The Central government is expected to raise more debt in the coming year than it has ever done in the past. It will borrow at least Rs 3.3 lakh crore. The cost of this borrowing needs to be kept low, the risks to the economy resulting from such large borrowing should be minimised, and the credibility of the government maintained.

Fortunately, even before the ballooning of the deficit this year, the government had already initiated work on finding ways to handle its large borrowing needs. It must now speed up implementation of a Debt Management Office, an initiative that takes on even greater importance after the deficit estimates for the coming fiscal year have been announced.

Why does a large deficit put the DMO at the top of the policy agenda? Think about how a private company like Infosys or Reliance would have handled its borrowings. Infosys has a balance sheet size of Rs 17,000 crore and zero debt. Reliance is a much bigger company, with a balance sheet of Rs 150,000 crore. But Reliance has borrowings of Rs 40,000 crore.

Suppose both these companies decide on fresh borrowing of 20 per cent of the balance sheet size. For Infosys, that means a bond issue of Rs 3,400 crore. That’s a trivial matter for Infosys. The bond market sees that Infosys has zero debt to start with, and that repayment of this bond issue would be easy. In terms of the mechanics of how they go about it, they can get away with informal mechanisms: all the Infosys CFO has to do is make a few phone calls and he will get Rs 3,400 crore. The services of an investment banker are not particularly required there.

... contd.