Modi and the money crisis: is foreign debt the last straw for India?

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Kathmandu. Under Prime Minister Modi, Indian aspirations soared high. Their march towards being global economic power was undeterred until they had to face the crisis brought by COVID-19. As Indian economy moves towards recovery phase from the emergency phase now, the Indian government faces a scarcity of fund to inject in infrastructure development projects.

India is one of the worst-affected country by the pandemic. According to Trading Economics, the Indian economy shrank 23.9% year-on-year in the second quarter of 2020, much worse than market forecasts of an 18.3% drop. It is the biggest contraction on record, the result of India imposing a corona virus lockdown in late March and extending it several times, halting the economic activities.

Adding to India’s woe is arch rival China’s economic growth. It grew by 3.2 percent year-on-year in the second quarter of 2020, rebounding from a record 6.8 percent contraction in the previous three-month period.

The Reserve Bank of India has released around $50 billion liquidity in the banking sector to bring them in the right direction.

In NIKKEI Asia, Amit Jain, a Singapore based consultant, opines that  owing to the private sector’s reluctance in long term investment, the Modi government is  kick-starting infrastructure projects which in turn can have a positive effect for the rest of the economy

The government has to find ways to collect the $1.4 trillion that Modi has promised to spend on infrastructure. For now, the government of India is relying more on mobilizing resources at home selling bonds to state run banks and financial institutions, but that will eventually run the banks dry of money to do business with.

“Infrastructure projects often take years to break even and need sustainable long term financing. India’s financial system simply cannot provide for it all on its own. Modi has no choice but to find the money elsewhere,” says Jain. “The country’s foreign exchange reserves are sufficient to meet any obligation. India can afford to borrow in dollars. Modi could consider lifting the limits set on foreign investors in the debt market. International financial institutions are estimated to have $120 trillion in assets under management. Even if India can tap a fraction of this pool it would go a long way in bridging the country’s financing needs,” he adds.




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