“We are in talks with bankers and other resources regarding the launch of such an issue,” said one of them.
The government plans to raise temporary funds from the central bank through ways and means advances (WMA), a short-term borrowing window. However, this may not be sufficient to meet anticipated immediate expenses, said the people cited above.
The structure of the issue and number of instalments are yet to be decided. The government may either sell the bonds in a direct public issue, or use a public sector company to raise the funds. State-run utilities and financiers such as REC, Power Finance Corp. (PFC) and NTPC sold tax-free bonds a few years ago.
“The finance ministry, the Niti Aayog and the Prime Minister’s Office are involved in the discussions,” said an executive aware of the plans. Niti Aayog and government agencies didn’t respond to queries.
Investment Option for Retail Investors
If taxes were to be applied to a 10-year bond offering 5.5% tax free, the effective cost would be 7.7%, if the current rate of marginal tax were to apply to the investment.
According to bankers, these bonds could also provide an investment option to retail savers, who now consider debt mutual fund schemes rather risky after Franklin Templeton decided to freeze six plans. If successful, this bond sale would be one of the first such issuances in which retail investors could also participate in a tax-free, sovereign instrument.
The Centre normally raises money from the debt market, where the Reserve Bank of India (RBI) acts as its merchant banker, auctioning securities weekly. The government has set a target of borrowing a net Rs 5.11 lakh crore in FY21, versus Rs 4.74 lakh crore in the previous year.
Gross borrowing is pegged at Rs 7.8 lakh crore, compared with Rs 7.1 lakh crore a year earlier.
“Fiscal slippages are definitely on the anvil due to lower tax collection,” said Madan Sabnavis, chief economist at CARE Ratings. “Giving tax-free bonds will open the window for retail savers and corporations to invest. But raising money through G-Secs will flood the market and push up yields.”
A nationwide lockdown means that a large part of the Rs 1 lakh crore of GST monthly collections would have slipped, according to CARE estimates. “Also, disinvestment cannot be realised,” said Sabnavis.