Consol Bonds – Economics – Free PDF Download

• The Covid-19 pandemic and consequential national lockdown in the country has laid a grave impact on the Indian economy.
• Large stimulus needs to be introduced.
• The stimulus refers to attempts to use monetary or fiscal policy.
• Thus, an introduction of a Consol Bond is one of the solutions for the government to fund the stimulus.

Consol Bonds

• 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 Instead of PM-CARES

• 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.
• 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.

Consol Bond- A Brief History

• This has been used as early as the First World War (WWI)
• The bonds, which paid out an interest of 5%, were issued in 1917 by UK government to raise more money to finance the ongoing cost of war
• Citizens were asked to invest in these bonds with a message that their investment will help fight the country, akin to a soldier’s fight but with no risk to their lives.
• As a result, most of the Consol bonds in the UK were owned by small investors, with over 70% holding less than £1,000
• In 2014, the British government, a century after the start of the WWI, paid out 10% of the total outstanding Consol bond debt

Why Consol Bond is a better option?

• An attractive coupon rate for the bond or tax rebates could also be an incentive for investors, who are looking for avenues to invest.
• Participative: It makes citizens active participants in the fight against slowdown caused by pandemic
• Attractive: With the fall of real estate and given the lack of profitable alternatives, the bond would offer a dual benefit as a risk free investment for retail investors.
• Guaranteed: It would be issued by the central government on a perpetual basis with a right to call it back when it seems fit
• Flexibility: The government can consider a phased redemption of these bonds after the economy is put back on a path of high growth
• Welfare Oriented: Unlike PM-CARES, the proceeds of the bonds could be used for everything — from Personal Protective Equipment for doctors to a stimulus for MSMEs

Concerns with India’s fiscal situation in pre-COVID time period

• In the Budget before the pandemic, India projected a deficit of ₹7.96-lakh crore
• There were concerns about off-balance sheet borrowings of 1% of GDP
• Excessive target of ₹2.1 lakh crore through disinvestments
• In recent times, both Union government and RBI have tried several times to nudge banks into lending to below investment grade MSMEs, but have not been successful.

Challenges with India’s fiscal situation in post-COVID time period

• In addition to the expenditure that was planned, the government has to spend between ₹5-lakh crore and ₹6-lakh crore as stimulus.
• The financial deficit number is set to grow by a wide margin due to revenue shortage caused due to lockdown
• There is lack of appetite for disinvestment.
• Even though RBI has increased the limit on ways and means for States by 60%, many of them have asked to double the limits. This is due to the shortages faced by States in indirect taxation collections from GST, fuel and liquor.

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