In an interview to CNBC-TV18, professor Charles Goodhart, the Global Expert on Public Finance Issues gave his views on the pros and cons of India getting included in one of the global emerging market government bond indices like the JPM emerging market government bond index.
Below is a verbatim transcript of the interview on CNBC-TV18
Q: India has had a congenital problem of running current account deficits (CAD). Is it a good idea for a country like this to allow more debt financing of this deficit?
A: If you are deficit country you actually have to take on more debt because if you are running a CAD you need to have a capital inflow to balance it. So yes this is probably a good time to try and encourage more debt while you recover and in future hopefully grow faster.
Q: Traditionally the Reserve Bank of India (RBI) has argued that more equity flows and Foreign Direct Investment (FDI) and deposits by Indians living abroad be used to finance the CAD, the RBI has been wary of increasing external debt since it could make the country vulnerable. Do you think it is a good idea to now increase debt finance?
A: At some point yes if one has got a much larger external debt one is more vulnerable. For example the Japanese who have got a huge outstanding debt but a very little of it is owned externally which means they can go on financing their debt much more easily. While some of the European countries like Italy had a larger external holding of their debt which when panic and difficulties started to arise did make them more vulnerable. And certainly you are right that if you can finance your CAD more through equities, equity inflows, FDI and inward remittances then that is better than actually selling fixed interest debt but one way or another you have got to meet the CAD that you have at the moment.
Q: In India the CAD is in part because of a large fiscal deficit. The government for political ends subsidizes fuels and this leads to a high usage and therefore more crude oil imports and therefore a larger current acct deficit. Won’t a policy of more foreign debt discourage the will to cut the fiscal deficits?
A: No, I don't think so. Indeed the foreign scrutiny of what you were doing might put further pressure on the government in order to maintain your credit rating position and so on. As long as the government always has excess, as it does ultimately and I don't think that the argument that this would remove pressure from the government to restore fiscal position, I don't think that is a very strong one.