Govt draws up plans to address concerns of green bond investors

The government is working out means to convince investors in green bonds that the money they put in will not be used for anything else.
 
“The decision is difficult and it is a work in progress,” said a top official in the Reserve Bank of India (RBI).
 
While the government runs committed funds like those from cess on taxes and the non-lapsable pool for the Northeastern states, there is no precedent for this as regards borrowing.
 

Sequestering the borrowing for green bonds has become a key demand from global investors. Those who have reached out to the finance ministry and the RBI have asked for an assurance that their investment in such bonds will be spent on only climate-positive projects and not be used to shore up the fiscal position of the government.

 
The subject is also understood to have been flagged by the Singapore government. The deputy prime minister of Singapore, Lawerence Wong, was in New Delhi last week and met Prime Minister Narendra Modi, besides NITI Aayog Chief Executive Officer Parmeswaran Iyer, G20 Sherpa Amitabh Kant, Department of Economic Affairs Secretary Ajay Seth, and Ministry of New and Renewable Energy Secretary I S Chaturvedi.
 
The government is keen that sovereign funds like Temasek invest in these bonds.
 
Sequestering market borrowing is a challenge for the government. All receipts, tax and non-tax, go into the Consolidated Fund of India as a fungible resource.

 
Parliament decides how the money is spent.
 
A government official aware of the developments said the treatment for such bonds had to be different from that for the money raised through various types of cess. Examples of these are the goods and services tax compensation cess and the road cess. While the money parked as cess is supposed to be utilised for identified purposes like paying the states or spending on roads, nothing stops the government from dipping into those funds in an exigency.
 
The Comptroller and Auditor General in a report on the government finances in 2020 noted the Centre withheld more than Rs 1.1 trillion of the Rs 2.75 trillion it collected as cess, instead of disbursing it to the states.

 
The Fifteenth Finance Commission has, for instance, asked the Centre to set up a non-lapsable fund for modernising defence and internal security. Union Finance Minister Nirmala Sitharaman has given an in-principle nod to the suggestion.
 
Unlike taxes, in the case of green bonds, it will be borrowing and the money borrowed so far has never been carved out.
 
To get around the problem, the government might use a precedent as regards its expenditure rules -- the non-lapsable pool for the Northeastern states, set up in 1998-99. Fifty-two ministries and departments at the Centre commit 10 per cent of their plan Budget every year for the Northeastern states. If at the end of the year any ministry’s expenditure falls short of this, the sum not spent is notionally transferred to the pool. This ensures compatibility with the rules of the Consolidated Fund, which require all unspent money to come back to it. The ministry concerned with the Northeast administers this pool, which is maintained as a reserve fund in the Public Accounts of the Centre.

 
The Centre in November 2005 constituted a National Investment Fund (NIF), into which the proceeds from disinvestment go.
 
In the wake of the global economic meltdown, a one-time exemption was given in 2009 to utilise the disinvestment proceeds directly for select social-sector schemes. The exemption continued, and by 2013 other expenditures too got its benefit.
 
The RBI and the Ministry of Finance have to take a call on the matter soon since the borrowing calendar for the second half of this year has to be announced before the end of September.
 
After Sitharaman had announced her plans for green bonds in the Budget this year, finance ministry mandarins held talks on the subject. Officers of the Ministry of New and Renewable Energy, besides those of the RBI, participated in them to work out the modalities of parking the funds.

 
One of the issues is how the interest on these bonds should be treated in relation to that on other bonds.