In this week’s newsletter, we discuss India’s inclusion in JPMorgan’s Global Bond Index, Tourism Tax, financial jargons and a lot more.
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A simple explainer on India’s inclusion into JPMorgan’s Global Bond Index
India has massive ambitions. It wants to become a $5 trillion economy in the next few years. By 2025, it wants to add over 30,000 km of highways, 400 Vande Bharat trains, over 200 airports and double our port capacity. By 2030, it plans to leapfrog Japan and Germany to become the third-largest economy in the world. However, to get there, the government will need to invest massive sums of money across the board. It needs to spend, spend and spend some more.
Now the government funds its expenses primarily through taxation. But that’s not always enough. More often than not, it will have to borrow money from investors to keep things chugging along. For the longest time, the government has raised money by issuing bonds. Bonds are standardised contracts. The government issues these contracts with a little help from the Reserve Bank of India (RBI). Investors buy these bonds by lending money. And after some set period of time, the government redeems the bond by paying investors some extra money on top.
However, most people who subscribe to government bonds in India happen to be domestic investors ― people from within the country. And this poses an interesting challenge. If you pool all domestic investors together and put them in a room, you can account for all the capital available. This is the money they can theoretically invest. But if everybody chooses to invest most of their capital in government bonds, what will the private sector do?
They will have to compete with the government and they can only do this if they are offering better returns to investors when they borrow money. This strains their financials. So if the government could borrow from foreign investors, that would help everyone in the ecosystem. It would help the government. It would help the private players. And it could help us boost our credibility in the international financial ecosystem.
So can’t foreign investors buy Indian government bonds?
Well, yes and no. For the longest time, the government did allow foreign investors to buy these bonds, but they had restrictions on the amount of bonds they could buy. And there’s one other thing. When foreign investors buy government bonds, they have to convert “dollars” to “rupees” and then invest that sum in India. However, the government also controlled this conversion business. So you could say that they couldn’t invest freely.
But over the last 4–5 years, there’s been a change in thinking. The government has come to realise that foreign investments can greatly help India achieve its massive ambitions. They also recognised an opportunity. Foreign investors don’t usually like to invest in individual government bonds directly. Instead, they like to buy baskets. Baskets of bonds from many countries. And there are specialised entities that help these investors track the performance of government bonds across the world.
For instance, JP Morgan has created a basket called the Emerging Markets Bond Index. Here, they measure the performance of international government bonds issued by emerging market countries like India. And yet India didn’t feature in their basket or index. They believed Indian government bonds didn’t meet the stringent requirements they set out. So any investor out there who intended to build a portfolio of government bonds would routinely leave out Indian government bonds. Because fund managers were interested in tracking the performance of the index JP Morgan or similar other entities put out. And it didn’t have Indian government bonds on it. So we missed out on a lot of foreign investments.
However, we’ve been working with entities like JP Morgan to meet these stringent requirements. We have been working on removing investment limits for foreign investors. We have been trying to simplify our tax regime. We have been telling them that we wouldn’t interfere with our currency as much. So they won’t have to worry about converting dollars to rupees anytime they want. And after a bunch of promises and actions backing them, it seems finally, they’ve seen merit in including Indian government bonds on their emerging markets bond basket.
A couple of days ago, 23 Indian Government Bonds (IGBs) worth about $330 billion made it to JP Morgan’s Emerging Market Government Bond Index. These bonds will be included slowly starting June 2024 until they form 10% of the total index 10 months later.
In simple words this means, a lot of foreign fund managers who want to replicate or benchmark their performance against JP Morgan’s index will start buying Indian government bonds. And experts believe this could attract as much as $20 billion in foreign capital. Even more, if other entities like Bloomberg or FTSE Russell start including Indian government bonds in their global index.
The obvious upside is that this makes it easy for the Indian government to borrow money. It could also make capital available for private entities in India since the Indian government won’t just have to rely on domestic investors. The flip side is that foreign capital can move out just as easily as it came in. So if billions of dollars worth of foreign capital moved out in a short span of time it could put the RBI in a vulnerable position since these investors will all want to exchange rupees for dollars. And the RBI has to make sure that nothing bad happens to our currency and through it, the economy.
So yeah, at the moment it seems both the government and the central bank believe that the benefits outweigh the risks and we hope that this paves the way for India’s inclusion in the broader financial market.
An Explainer on Tourism Tax
You’re excited about that international vacation. You’ve budgeted carefully and saved up enough money. You’ve got your manager to approve the leaves for that much-needed break from work.
