The episode examines how rising government borrowing, persistent inflation, changing bond investors and huge AI-related investment needs are reshaping global bond markets. In this episode of How India’s Economy Works, Puja Mehra speaks with Dr. Anoop Singh, economist and Former Director of the IMF. Singh explains why the US Treasury market matters far beyond the United States, why central banks have less control over long-term borrowing costs than many assume, and how the world is entering what he describes as a “new fiscal era” marked by greater fiscal dominance.

The conversation also looks at the implications for India. Singh discusses India’s high public debt and fiscal deficit, the importance of maintaining fiscal and central-bank credibility, and why the key question is not simply how much the government can borrow today, but whether that borrowing will generate enough productive investment and growth to service the debt in the future. He also examines India’s definition of capital expenditure, the need for greater spending on research and development and innovation, and the importance of building stronger fiscal buffers.

Tune in for insights on the global bond-market shift, fiscal dominance, rising borrowing costs, India’s public finances, and why fiscal credibility is increasingly tied to economic growth.

CHAPTERS

(00:00) Introduction to Global Bond Markets

(00:35) Liquidity Buybacks and Currency Interventions

(02:58) The Federal Reserve Rate Decision

(06:15) Entering the Fiscal Dominance Era

(12:18) Political Barriers to Budget Adjustments

(16:56) Fiscal Credibility Linked with Growth

(22:27) Global Spillovers on Indian Debt

(24:02) Redefining Quality in Capital Expenditure

(27:27) Persistent Global Inflation and Buffers

(32:29) Sustainability of State Fiscal Deficits

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TRANSCRIPT

NOTE: This transcript is done by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on feedback@thecore.in.

Puja Mehra: Dr. Anoop Singh, thank you so much for coming to the show today.

Dr. Anoop Singh: Thank you.

Puja Mehra: I want to speak with you today about all that's going on in the global bond markets. We read that the US Treasury is offering to buy back bonds and also that it's trying to jointly intervene in supporting the yen with Japan. What is going on and why is all this happening?

Dr. Anoop Singh: Right. I'd say something unusual is happening and it's happening in the world's, what we thought were the world's safest financial markets. So as you said, the US, the Treasury has doubled the maximum size of its liquidity support buybacks in longer dated bonds.

But this is not what you call QE. It's not that the government is trying to push the yields down. The Treasury is simply buying older, less liquid securities to improve the functioning of the market while it is simultaneously issuing enormous amounts of due debt.

Japan is a bit different. Japan and the US took the unusual step of jointly supporting the yen. The US intervention involved selling euros to buy yen.

But important to note that intervention weakened the yen, even as they raised the policy rate to 1.25%. So these are very different interventions. But they tell us, basically, this is point number one, authorities in advanced economies are having to pay much more attention to the functioning of bond and currency markets than they've done in the last 20 years.

Puja Mehra: So are you saying the two developments are unrelated, what's going on with the yen and what's going on with the US Treasury bonds?

Dr. Anoop Singh: They have a similar context, but they are unrelated. So what's happening is this, my shorthand. We are seeing more government borrowing at the same time as we're seeing inflation being persistent.

At the same time, we're seeing enormous demand and corporate financing needs for AI. We are seeing fewer institutions and central banks automatically buying bonds. And therefore, what we're seeing is a higher market-clearing price for long-term capital.

That's where the problem comes from.

Puja Mehra: And will Fed's rate hike this week also, in some way, mitigate some of these concerns that markets have, or the bad supply mismatch that there is in the bond markets? That's right. That's what's happening, right?

Dr. Anoop Singh: Yes. Before I go into that, let me just make one point. Why is the US Treasury market so important?

It's because Treasury yields, of course, they are America's borrowing costs for itself. However, they are the main or principal benchmark for the global price of long-term capital, and that affects every country globally. Now, you asked me, will the Fed hike help?

