The Indian economy made a decisive structural turn in 1991. Change was manifested in policies, processes, thinking. A new series looks back at events in the transition, their contexts, the men and women who shaped them, and the ways in which they’re playing out now. Every Wednesday, starting today
In 2000, the Reserve Bank of India proposed amendments to its statute, the RBI Act, that could eventually end its role in the management of public debt — and hand the government discretion to assign the job to an independent agency or a new debt office. For years, the RBI has been managing borrowings, or public debt of the central and state governments, besides being a banker to them. In the case of the Centre, this is mandated by law; for states, the RBI acts as per agreements it has signed with them.
The prevailing philosophy from the late 80s onward has been that central banks ought to focus solely on inflation, leaving functions such as managing debt for the sovereign to a separate agency. This made sense in the backdrop of mounting debt and the East Asian crisis in the late 90s — and the argument, then and now, is that there is an inherent conflict in a central bank trying to control inflation and managing public debt at the same time. The central bank as debt manager would be caught between trying to keep interest rates low to ensure smooth borrowings by the government, and keeping rates higher at times to control inflation.
Yashwant Sinha, who was Prime Minister Atal Bihari Vajpayee’s finance minister from 1998-2002, put a committee of officials from the Finance Ministry and RBI to work on the proposal for a separate public debt office. Senior Ministry officials visited countries such as Sweden, Portugal and UK, which had public debt offices de-linked from their central banks. The idea was to examine if the experience of these countries in managing borrowings — both in local and foreign currency — and issuing debt through a separate agency body reporting to the treasury department or an independent body could be helpful for India.
By the time the officials started work on the report in 2001-02, however, the RBI had flagged a few issues. The critical one, according to the bank, was the overhang of huge borrowings by the government, or the fiscal deficit. The timing wasn’t opportune, and hiving off public debt management from the central bank would mean hampering the RBI’s efforts to manage interest rates, given the level of the fiscal deficit.
There was also a hint of scepticism over the Finance Ministry’s ability to handle the function. As for the Ministry, it had then — as now — argued for a Debt Management Office (DMO), but had found itself up against the central bank headed by Bimal Jalan and his deputy, Y V Reddy.
Interestingly, despite differences, the RBI then did not submit a dissent note, but signalled its disinterest by not sending the bank’s top officials to participate in these discussions towards the fag end. A stand-off was averted because of the equation that Yashwant Sinha shared with Jalan. Sinha would consult Jalan on issues far beyond the domain of the RBI, such as the Budget and fiscal matters, leaning on the Governor’s experience as a former finance secretary and chief economic advisor. In turn, Jalan would informally sound the Minister out on several issues, with both men mindful of the thin line that divided formal and informal consultations on policymaking.
In keeping with their levels of trust, Sinha made the choice to go with the RBI — based on the absence of consensus on a sensitive issue.
And so, what started off as a joint exercise between the government and RBI was reduced, by 2002, to an internal report of the Finance Ministry.
A decade and more later, over 10 committees, including one headed by the current RBI Governor, Raghuram Rajan and another headed by Justice B N Srikrishna, have recommended a new debt office. Since then the arguments haven’t changed much, and there are few changes on the ground.
That’s because over the last 15 years, barring a couple, the government’s fiscal deficit has been high, making it difficult in some ways to ignore the central bank’s preconditions for a separation of debt management. The RBI’s arguments were centered around lowering of fiscal deficit and putting an end to financial repression — or doing away with the practice of state-owned banks being captive buyers of government bonds — before establishing the DMO.
Now, again, the government announced a new Public Debt Management Agency or PDMA, but faltered in not ensuring a wider debate — and perhaps in overlooking legislative issues such as trying to incorporate a new law through the Finance Bill, which is a money bill.
Governor Rajan’s persuasive arguments, and the backing of some lawmakers, too appear to have tilted the balance. What has helped also is word from the central bank that it would help the government over the course of the next year to build the debt management office.
Sadly, the road map, announced last week by Finance Minister Arun Jaitley, to establish the new debt office was always an option on the table. Gradualism does pay off sometimes.