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FESTIVE BONDS

When finance ministers raise taxes, their henchmen begin to collect them from the first of April. But when they promise benefits, they do not feel obliged to deliver them soon. The present finance minister is about to deliver on a promise he made last February; his alacrity and sharp memory should be welcomed. He promised that he would offer Indians a government bond whose real value would not go down with inflation. He is about to keep his promise: the Reserve Bank of India will open its issue of the bonds, which will bear the appropriately longwinded name of Inflation Indexed National Savings Securities — Cumulative. The name is such a mouthful that it will put off many investors it is intended for. Apart from an exaggerated sense of self-importance, it is impossible to see why the Reserve Bank had to choose a name so difficult to remember. The new generation of Reserve Bankers may feel that this is the right style for the august institution; perhaps they are too young to remember that the Reserve Bank issued index bonds sixteen years ago, for which it chose the relatively crisp name of capital-indexed bonds. True, the proposed bonds are not so simple; so, in real terms, their yield went down progressively towards zero. It did not have to go that far. Investors saw through the Reserve Bank’s cleverness and gave the bonds a cold shoulder; it soon abandoned them.

This time, the Reserve Bankers have chosen an even more obvious ploy to minimize demand. They will keep the issue open for just nine days, of which three will be holidays. They have asked potential investors to choose between the bonds and the festivities. Perhaps some elderly people, who see their meagre investments being eaten up by inexorable inflation, will take time off and spend hours filling application forms; but by and large, the issue has been well designed to fail.

Those who prefer parties to bonds should, however, think twice before they fall for cakes and twinkling lights, because the bonds are not badly designed. This time, the Reserve Bank has indexed both the principal and interest. Admittedly, the promised real interest rate of a per cent and a half is measly. But the government guarantees inflation of 7 per cent or so; that makes the new bonds marginally better than 8 per cent long-term deposits with banks. Admittedly, investing in the bonds is a headache; cashing them may be even worse. But the government has to keep its reputation for red tape; it would not do to make things too easy for the people. Still, the question needs to be asked: why a window? Why cannot the bonds be kept on tap forever, so that the government would have an incentive to bring down inflation?