That's right, yeah. Well, as you know, the Fed has raised its policy range by just 25 basis points, and it gave us a reason that inflation remains elevated, as it is, and the increase should support a speedier return to its 2% goal. This, as you know, is quite the opposite outcome from what the US president was hoping for.

Now, will it help? Well, if investors become confident that the Fed's main role will be to prevent inflation from becoming entrenched, that will reduce the inflation risk premium that are now embedded in the long-term Treasury yields. So it's simply that they've got to convince the markets that the Fed is a central bank, and it is acting as such.

Now, having said that, the Fed can only address, like any central bank, can only address part of the reason why yields have gone up. And as you know, yields are not short-term, they're long-term. What is not under the Fed's control are the factors that are resulting in the problems we see in the bond market.

The Fed has no control over large fiscal deficits, whether it's the Fed or RBI. It has no control over the extent of issuance of treasuries by the US. I haven't mentioned this, but the investor base has been changing, and the traditional buyers of government bonds, such as central banks, are buying it less.

At the same time, we're seeing huge demand for AI investments, which want long-term capital. And so the issue is that the Fed can control only the overnight policy rate. It can influence long-term yield, but it depends on factors, as I just mentioned, that are not in the control of the Fed.

Puja Mehra: So are you also suggesting that it isn't just a demand supply of bonds or various kinds of borrowings in bond markets, but also a question of newer risks or different risks?

Dr. Anoop Singh: Yes. There are two major factors. One is that demand for long-term capital has increased from AI.

And the second important reason is that the investor base has changed over time. Central banks are buying bonds much less, and therefore, bonds have to be priced higher to induce other borrowers, many of whom now are now the non-bank financial institutions, to buy the bonds.

Puja Mehra: And also, I think governments are borrowing more. So overall, borrowing requirements have risen, right?

Dr. Anoop Singh: Yes. So the fact is, we're in a new world. I call it a new world of fiscal dominance.

But that is only a partial statement. We are seeing fiscal dominance because we're seeing fiscal dominance defined as government spending and government financing in ways we have not seen before in the advanced countries. At the same time, the investor base has changed.

And so that's where we are. Now, will markets react? And how will the governments react?

So the main issue is that markets can change the price at which yields are bought. So that becomes a powerful constraint on governments. If you have higher yields imposed by the so-called bond vigilantes, who are those who are buying the bonds, that raises interest spending by governments that leads to even higher deficits beyond their own spending.

Therefore, that doubles back as higher refinancing requirements, that doubles back as a potentially still higher yields. So we're seeing incredible developments in a new world.

Puja Mehra: Okay. So I have many follow-up questions to what you just said. But first of all, my listeners may not know what fiscal dominance means, if you could help us understand that.

Dr. Anoop Singh: Oh, yes. Well, fiscal dominance is that, you know, in the old days, we taught governments were having crises of debt management in emerging markets. We've had Argentina very often having crises.

We've had many countries in Asia having crises arising from government spending, arising from higher debt, and arising from inability to finance it. And also, most importantly, I'll come back to this, they were investing in areas and spending in areas that was not productive for the economy. So the issue is not just that you're spending more, the issue is equally what you're spending on.

I'll come back to that point afterwards. What has changed is, in the new fiscal era we are in, it is the advanced countries that are now doing this. So the crises we may see coming are coming more from advanced countries.

Now, if there is a crisis in advanced countries, emerging markets will, of course, be affected. But the trick now is that the move to fiscal dominance is now in the advanced countries. It's been that way in Japan for a long time, because they have a very high domestic financing base.

But now it's happening in most advanced countries. And the difference is, firstly, the public is not sure why it's happening, they're not sure if they're getting returns. If it is corporate financing for AI, there's now uncertainty, will that lead to higher growth now or later?

So we're in the new fiscal era of government spending coupled with simultaneously AI-related spending in the advanced countries, especially in the US, but also China.

