Does it make any difference whether the country’s public debt is managed by the Reserve Bank of India, by the government of India or by a separate agency?
Why did the Central government withdraw certain provisions of the Finance Bill, 2015, on the Public Debt Management Agency (PDMA)
The discourse on the separation of debt management and monetary management in India is nearly two decades old. The orthodox view favoured separation, as did the committee on capital account convertibility in 1996, because of the conflict of interest between monetary policy and debt management. Post the Asian financial crisis, after Bimal Jalan took over as governor of the RBI, the dominant belief shifted against such a separation of powers for several reasons. First, large fiscal deficits meant that the government borrowing programme did impinge on monetary policy, liquidity and the cost of credit for the private sector. Second, higher costs did not deter governments from borrowing more. Third, foreign exchange market volatility had implications for debt management. Fourth, there are also conflicts of interest between government as owner of banks and issuer of debt.
Both the UPA and the NDA governments have been in favour of setting up a separate debt management agency. In his 2015 budget speech, Finance Minister Arun Jaitley proposed to set up a PDMA that would bring the management of both India’s external borrowings and domestic debt under one roof. The Finance Bill, 2015, laid out the contours of the PDMA. It envisaged the agency as a body corporate with a separate board, consisting of executive and nominee members appointed by the Central government.
But last week, the government withdrew certain clauses from the Finance Bill on the setting up of the PDMA. According to reports, the finance minister has said that the government, along with the RBI, will now draw up a “detailed roadmap” for the setting up of the agency, which will be separated from the RBI to prevent conflicts of interest, as our central bank is both the regulator and a dealer in government securities. There is no evidence in India to suggest that either debt management or monetary management has been compromised by the RBI or that, as market regulator, its role has conflicted with its monetary operations in the money and government securities markets. One question that has to be addressed in the light of this evidence is: If it ain’t broke, why fix it?
Globally, the conventional view on separation has also been under challenge after the financial crisis. In 2010, Charles Goodhart pointed out that, with elevated debt levels, debt management could no longer be viewed as a routine function that could be delegated to a separate, independent body. Further, in the coming epoch of central banking, he argued, central banks should be encouraged to once again take up their earlier roles as managers of national debt. Even in the UK, there was serious parliamentary debate on shifting the debt office back to the Bank of England. It was ultimately decided not to unsettle the extant structures. Instead, it was decided that the two should work in close coordination with each other.
When looking at the contents of the now-scrapped provisions, there are two clear strands that got mixed up in the recent public discussion. The first is the issue of the governance structure of the PDMA outside the RBI and how separate it should be from the government. To begin with, it seems desirable that the agency take over the management of only Central government debt and not that of the state governments. There are several advantages, from a systemic stability perspective, of allowing the depository and settlement mechanism to continue with the RBI. The arrangements for cash management and meeting temporary shortages of liquidity will need to be worked out. Irrespective of how separate the agency is, given the size of the borrowing programme and the stage of development of markets, the RBI and the ministry of finance will need to work in close coordination. The paramount need is for the PDMA to function professionally in order to meet its long-term objectives. It should not be overwhelmed by immediate compulsions if they are not sustainable in the longer run.
The second issue on which there has been much misinformation is the regulation of the government securities market, including repos and reverse repos. This is a new proposal, unlike the one on the PDMA, and quite independent of it. In the case of the government securities market — outright, repos and derivatives — the dominant players are RBI-regulated entities. Given the close linkages of this market with overall liquidity and forex management, market regulation has been with the RBI. Where trading is done on the exchanges, the Securities and Exchange Board of India regulates the market concurrently. The Finance Bill, 2015, sought to completely revoke the powers of the RBI, which were specifically given to it through the 2006 amendments, to regulate the market in government securities and any derivative based on these securities. These clauses had apparently been introduced without any dialogue or consensus. Doubts had even been raised on whether the RBI’s monetary operations through repos and reverse repos could have come under the purview of Sebi.
The finance minister has to be congratulated for being pragmatic and withdrawing these provisions of the Finance Bill as well as for indicating that the government will work with the RBI on a well thought out roadmap for the PDMA. It is also hoped that there will be similar dialogue and consensus on the regulation of the government securities and derivatives markets.
The writer is a former deputy governor of the Reserve Bank of India.