Rupee bonds rather than foreign aid

Rupee bonds rather than foreign aid

Let Kerala’s well-wishers abroad buy them cheap.

The controversy over accepting foreign aid for reconstruction in Kerala is best avoided. The matter should not be seen just from the perspective of coping with flood damage. Accepting foreign aid has implications for the country as a whole. Suppose India accepts aid from the UAE, and then, another nation offers aid that India cannot accept, say, because that nation is in the habit of sending terrorists into India and does not deserve to occupy any moral ground, high or low, vis-à-vis India. India would then have to turn it down, inviting accusations of discriminating against some nations in the area of aid legitimacy. It is best to not accept aid from other governments for disaster relief.

This does not mean that India should turn its back on external generosity in the face of a domestic calamity or that Kerala should be starved of funds for reconstruction. Non-government agencies and individuals are free to send donations. An even better way to let external well-wishers provide resources to help with post-disaster reconstruction in the state is to invite them to invest in rupee bonds issued by Kerala-based companies that are either already involved in building infrastructure in the state or are newly created to undertake post-disaster recovery. If they are issued in India, and there is no room left in the corporate bond segment permitted for foreign portfolio investors, RBI could create that space without difficulty. At present, issuing rupee bonds abroad is treated as external commercial borrowing, and it is unclear that bond issuance abroad by state government-owned entities would not fall foul of the bar on state governments borrowing abroad on their own. Kerala’s disaster relief is as good an occasion as any to clarify the matter.

The coupon/pricing of the bond could reflect any noncommercial intent in their purchase by foreign investors. Concessionary pricing would spell illiquidity for a while. But the bonds would be a tidy bet on Indian productivity and rupee gains that would sit well in a diversified portfolio of long-term investments.