By Bidhan Gautam
Governmental securities in this modern world that we live in, is a socio-economical reality which is needed to be understood and made visible among the people, as it runs the society, the system and the state.
I came to an understanding through means of social and print media that government is auctioning 10-years old state government securities worth Rs 312 crores, in face value, (an amount to be paid to an investor at the maturity date of the security) which has been a social talk ever since.
Government securities are a tradable instrument issued by the central government or the state government. It acknowledges the government’s debt obligation, i.e. repetitive way of saying, “you owe a debt” to a person or entity from whom or which you borrowed the money. These securities are also called sovereign securities and are used to raise money from the common people for the government and to invest their money and let it grow.
Government securities are created to see that the government runs in a stable economic and stable atmosphere which is the most worthy entity to invest into. These securities give government an upper hand. Whenever tax revenue doesn’t match to it’s expectations and the government falls short of money as per its budget estimate and thus requires money to pay for its day to day expenses, welfare schemes and its previous debt or if any other requirements arises.
Government’s stable economic and political atmosphere is the big reason why people and organisations buy government securities, as it is considered to be a lower risk investment. The interest are mostly or always guaranteed making a stable source of investment.
Securities are either short term usually called treasury bills with original maturity of less than 1 year or long term called bonds or direct securities with original maturity of one year or more.
In India, central government issues both treasury bills and dated securities but the state government can issue only bond or dated securities which are also called state development loan’s, practically which carries no risk of default and hence are called risk free investment. Government securities provides a return in form of interest and pays maximum safety as they get sovereign commitment for payment of interest and payment of principal. Government Securities are available in a wide range of maturities ranging from 91 days to as long as to 40 years. Government securities such as state development loans and special securities provides attractive yields .
Idle funds, i.e, holding of cash/liquid asset in excess to carry out day to day express does not yeild any return, so it is an advantage to invest in government securities.
Government bonds assist in funding deficits in the federal budget and are used to raise capital for various projects such as infrastructure spending. However, government bonds are also used by the Federal Reserve Bank to control the nation’s money supply. When the Federal Reserve repurchases government bonds, the money supply increases throughout the economy as sellers receive funds to spend or invest in the market. Any funds deposited into banks are in turn, used by those financial institutions to loan to companies and individuals, further boosting economic activity. Besides banks, insurance companies and other large investors, even the small investors like co-operative Banks, provident fund are also required to hold Government securities.
Reserve Bank of India conducts the auctions through which government securities are issued. All the auctions are conducted on the Electronic platform called the E-Kuber, the core Banking Solution platform of Reserve Bank Of India. Commercial banks, Scheduled Urban Corporative Banks, Primary dealers, insurance companies who funds and maintains funds account and securities accounts with Reserve Bank of India are the members of this Electronic platform.
RBI has entered entered into agreement with 29 states governments and one union territory for management of public debt. Under Article 293(3) of the Constitution of India, it is provided that a state government has to have a permission from the central government for any borrowing as long as the state government has a outstanding loan from the centre.
Generally government securities are referred to as risk free investment however, in case with any financial instruments like bank, corporates etc, there does lie risk hence, it is important to take measures for lowering the risk or mitigation.
Some major risk associated with governmet securities are market risks which arises due to change in interest rates, liquidity risk which occurs due to non availability of buyers for the security, i.e, no trade activity. There are things that is to be considered before buying securities like higher returns, credit worthiness, Exit options, avoid complex bonds, risk-return balance.
Government securities give government an upper hand to run the government in a healthy economical and political atmosphere, giving people or organisations a platform to invest their money with higher returns.
The government of Sikkim under the new government has a financial deficit or a debt burden of Rs 8000 crores and more. The auctioning of state government securities will help balancing the debt burden to some extent and will help in finishing many unfinished social scheme’s and projects which needs attention. Thus, this is where the government securities plays an important part in retaining a healthy political and social atmosphere as it gives government an upper hand in dealing with all the obligations.
About the author: Bidhan Gautam is a writer and a social entrepreneur.
NB: Views/Opinions expressed in the article or write up is purely of the author or writer. For any queries or contradictions the author can be contacted in his/her email id.