India seeks diaspora bailout without strings

July 26, 2013

By Andy Mukherjee

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

India wants to ask its diaspora for a loan to ride out a funding crunch. For the fourth time in 22 years, the government is contemplating a cash call, Reuters reported on July 22. The borrowing will probably be in the form of a time-deposit-like structure, exclusively aimed at non-resident Indians.

Tapping expats for a loan isn’t a uniquely Indian arrangement. The most successful issuer has been Israel, which has even sold bonds at lower interest rates than US Treasuries to the Jewish community in the United States. Not all borrowers receive a patriotic discount, though. Ethiopia’s two attempts at solving its electricity shortage with money from expats have been largely unsuccessful. But the idea of channelling the annual $53 billion savings of the 140 million Africans who live outside of the continent survives.

Developing nations see benefits in borrowing from their countrymen overseas, especially in difficult balance-of-payment situations.

The rupee has slid 9 percent since early May, and India needs $25 billion in overseas funds in the second half of this year, according to JP Morgan. Having the diaspora as its fallback option has allowed New Delhi to avoid foreign debt markets altogether, thus avoiding the whims of global investors. Besides, unlike the IMF or the troika in Europe, expats don’t demand harsh fiscal belt-tightening and other structural reforms, which are often politically infeasible.

Finally, the borrowing doesn’t even have to be public debt. The India Development Bonds of 1991, the Resurgent India Bonds of 1998 and the India Millennium Deposits of 2000 were offered by the State Bank of India at the government’s behest. They were implicitly state-backed: Domestic taxpayers are on the hook, so the credit risk for lenders is minimal.

On commercial logic, State Bank of India couldn’t today raise the $5.5 billion it took from the diaspora in 2000. The most that any non-Japanese Asian issuer has scooped out from the offshore US dollar debt market was a $5 billion offering from conglomerate Hutchison Whampoa – that was almost 10 years ago.


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