But suddenly the government throws a spanner in the works. They decided to impose a special fee on tourists. They tell you that for every day you spend in the country, you have to shell out an additional sum of money. It’s a tourist tax if you will.
Okay, such swooping decisions don’t happen overnight. But it could. Last year, out of the blue, Bhutan hiked the fees to a whopping $200 a day. It was still ₹1,200 a day for an Indian tourist, but you get the point. And it’s not just Bhutan that has a tourist tax. Just last week, Venice decided that even if someone’s visiting the city for a day trip, they’ll have to cough up a €5 entry fee. A few days ago, Iceland said it’s mulling over a daily tax. Thailand’s getting ready to impose a US$10 tourist tax. And Bali has announced that it’s soon going to charge a one-time fee of $10 per tourist too. Over 40 regions already levy this and the numbers only seem to be going up every year.
So, why is everyone in a sudden rush to tax tourists?
The reason is actually pretty simple — flights are cheaper and more accessible, social media has created a culture of YOLO and FOMO, and increasing disposable incomes means that everyone wants to travel these days. Everyone wants to cross off stuff on their bucket list. It’s the “experiences” over “material stuff” trend. But most of these tourists don’t really care about the places they’re visiting. They’re just in for a jolly good time, some Instagram photos and they’re out.
The unfortunate reality is that the ones who are hurt by all this are the locals. Because it’s their tax money that’s spent on cleaning up the mess. The streets have to be tidied up after the tourists. The transport system has to be upgraded to meet additional demand. The city’s sights and sounds need to be constantly spruced up so that the ‘outsiders’ don’t complain. And you also have to remember that most of these small towns aren’t built for a large influx of people. Their waste management and drainage systems may not be equipped to handle it. So there’s a need to constantly spend on upkeep and maintenance.
But maybe that’s not even the worst part. Just look at Thailand. During 2017–2019, the government actually needed to subsidise medical treatment for foreign tourists who needed to be hospitalised for various ailments. It cost the government over $10 million.
It’s insane!
Now sure, you could argue that tourism related activities can give a major boost to the economy. It helps hotels and restaurants. It creates jobs. There’s often a multiplier effect. Where say $1 spent by a tourist can create a ripple effect of $1.50 in economic contribution. But as new ways of travel have emerged, people feel that tourists are taking away more than they give. A large influx of tourists could mean that rich people might just buy apartments to rent out via Airbnb. It takes long-term rentals out of the market and increases cost of living for the locals. No wonder that locals are developing “tourism-phobia” these days and even launching protests against rampant tourism.
In economic theory, these things are often called the ‘production externality’.
Or in simple terms, it refers to the unintended side effects of tourism. It’s when the cost of these negative effects has not been accounted for in the market price of touristic activities.
And a tourism tax could help reverse it. Or at least help create a net positive social benefit.
Now taxes do sound good on paper. After all, you’re taking money from the ‘outsiders’ and the residents aren’t affected. They don’t have to be penalised for the problems they didn’t cause. But for it to work, governments do need to spend it on improving things for their residents as promised. And for the most part, it seems to be ticking the right boxes.
Maldives publishes a ‘Green Fund’ report every month. They show how much money each island or city has raised. And then break it down into the expenditure on projects such as – improving the sewerage system, setting up plants to convert waste to energy, and even reviving the Maldivian coconut industry. So that’s a positive.
Then there’s Bhutan which says that all their taxes get deposited into a pool account. That includes the tourism tax too. So it can be used for paying salaries to government staff too. It’s the leftover stuff that’s used for things such as maintaining forests and historical monuments. Now while that might seem like a negative, remember that Bhutan became the first carbon-negative country on earth in 2017 — the country is actually absorbing more carbon dioxide than it produced.
So maybe there’s some good coming out of these tourist taxes.
But wait…there’s one more thing we must address. Does this tax actually hurt tourism revenue?
Well, the results are a mixed bag.
Multiple surveys indicate that people don’t seem to actually hate paying a tourism tax. As long as the country proudly displays how this money is being used to improve tourism facilities, people are happy to open their wallets. In some cases, such as in Maldives, the elasticity of tourism is low — a 10% increase in tax only led to a 5% drop in tourists. On the other hand, there are other studies which indicate that higher taxes reduce international arrivals and hurt businesses catering to these tourists.
So yeah, the results are mixed. And without a clear answer, you can see why most countries are leaning towards imposing taxes. It’s an easy way to appease the local population. And that means, you’ll probably find more countries imposing this sort of tax sooner or later.
Maybe save up a little more for that international vacation from now, folks.
Jargon of the Day
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