Why Elephant Bonds Are Not Worth Going for
The proposal of the high level advisory group (HLAG), set up by the minister of commerce, for an amnesty scheme to bring black money back into India via the issuance of elephant bonds has drawn very few responses. This is not the first time such an effort has been made; but this proposal needs closer scrutiny because it has important macroeconomic implications.
To start with, the proposal is to bring the Indian monies parked in offshore financial centres or in the tax havens, in foreign currency. The proposal involves amnesty from persecution. However, for every $100 declared, the declarant will pay $15 as tax and invest $40 in a 20-year to 30-year bond. 
The nature of these bonds, as discussed in the HLAG report, can be of two types—London Inter Bank Offered Rate (LIBOR) + 500bps (basis points) coupon bonds (Para 7.2.4) or a 5% fixed coupon bond. The coupon payment earned will be taxed at 75%. 
What appears from a plain reading is that the bonds can be foreign currency denominated. The remaining $45 now becomes legitimate asset of the declarant which can/has to be invested in India. The money will be routed through the National Infrastructure Investment Fund (NIIF). 
It is claimed that if a sizable mobilisation happens, say to the tune of $500 billion or more, the real interest rates will fall, rupee will strengthen and savings investment gap will be narrowed. 
The proposal must be evaluated on two dimensions, namely, its impact on the external situation of India and the domestic impact on interest rates and public finances.  
On the external front, a convenient staring point will be to gauge how India’s international investment position (IIP) which records changes in financial assets and liabilities vis-à-vis rest of the world, will be impacted, assuming that, say, $100 billion is mobilised. 
One of the main implications of incorporating foreign parked monies in standard IIP accounts is the insight that the assets recorded under IIP are grossly understated. 
Thus, depending upon the estimate of the foreign parked monies—which is in the range of $500 billion to $1 trillion—India’s IIP position can change from being net borrower to a net lender to the rest of the world.    
If one plugs the figures from the proposed scheme, $15 billion (or Rs1.06 lakh crore @ Rs71 per US dollar) will add to the FX reserves directly; $40 billion (Rs2.84 lakh crore) will add to other liabilities under the assumption that elephant bonds are FX denominated and $45 will be placed under other assets. These changes are depicted in the table below with March 2019 IIP figures as the baseline. 
Is this good or bad? It is better to evaluate the post-mobilisation outcome through the lens of the Bimal Jalan Committee Report on the economic capital framework of the Reserve Bank of India. 
The Committee had noted that “… given the expanding net negative… IIP of India, the magnitude of foreign exchange reserves provides confidence in international financial markets. At present, the foreign exchange reserves (more than $400 billion) are significantly lower than the country’s total external liabilities ($1 trillion) and even lower than total external debt ($500 billion). This position is in contrast to that in 2008 when India’s foreign exchange reserves, at $310 billion, exceeded the then total external debt of about US$224 billion and provided a much larger coverage of total external liabilities that amounted to about $426 billion. This needs to be taken into account in assessing the external risk being faced by the country …”
With due respects, the proposal fails to address the external risk mentioned in the RBI report. 
The improvement achieved in net IIP is just $10 billion for a mobilisation of $100 billion. The very design that foreign money will be brought in by issuing debt should be a point of concern. 
National security advisor (NSA) Ajit Doval had estimated in 2011 that 60% of the foreign money originates from bribes, 15%-20% from business malpractices, 10%-12% from mafia and the rest 8%-9% simply parked abroad to avoid taxes in India. 
So, a maximum of 10% of foreign money is from legitimate activity but not repatriated to avoid taxation. For such money, amnesty may be justified. For the rest, the ethics and morality of creating an external (public) liability out of such money needs to be revisited.    
How will the domestic debt be impacted? The proposed scheme will lead to one-time net revenue of Rs1.06 lakh crore which is around one-third of gross primary deficit as of March 2019. When the NIIF issues elephant bonds, public borrowing will increase by Rs2.84 lakh crore via off balance sheet route in foreign currency.  
By combining the two facets discussed above the proposal, by itself, does not appear to address the twin deficit problem, i.e., simultaneous current account deficit (CAD) and fiscal deficit. 
The changes in IIP reflect in finance account of the balance of payment and have no bearing on the CAD (=savings investment gap). Likewise, increase in the public debt via NIIF does not resolve the structural aspects of the fiscal position. 
The presumption that mobilisation through the scheme will reduce interest rate is premature. The appreciation in rupee will shrink the existing tax base even after the one-time windfall. 
Similarly, reckoning of uncounted foreign assets under finance account does not lead to structural adjustments in CAD in which case it is farfetched to assume that the rupee will reverse its present course in the long-run.    
Then some other issues, which are mentioned but not elaborated, include the choice of LIBOR as a benchmark for the coupon when it is certain that LIBOR will be discontinued after 2021. 
What the impact of this scheme will be on sovereign rating and domestic asset markets and domestic bank credit, needs to be thought out.  
It would have been better if the flow of foreign money was through the UN Convention route in which case the IIP will be impacted only on the asset side. 
The government must stake its claim on unclaimed deposits in the Swiss Bank before they are confiscated by the Swiss government.  It is advisable to issue elephant bonds in rupee only so that no corresponding external liability is created.
(The author is an economist in the banking sector. Views are personal)
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