The Covid-19 pandemic and the following nationwide lockdown has significantly affected the Indian economy. This circumstance necessitates a large stimulus from the government to rejuvenate the economy. Regrettably, the required stimulus surpasses the government’s current revenue receipts.
Stimulus refers to the efforts made through monetary or fiscal policy to rejuvenate the economy. Therefore, introducing a Consol Bond is a viable solution for the government to secure the necessary funds for the stimulus.
Financial Deficit in the Pandemic Aftermath
In the 2020 Budget, prior to the pandemic, India had estimated a deficit of Rs.7.96-lakh crore. However, this financial shortfall is projected to rise due to reduced revenue from an impending recession and a lack of disinvestment. While measures have been taken by the government and RBI to minimize the economic repercussions of the nationwide lockdown, they are deemed insufficient.
To supplement the planned expenditure, the government needs to distribute nearly Rs.5-lakh crore and Rs.6-lakh crore as part of the stimulus.
Understanding Consol Bonds
A Consol bond, often known as perpetual bond, is a bond that does not have a maturity date. These bonds are typically seen more as equity than debt. One primary advantage of these bonds is that they provide a consistent flow of interest payments in perpetuity. Despite this, these bonds can be redeemed at the issuer’s discretion.
Historical Occurrence of Consol Bonds
Consol bonds were mainly used by the British government during World War I. The bonds were issued in 1917 to help the British government raise more money to cover the costs of the war. In 2014, a hundred years after the start of WWI, the British government paid out 10% of the total outstanding Consol bond debt.
Consol Bonds in Relation to the Current Indian Economic Scenario
The introduction of Consol bonds could have been a more effective solution for the government if citizens had chosen to invest in these bonds instead of donating to PM-CARES. This would have made citizens active participants in managing the country’s economic circumstances. Unlike PM-CARES, the bond proceeds could have been used to meet various crucial medical and economic needs of the country.
Consol Bonds as a Potential Solution
Given the downturn in real estate and scarcity of safe investment options besides gold, the Consol bond presents a dual advantage as a risk-free option for retail investors. An appealing coupon rate for the bond or tax rebates could also serve as an incentive for investors. Post attaining high growth in the economy, the government may contemplate a phased redemption of these bonds.