Puja Mehra: Another thing you said previously is that there are new kinds of investors. What are these new investors?

Dr. Anoop Singh: Well, apart from the governments, which are also investing in AI-related areas, they're investing in industry, they're investing in technology. So advanced countries, the US, wants to remain dominant in technology and AI. So they are spending a lot from that point of view.

Now, what I mean is, relatedly and simultaneously, in parallel, we're seeing the private sector and the corporate sector investing similarly in AI-related spending.

Puja Mehra: So their requirements have increased, is what you're saying, right. So have you seen anything like this, what you call the new fiscal era in the advanced countries, or this is completely the first time we're seeing something like this?

Dr. Anoop Singh: Well, I would say we've seen advanced country crises. We had the UK, we had a European crisis that affected advanced countries in Europe, although it came more from Southern Europe. But it's the first time we're seeing it across the globe in the advanced countries and China.

We must, in many advanced countries, China is included, but China is a different case. I'll come back to that afterwards. But yes, it is the first time in this new fiscal era.

Puja Mehra: In the UK, we saw a government fall because of what happened in the bond market. Is something like that likely in the US?

Dr. Anoop Singh: Well, it's now much more complicated, because now there will be a catalytic effect across the globe. So let me explain what I mean. The US Treasury yield, as I said, is the borrowing costs of the United States.

However, it is also the global price from which long-term capital is priced globally. So when that price rises, all countries feel it, including all countries that also have high fiscal problems and are borrowing a lot. So we have higher advanced economy yields.

That may lead to portfolio reallocation across countries. So in India, that could put pressure on the rupee. It could put pressure, therefore, on Indian bond yields.

It would raise the cost of financing corporate investment in India, for example, because yields and prices have gone up of long-term capital. And therefore, we may see at the end of it a lower, weaker corporate and private investment, which is what we are seeing now in India.

Puja Mehra: And is this just a phase, or is this likely to last?

Dr. Anoop Singh: This is going to last unless the financing needs of the US and advanced countries were to change fundamentally. The problem is that the US believes, rightly, from a short-term point of view, it can finance whatever it needs financed at whatever price, because the government across the world, central banks across the world, and the investors across the world will continue to buy US treasury bonds. This has been the old story.

They currently believe this will not change. So we can do what we need to do. But they are wrong in that.

Now the second issue is other advanced countries are facing similar issues. The issue is that governments are now unable to take the steps needed to curtail and transform and reduce their government borrowing. They are unable to do it, either because they don't believe they should do it, either because they believe other countries should do it.

But most importantly, in many countries across Europe, they believe that politically it can not be done. And right now, in the next few weeks, the pressure is on France. France is trying to adjust its budget exactly for the reasons it should and exactly the reasons you and I have talked about.

They know that this will not be accepted publicly. The elections are one year away. They don't want it sooner.

If they try to do it now, there may be a breakdown in terms of the functioning of the present government. So we're seeing two things. We're seeing countries that don't want to adjust, like the US.

And then we're seeing countries that may not want to adjust. And we're seeing countries that cannot adjust because of political conditions. Now the bottom line among all this is, as advanced country debt has gone up in the last five, six years, the productivity effect, the effect on growth has been muted.

It is not giving results that the public wants. If it's on defence spending, if it's on AI, which will take 10 years to produce any results. So the difference is governments don't want to do it.

Governments cannot do it. The public doesn't like it. The public doesn't know how it's helping their education spending and health spending.

And therefore, we're stuck in a completely new kind of global era.

Puja Mehra: So in this era, you're saying that governments are borrowing and what they're spending on is neither helping them politically nor helping the economy generate more revenues for them to be able to pay back these borrowings. So we seem to be in a slightly risky situation.

Dr. Anoop Singh: Yes. And there is a third point. Neither are we seeing the public supporting it.

It's not like the public is saying in France or the UK or Italy, what you're doing is good. It will help me. They're not seeing that.

