Professor Prasanna Tantri, an Associate Professor of Finance at the Indian School of Business (ISB), has put forth a novel proposal: if the government and regulatory bodies are prepared to undertake financial risks, they should do so by guaranteeing a portion of equity investments in new and innovative startup firms, rather than solely guaranteeing debt.
Tantri’s suggestion comes amidst ongoing discussions regarding the risks associated with the Reserve Bank of India’s foreign-currency measures. He contends that the prevailing strategy of guaranteeing debt is often unsuitable for burgeoning, innovative companies whose investments are inherently high-risk and may struggle to meet fixed repayment schedules.
Stimulating Innovation and Job Creation
While acknowledging the possibility of taxpayers incurring losses on some equity guarantees, Tantri argues that such losses would be significantly smaller than the financial burden imposed by schemes like the NRI subsidy. More importantly, he highlights the substantial national upside of this approach.
"Unlike the NRI subsidy scheme, however, this risk carries substantial upside for the country. It can stimulate innovation, investment, and job creation while helping India address its persistent 'missing middle' problem," Tantri stated.
He firmly opposed the idea of the government taking a seat on the board of these innovative companies, suggesting instead that a team of respected corporate leaders could manage funds under such guarantees, distinct from government-led investment models like SIDBI.
Context: Risks of Foreign Currency Measures
Tantri's proposition is rooted in his broader critique of the RBI's foreign currency non-resident (bank) [FCNR(B)] measures and other foreign-currency borrowings. He previously raised concerns that India had mobilized approximately $136 billion in borrowed dollars to maintain what he deemed arbitrary exchange-rate levels.
He warned that these measures could inflate India's external debt from around $765 billion to nearly $900 billion. Furthermore, the efforts to prevent a rapid appreciation of the rupee have led to surplus liquidity within the banking system.
The finance professor emphasized the importance of evaluating financial decisions ex ante, before their outcomes are known. He identified five major risks stemming from these measures, including the potential for clustered outflows, as much of the borrowed money has a known exit timeline. He cautioned that a challenging geopolitical situation in the future could transform scheduled outflows into significant pressure on the rupee, representing a substantial financial gamble on uncertain future conditions.