Japan’s bond market has a few lessons for India’s next budget

Bond investors need an assurance that debt compression is viable

- ANDY MUKHERJEE

India can still prove to the market that its debt position is sustainable.

(AFP)

The sharp selloff in Japanese bonds has a message for India’s budget. If bond vigilantes could bring such turmoil to a global safe haven on the mere hint of a tax slippage, they could rip apart any sign of fiscal recklessness in a developing economy faced with a chronic shortfall of resources to create jobs and provide welfare.

Volatility spiked last week in Japan’s bond market amid concerns that politicians were losing the plot. Ahead of Japan's 8 February elections, Prime Minister Sanae Takaichi has promised a two-year cut in the 8% consumption tax on food. The concession could unmoor expectations that government debt will settle at about 222% of GDP by 2030, from about 230% now, the highest among advanced nations.

Looking at numbers alone, India could not be more different. Although its overall GDP will soon be bigger than Japan's, on a per-capita basis it is 2 times poorer. Public debt has been 80-85% of GDP in recent years, But funding is constrained. If New Delhi doesn’t keep a tight lid on its own obligations, it will be forced to raise funds from a limited pool of creditors at a cost higher than what can stabilize its debt. With 10-year sovereign bond yields inching up to 6.7% and nominal GDP slowing to 8%, the margin of safety demanded by bond investors is narrowing.