough task.
"It will aid the sector to a limited extent. While the interest is low, transmission of cheap capital in the system is important, which takes time," said Rahul Mishra, Principal, A.T. Kearney.
"Also, given the NBFC crisis, the overall availability of capital is very limited and whatever capital is available, it has strong checks and collateral requirement. A combination of low interest, eased out lending norms and better transmission of money will have a positive impact on consumption sectors over a 3-6 month period," he added.
(Rohit Vaid can be contacted at rohit.v@.in)
( With inputs from IANS )