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Will the government issue Corona bonds? A plan has been in the works

As the Indian economy struggles in the vice-grip of the Covid-19 pandemic, the government has been considering the idea of issuing “Coronavirus bonds” to shore up liquidity. One suggestion was to use them to make payments such as tax refunds.

A proposal made earlier this month and being debated in the highest echelons of the government envisages issuing special tax-free bonds bearing 4% interest rate and a six-year lock-in. According to a source, such a bond issue would require amendments to tax laws and, hence, will need an ordinance for it to be launched urgently.

In a televised address to the nation on Tuesday, Prime Minister Narendra Modi announced a Rs 20 lakh crore package and economic reforms. Modi said finance minister Nirmala Sitaraman would lay out the plan beginning Wednesday.

The Finance ministry and NITI Aayog did not respond to questions sent to them on Monday. When asked about the possibility of issuing Covid bonds during a conversation with ET earlier, chief economic advisor KV Subramanian had said that the government had received many proposals. “There are ideas and each of these ideas has their pros and cons, and we are evaluating them,” he said.

The government fears that the severe blow to GDP growth will drastically reduce its revenues and it does not see buoyancy in the next few quarters. The bonds are proposed as an alternative to printing cash and would be almost like an alternative with the investor’s name and details imprinted on it.

Anyone, including non-resident Indians and corporates, would be allowed to invest in the paper. They would be transferable and can be mortgaged to raise money from banks and financial institutions. One plan being debated is the government also pay tax refunds with bonds and even consider paying suppliers with the bonds.

It is estimated that the government would save about Rs 2 lakh crore of liquidity if it pays refunds using the bonds. The inflationary impact of such an issue will be felt depending on when it is issued, how much it is sold and what do the buyers do with it. However, if the government were to pay its dues in bonds, they are likely to be converted to cash immediately by way of pledge or sale to banks. That will add to the money supply and hence, inflation.

Prime minister Narendra Modi had held a series of meetings with his ministerial colleagues to work out a second stimulus package to revive the stalled economy. States have been asking for financial support to fight the pandemic and help pay mounting bills even as revenues dry up due to lockdowns.

What’s the issue

  • 6-year, 4%, tax-fee bonds issued by GoI
  • Corporates, individuals, NRIs can invest
  • Govt hopes to shore up Rs 2 lakh cr

Source: Economics Times

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Corona Newsline Supported by LiiFii Research Foundation.