If the RBI that Mr Rajan heads is now opposing the reforms (the idea of PDMA and entrusting the regulation of government securities to SEBI), he is obliged to disclose the RBI’s reasons and also explain why he changed his own views. Equally, Mr Jaitley is obliged to explain why he gave in to RBI’s opposition, and what the “further consultation” with RBI is expected to yield.
An extraordinary thing happened ten days ago, thanks to the Finance Minister, Mr Arun Jaitley. It was even more extraordinary that there was neither praise nor criticism from the Opposition benches. It was as if what had happened was a non-event.
In fact, the two subjects were of great importance as acknowledged by Mr Jaitley himself. The first was taking away the management of the domestic debt of the Government from the Reserve Bank of India (RBI) and entrusting it to an independent Public Debt Management Agency (PDMA). The second was moving the regulation of government securities from the RBI to the Securities and Exchange Board of India (SEBI).
Mr Jaitley had endorsed the two ideas. He had included provisions in the Finance Bill to give effect to them. Then, on April 23, just before the Finance Bill was taken up for consideration and passing, he withdrew those provisions, even while asserting that the two ideas had strong merit!
Consistent Support for PDMA
Let’s examine the idea of PDMA. Government borrows to finance its debt. It issues — or authorises the RBI to issue on its behalf — government securities. Who is the largest trader of government securities? RBI. There is an exchange, a depository and a clearing house for government securities. Who is the operator of the securities infrastructure? RBI. There is a vibrant market for government securities. Who is the regulator of the market? RBI. Banks are the largest purchasers of government securities. Who is the regulator of banks? RBI. Government securities are attractive to both sellers and buyers because they carry attractive rates of interest. Who determines the interest rates? RBI, while performing its functions as the monetary policy authority. If there was a case of “he was judge, jury and prosecutor”, this was the best example! The present system is riddled with conflicts of interest that will be obvious to any one who understands markets.
RBI was among the first to recognise the conflicts of interest and, therefore, in its Annual Report 2000-01, proposed the idea of a PDMA. It was supported by the Percy Mistry Committee on Making Mumbai an International Financial Centre (2007), the Raghuram Rajan Committee on Financial Sector Reforms (2008), the Jahangir Aziz Internal Working Group on Debt Management (2008), and the Financial Sector Legislative Reforms Commission (2011). The reports of the two last named bodies also suggested a draft law to create the PDMA.
In the Budget for 2007-08, we announced the setting up, in the Government, of a Middle Office of PDMA. It was set up and, with the help of RBI’s experts, began to acquire skills in public debt management. Mr Jaitley, in his Budget for 2015-16, announced the final step of establishing, by law, the PDMA. It was a fine example of continuity in policy.
SEBI as the Regulator
The other idea of entrusting the regulation of government securities to SEBI also flowed from the conflicts of interest that I have referred to. SEBI is the regulator of the capital market (equity and corporate debt) and will be, shortly, the regulator of the commodities derivatives market as well. It is therefore logical that the government securities market should also be placed under SEBI, which will be the unified regulator of financial trade — an idea supported by the committees mentioned earlier. No one doubts that SEBI has the relevant skills to take on the additional responsibility. Besides, firms and individuals involved in trading will benefit from a single-source and consistent regulation of different kinds of securities.
If the Finance Bill had passed with the original provisions, one body that had authority over the two subject matters would have yielded that authority to other bodies. That body was the RBI. So, Mr Jaitley should tell us if it was indeed the RBI that pressured him to withdraw the provisions.
Duty to Explain
Mr Rajan is the Governor of RBI. He chaired a committee that supported the two reforms. Even a few weeks ago, he publicly backed an independent PDMA. If the RBI that he heads is now opposing the reforms — proposed through statutory changes — he is obliged to disclose the RBI’s reasons and also explain why he changed his own views. Equally, Mr Jaitley is obliged to explain why he gave in to RBI’s opposition, what is the “further consultation” with RBI expected to yield, and what is the time line for the next move on the two proposals.
The two proposed reforms were bold steps that would have brightened a mediocre record of the NDA government as it draws close to the completion of one year in office. The Government stood on solid ground. Every committee and commission that had looked into these matters had endorsed the two ideas. The two reforms were consistent with international best practices. The two reforms would not have impacted the average voter and no political capital would have been spent. Yet the Government beat a retreat without an explanation.
The Finance Bill would have been passed easily in the Lok Sabha where the Government has an absolute majority. There was no fear of the Bill being scuttled in the Rajya Sabha which can only return a Finance Bill. The moral of the story is that numbers alone do not assure economic reforms.