So what we're seeing is a disconnect between the spending taking place and the public's desire for the role of the government. It's the first time we've seen a breakdown, a disconnection between what's happening and the attitude of the public.

Puja Mehra: So no political dividends and no economic dividends for all this.

Dr. Anoop Singh: Exactly. That's where we are. And now we are generally stuck.

And therefore, it's not the emerging markets like India are not a source of the problem, but they are definitely subject to its global effects. So basically, in the old days, economists used to say, even eight, nine, ten years ago, even the most celebrated economists, even Nobel Prize winners would say the following in advanced countries, keep spending, don't worry, interest rates are low, long term yields are low, that is not going to change. So keep spending, keep financing, and your debt will not go up.

It shows how wrong they were just 10 years ago. That's important to understand.

Puja Mehra: Should we now talk about, you already mentioned it, but perhaps in some detail, the fallout on India?

Dr. Anoop Singh: Yes. Now, as a follow up to what I just said, and looking at India, what these economists said 10 years ago is keep spending because it will produce growth. And the idea was, as growth is going higher and higher, the debt to GDP ratio will come down because growth is going up.

So if growth is going up, the debt ratio will come down. So keep doing it. So they said, don't worry about fiscal credibility, because your spending will produce a growth that will bring the ratio down.

Now, that has completely changed. And we all want growth. Growth is eventually the most important instrument or target for most countries.

Interestingly enough, last week, the British Chancellor, the new British Chancellor, John Healy, said something quite incredible too. But he said something which is completely correct. And it is the best phrase I have heard about that defines the problem we are talking about.

Then what he said, he made one sentence. He said one sentence last week, John Healy. He said, let's remember, fiscal credibility is indivisible from growth.

He then went on to say, growth, yes, is the sustainable pathway out of indebtedness. We need growth to go higher so we can bring our debt down. But the point is, the two are indivisible.

If you don't have fiscal credibility, you will not get the growth that you want. That is the most important point. In order to get growth, you need to alter your fiscal situation and to build credibility in markets.

He's talking about credibility in markets. So unless markets see that your fiscal measures are working and will bring your debt down, you will not get the growth that you need. So this is most important for emerging countries and India.

Puja Mehra: But in India, the markets are often not able to give such messages because the RBI intervenes so heavily.

Dr. Anoop Singh: Well, the difference is that markets, I would say, when it comes to borrowing and it comes to long-term yields, the market makes its message very clear. India may be a bit different for a while because there's a large investor base where institutions are forced to buy government debt. But we're already seeing, and all those states are also being able to finance themselves in some way, and they don't go to pure market borrowing so much.

Already we are seeing in many states where the fiscal finances are nearing unsustainability, how the yields for any state government bonds, were there to be issued, would be much higher were they allowed and forced to go to market borrowing. So this is happening in India too.

Puja Mehra: Yeah, I mean, I think the share in revenues that are taken up by interest repayments, even for the central government, the union government, has been rising. And I think in the last budget, it was 40%.

Dr. Anoop Singh: Yes. So I would say, I looked at a number some time back, the percent that the central government spends on interest payments in India in a year is, if I remember correctly, more than double what we spend on health. And it's probably more than, significantly more than what India spends on education and health.

So you tell me if that is right.

Puja Mehra: I also want to add one question to that, which is that for all this borrowing, like you said, are we getting the economic dividends and the political dividends to justify the borrowing?

Dr. Anoop Singh: Exactly. So that is the basic point. If you are investing in high return, productive investment sources, that is raising our productive capacity, yes, it would then increase future income and increase the tax base from which the debt is serviced.

But the issue is, is that happening? So it's not that governments are able to borrow today. That is not the issue.

Because in many countries, they can be forced to borrow, or the markets are forced to invest. The issue is, can you finance that tomorrow? So that is the question we should ask, not, I can borrow today, so I can spend as I want.

