Relevance of the Consol Bonds amid Covid-19
- 09 May 2020
- 4 min read
Why in News
The Covid-19 pandemic and consequential national lockdown in the country has laid a grave impact on the Indian economy.
- Considering the above scenario, the large stimulus needs to be introduced by the government to pull back the economy where the required stimulus will exceed the current revenue receipts of the government.
- The stimulus refers to attempts to use monetary or fiscal policy (or stabilization policy in general) to stimulate the economy.
- Thus, an introduction of a Consol Bond is one of the solutions for the government to fund the stimulus.
- In the Budget (2020) before the pandemic, India projected a deficit of Rs.7.96-lakh crore.
- Further, the financial deficit is expected to increase by a wide margin due to revenue shrinkage from the coming depression accompanied by a lack of disinvestment.
- Though, the government and RBI have announced various economic measures to deal with the economic impact of nationwide lockdown but these measures are considered to be inadequate.
- In addition to the planned expenditure, the government needs to spend nearly Rs.5-lakh crore and Rs.6-lakh crore as stimulus.
- Consol bond (also known as perpetual bond) is a fixed income security with no maturity date.
- It is often considered a type of equity, rather than debt.
- The major benefit of these bonds is that they pay a steady stream of interest payments forever. However, these bonds can be redeemed at issuer's discretion.
- Notable Existence of Consol Bonds in the History:
- The console bonds were majorly used by the British government during World War-I.
- The bonds were issued in 1917 as the British government sought to raise more money to finance the ongoing cost of World War-I.
- In 2014, the British government, a century after the start of World War-I, paid out 10% of the total outstanding Consol bond debt.
Consol Bonds and Current Indian Economic Scenario
- Consol Bonds Instead of PM-CARES:
- The introduction of the Consol bonds would have been a better solution for the government if people would have invested in consol bonds instead of making donations to PM-CARES. It could have made citizens as active participants in handling the economic scenario of the country.
- Unlike PM-CARES, the proceeds of the bonds could have been used to fulfil the various essential medical as well as economic requirements of the country.
- One of the Available Solutions:
- The fall of real estate and given the lack of safe havens outside of gold, the bond would offer a dual benefit as a risk free investment for retail investors.
- An attractive coupon rate for the bond or tax rebates can also be an incentive for investors.
- The government can consider a phased redemption of these bonds after the economy is put back on a path of high growth.