Bond inclusion shows our fiscal prudence: Finance secy T V Somanathan

The entry of government bonds in the JP Morgan Global Bond Index is a “reflection of the record of (the government’s) fiscal prudence”, Finance Secretary T V Somanathan told Business Standard on Friday.

“The government has not made any changes in its taxation or regulatory policies,” Somanathan said, adding that “the inclusion of government bonds in JP Morgan’s widely tracked emerging market index is being done on their own, and is not based on government action”.

JP Morgan on Thursday announced that it would include Indian government bonds in its benchmark emerging-market index, with a maximum weight of 10 per cent.

The finance ministry on Friday applauded the JP Morgan decision, stating that it would give the country more access to debt funds.

Calling the inclusion a “welcome development”, Economic Affairs Secretary Ajay Seth said the inclusion of Indian bonds in the JP Morgan index is “a welcome development showing confidence in the Indian economy”.

Chief Economic Advisor V Anantha Nageswaran said, “It attests to the confidence that financial market participants and financial markets, in general, have in India's potential and growth prospects and its macroeconomic and fiscal policies.”

“Just as long-term equity investors have been amply rewarded by investing in Indian markets, so will long-term investors in Indian government bonds be,” Nageswaran said.

On not offering any tax incentives, another senior bureaucrat said that it could have an effect on the government's right to tax its residents on certain types of capital gains. Also, it could lead to disparity between domestic and foreign investors.

Finance Minister Nirmala Sitharaman in the Budget for financial year 2021 had announced that "certain specified categories" of government securities would be opened fully for non-resident investors, apart from being available to domestic investors as well.

The Reserve Bank opened certain specified categories of government securities (GSec) for NRIs, in line with the Budget announcement. This was under the overall foreign portfolio investors (FPIs) limit of above 6 per cent, but those falling under these specified securities can be subscribed without any restriction.

However, the proposal could not take off as the taxation policy , which levies withholding tax on gains from GSec, acted as a big hindrance.

Currently, FPIs only pay a concessional rate of 5 per cent when they invest in GSec, whereas NRIs pay between 10-20 per cent on profit from investment in GSec.

Almost all the GSecs are taxable securities and hence the interest received on such investments is taxable.

"The government does not intend to give a waiver on capital gains taxes and is worried that foreign investment will exacerbate the volatility of local markets," the official cited above said.