The issue is, will I be able to service this tomorrow? By tomorrow, I mean in the next five and 10 years. So the issue is, we say, India is spending more on capital expenditure, and that's good.

That is what we need to examine.

Puja Mehra: So now to an already difficult case in India that you just described, we have this additional complication of what's happening in the global bond markets, where the benchmark itself is moving up. So what is the likely fallout going to be here?

Dr. Anoop Singh: Well, the issue is, I'm not saying India should stop borrowing. That's not the issue. We're not at the stage yet where we need to cut back our spending and cut back our borrowing.

We need to do two things. Number one, we do have a very high debt ratio. So the consolidated public debt is probably over 80% of GDP, which is high for emerging markets.

Our fiscal balance, the fiscal deficit per year is above 6%. So these are high numbers. But having said that, we still have the credibility.

And when I say we still have the credibility, you saw that last week or two weeks ago, Japan's rating agency upgraded Indian debt to the A category. So the issue for India is, we are in a situation now, we need to take steps to ensure we don't fall into this situation in the future. And as part of this whole process, it means fiscal credibility with markets must remain.

And that, when I say fiscal credibility, I have to jointly add into that central bank credibility. So we're looking at the credibility of the governments and how markets believe what they're spending on and whether they can finance it and pay it back next year on 10 years. But equally, they want to make sure inflation will remain under control.

And that is a task for the central bank.

Puja Mehra: What are India's strengths in this regard?

Dr. Anoop Singh: The strength in this regard is we have high debt that needs to come down. We're not seeing the pressure that advanced countries are. But we need to build up our fiscal buffers.

Buffers mean we need to build up the ways we protect ourselves. So the issue is not that India should stop borrowing. It is that India must borrow better.

So when investors ask you, yes, I'll buy your bond. But then you ask them what yield you buy it. And they will answer, well, it depends what you're spending on.

So the issue comes down to building up productivity of your spending. Now, I want to make one point, which I think needs to be said. And that is, at the bottom line, if you're borrowing, you need to have credibility that this is producing productive investment and growth in the short term.

Now, when India defines capital expenditure, there is a slight problem of how we define it. When India defines budgetary expenditure, which is what markets look at, India includes not just direct physical capital creation or asset creation. India includes financial investments.

It includes loans. It includes equity investments and other financial transactions which are grouped and added to and part of what is called capex or capital expenditure. That is not capital expenditure.

It may be, it may be that those financial transactions, it may be that giving a loan to a state is going to raise productive investment. We don't know that. It's not part of the common international definition of capital expenditure.

So apart from definitions, it needs to focus on areas with demonstrably high economic returns. We can't justify high capital investment. We can't call it high capital investment if much of the increase that we are focussing on is coming from financial assets which may or may not produce growth.

So this is a very important point for countries and for India. So the link is this. If you have productive public investment, eventually we hope it will lower infrastructure and transaction costs.

That's not going to happen if you're investing in financial assets that are not geared towards that. Eventually, if you are doing correctly, it will lead to stronger private investment. But now at the same time, with the AI world we are now in, equally important to physical infrastructure of the sort we are used to is more research and development spending and innovation spending which is needed for productivity.

Is India doing that? That is an equally important question. So part of physical credibility for growth is what are you spending on?

And I had one more point to it. Are you spending enough on research and development, on innovation that is needed for India to become a creator of AI issues and faster growth?

Puja Mehra: I asked you about strengths, but these sound like weaknesses to me.

Dr. Anoop Singh: Yes, so you see, what I'm saying in a simple sentence is this. Our fiscal buffers, the fiscal buffers we have, that is the protection around the public sector to protect it from these, what's happening in vast countries. We don't have enough of them.

We don't have enough fiscal buffers. If our growth is 8% of GDP or near to 8%, the buffer is to bring your debt down, to find a way to reduce your spending, reduce your financing. In the old days, you needed low growth or recession to increase government spending.

