No-one could accuse the Indian government of failing to act. Not anymore. Not after announcing multiple stake sales of state-owned companies, a liberalisation of its external commercial borrowing rules and, most recently, a cut in withholding taxes of foreign debt that bankers think could swell global bond volumes by as much as $3bn by the end of the year.
These changes have ensured that India has generated more column inches over the last few months than any other economy in Asia.
Many of these moves were long overdue and came after a long period during which the government could have rightly been accused of failing to act. But India’s policymakers are now clearly in the mood for change. They have responded to the cacophony of dissenting voices that question the country’s recent economic performance, and they have been right to do so. But they should go one step further.
Perhaps the biggest hurdle for Indian corporations that want to fund offshore is a cap on the margins they can offer. They cannot pay an all-in rate of more than 350bp over six month Libor for deals with a maturity of between three and five years, or more than 500bp over Libor for deals above five years.
The three-to-five year margin cap was increased by 50bp the last time the rules were announced, in July. But bankers still complain that the price ceiling hinders their ability to generate business and removes a whole swathe of companies from tapping the offshore market.
There’s more than one way to skin a cap
Indian central bank officials should not, of course, be worried about foreign bank revenues. But they should be worried about the ability of Indian companies to become world-beaters.
By restricting what borrowers can pay on their overseas debt, India has created an unnecessary barrier to competition. Only the biggest Indian companies can tap offshore investors now; smaller players have little choice but to temper their ambitions and stick to domestic funding. That is a bad situation for everyone.
This does not mean that the Reserve Bank of India needs to scrap its limits on margins entirely. There are many in the market who argue that this would be a good idea, but such a bold move is unlikely from policymakers who prefer gradual change over seismic shifts. The central bank still, however, has other options.
The best scenario: India could take a more varied approach to its offshore borrowing rules. It now imposes blanket restrictions across different industries. The rules not only restrict what borrowers can pay, but what maturities they can use. (The rules state, for instance, that offshore debt worth more than $20m must be raised with a tenor of five years or more.)
It would be better for the government to allow smaller companies more breathing room with size and maturities, but still impose stricter guidelines on those economic powerhouses that have already proven they can thrive with the regulations — and which could reasonably be expected to take a more mature approach to borrowing.
The central bank could, as an alternative, simply allow more exemptions from its rules. It has given state-owned borrowers more leeway with maturities this year, and could easily extend these exemptions — and pricing exemptions — to private sector companies too.
That is perhaps the worst option, though. It allows the government to turn off the tap at any moment, and encourages the stop-start approach to external borrowing rules that the government has adopted so far, an approach which leaves no-one involved with any certainty whatsoever. But even this would be better than the situation now, where global lenders and Indian companies are often restricted from agreements that both parties are pushing for.
Indian policymakers have proved over the last few months that they are willing to make big changes to help steady investor expectations, and to help local corporations expand overseas. But they should not stop before embarking on a big reform of the most prohibitive rule of all. Central bank officials have made steps to liberalise the external commercial borrowing rules, but they should stop tinkering — and start abolishing.