Across The Aisle: Government proposes, RBI disposes

Mr Raghuram Rajan and Mr Jaitley is obliged to disclose and explain the take on PDMA.

Written by P Chidambaram | Updated: May 10, 2015 5:52 am
column, sunday column, P Chidambaram, RBI, Arun Jaitley, PDMA, SEBI, Finance Bill, Government Securities, Govt Banks, Percy Mistry Committee, Making Mumbai an International Financial Centre, JAIWGDM, RRCFSR, Rajya Sabha, NDA,Indian Express 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.

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.

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    DA
    May 10, 2015 at 4:10 pm
    Thanks for this perspective, Mr. Chidambaram. You are at you best, when your analysis is not self-serving. Mr. Rajan is not obliged, as you claim, to explain why he changed his stand. And, in the process, got the PM to mediate in his favour and and occasion to embarr Mr. Jaitely. If you are privy to reasons why this may have been opposed by RBI, you'd do citizens by favour by discussing possible reasons, even if it does sound like speculation.
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    1. H
      Harish Kumar
      May 10, 2015 at 4:39 pm
      Change is always resisted by employees and their ociations. PDMA must get its true shape for better finance management.
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      1. M
        Manas
        May 14, 2015 at 9:38 pm
        Nice analysis by PC. RBI has no duty, but govt should be transparent and explain its position.
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          M.S.Badrinarayanan
          May 10, 2015 at 6:36 am
          A complex issue. As PC said, may be a non voter issue. But, for a general observer like me, can Indian Express further throw some light on merits/demerits and timing of such reforms needed. PC's article is Statesman like approach or political, unable to appreciate while Rajan's focus on Inflation and FM's focus on fiscal prudence are clearly appreciated. I guess the issue is timing and not majority.
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            Manmohan
            May 11, 2015 at 6:03 am
            Mr. PC was trying to align government debt management with USA. Look what happened to USA, the worst debt crisis. I think Mr. NM is smart PM and he saw through the game. Supporters of PDMA claimed that due to lack secure investment opportunities the savings are going into gold. But it is up to readers to decide best option between gold and piece of papers. Mr. PDMA is an instrument to dramatically increase government borrowings. Better delay its creation.
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            1. N
              Narendra M
              May 10, 2015 at 4:29 pm
              (1) I wish to know why there is opposition from officers and employees of RBI to government’s proposal of establishing a separate authority for Public Debt Management (PDM). From another perspective, I think PDM has a direct relationship with disclosure of information about debt, the state of government finances (revenue and expenditure), particularly of the State governments. Today, as an ordinary citizen, I do not get to know the real picture about the state of Union or State finances, with extensive use of jargon. This is a very unsatisfactory state of affairs. Though all the departments of Union and State governments vie with each other to give publicity to citizens’ charter, they do very little to disclose details about public debt which citizens may desire to know. (3) I believe that for efficient PDM time has come for the State governments to strictly adopt and follow commercial accounting principle in all its departments. I do not know how many departments of Union and State governments are still maintaining books of account using single entry system and how many are using computers for accounting purpose.
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                Devi
                May 11, 2015 at 12:02 pm
                Though the RBI staff union reaction can be explained using Jeopardy Thesis of Albert Hirschman (Rhetoric of Reactions), few questions that also need answers are as follows: (1) Whether the Parliamentary committes ever had a chance to examine the C & AG Reports on the present debt operations vis-�-vis the dividends paid the Public sector Financial enies who lend money to the government ? (2) If not, is it not appropriate to do so at least before modifying the debt management operations. (3) How different would be the policy the objectives the new eny compared to present policy objectives? (4) What would be the efficiency indictors to measure performance of the new eny? (5) Will the new eny add to costs of operations, if so how those would be financed? (6) How the new eny would be made accountable to Parliament, both at in the context of recruitment and conduct o the CEO and his/her annual performance? (7) If the new eny is permitted to borrow from foreign countries, what kind of arrangements would be in place to cover currency rate risks and how those risks would be financed? (8) Will the government switch the definition of fiscal deficit in relation to Gross Borrowings or would it continue to measure fiscal deficit as it is being done now using 'net numbers'''? (9) Will the new eny start 'rating' the Central and State government bonds and subject the trading the same to the SEBI regulations? (10) Who will set the operational objectives – policy and profit, for the New Eny and on what basis? If such issues are not being addressed, there doesn't seem to be any justification to modify the present arrangement in debt operations. So far, there appears a vacuum on all such matters, at least in public domain.
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                  Ramesh Grover
                  May 10, 2015 at 9:10 am
                  It is a complex issue. One has watched the movements of this government, and one is pleased to find that it listens respectfully to advice from RBI rather than erting itself deviously. China bran is however right where he tells us that both Jaitli and RBI need to be more transparent about the change in their approach. Perhaps a more open expert discussions would throw more light on such a complex issue which was also not pushed to its logical end by Chidambram also.
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                  1. S
                    Sanjay Bhattacharya
                    May 10, 2015 at 5:51 pm
                    Chidambaram ji, You and Sonia hi destro the country's economy. Whe you took over as FM from Vajpayee Govt you said 'we have got a good economy and I can make further experiment with this.' Your experiment brought untold corruptions which India never experienced before. The result was that after 10 years of UPA rule, the growth rate came down from 8.5% 9during Vajpaye) to 4.5%. Your name and your son's name are also mentioned in corruption. You became so unpor that you did not compete the election. I hope you will have some introspection and refrain from criticizing the present Govt which is doing exceedingly well.
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