You can't do that if your growth is higher. They're two opposite parts of the equation. So I'm saying India has high public debt.

India's fiscal balances every year are high at 6%. However, we are managing it. We've been upgraded.

We're not in the situation yet, but the buffers that will protect us in the future need to be demonstrably increased. We are not there yet. And also, equally, we need to also make sure inflation is coming down.

So that is the job of the RBI. So the issue is, you see now across the world, in the past one week, the question you might ask is, in a simple way, to make your point, who is not raising interest rates? Every country that has these problems has.

Beginning with the ECB, the US, of course, Japan raised it yesterday, despite the intervention of two weeks ago. So the question now is, inflation is becoming a much more persistent problem across the world. Markets need to believe not just the government financing side is coming down or that it is producing productive growth.

It's equally that is inflation coming down. If you have inflation remaining where it is now across the world, you are not going to get the credibility that I started out that is needed for growth. So the issue you might ask is, in the simple way, today, who is not raising interest rates and why is that?

Puja Mehra: I think the RBI is not.

Dr. Anoop Singh: Well, I'm asking a question across the world. If this high inflation is at a point where the US Fed, appointed by the President of the United States, is prepared to raise interest rates, despite the pressure not to do so, the problem must be pretty severe and the problem of inflation persistence must be pretty high. And now we have this in the ECB.

We have this in Japan. And so the issue then arises, who is not doing it? Now, China is separate.

China is facing a different situation where it does not need to raise interest rates because their overall demand domestically is low. And that's because of the policy framework they have. So we should leave China out of this for now and ask other countries a simple question.

Why are you not raising interest rates? Period.

Puja Mehra: Let me ask you, what do you think of RBI's credibility?

Dr. Anoop Singh: I would say the best public demonstration that we've seen in some time is that Japan has upgraded a long-term debt rating to the A category for the first time. When you upgrade a rating for debt, implicitly or explicitly, but more implicitly, central bank independence is part of that process. If you believe a country had a central bank that would just keep on doing what the government wants to finance its higher spending, you're not going to get market credibility for an A grade rating.

Now, this is Japan. It's not all the other private rating agencies, but it has happened in one. So the issue is that India has an inflation target.

India has an inflation range. India needs to make sure we stick by it. You may still want to ask after all that, given what's happening in the last one week and the world, the one question, who is not raising interest rates?

Puja Mehra: No, I would say that the RBI certainly seems to betray a great amount of tolerance for high inflation, but yeah, that's what it is. But also, you've already said that, but let me also once again ask you, what about central and state finances? There has been a rating upgrade, like you said, but anything more you want to say on central and state finances?

Dr. Anoop Singh: Well, the advantage is that in India is the reality and the actions being taken. The reality is that India's state finances in many states is unsustainable from a growth perspective. It already is.

Now, when I say in a productive way, I mean, is the state spending and government spending in areas that are raising productivity, research and development, and credibility for India? Are we investing in areas needed for higher growth? If we're not, and we have a fiscal deficit of 6%, 7%, not sustainable.

So the issue comes down to one. Right now, India is not facing the pressure. India needs to make sure that what it borrows today will help growth tomorrow and therefore help us repay the bonds two days from now.

Unless we're sure of that, we need to build up our fiscal credibility. So I come back to what John Healy said. He said, fiscal credibility is indivisible from growth.

India needs growth, hence it needs fiscal credibility as defined by markets. Are we there yet? This is what we need to ask questions across the board.

Puja Mehra: Dr. Anoop Singh, thank you so much.

Dr. Anoop Singh: Well, thank you. We discussed a whole heap of stuff we talked about, but ultimately, everything I've said affects India too. So I'm very glad you've gone over the implications for India from the global economy.

Puja Mehra: And in fact, it affects each one of us.

Dr. Anoop Singh: Absolutely, absolutely.

Puja Mehra: Thank you. Thank you so much.

Dr. Anoop Singh: Thank you.