In the budget speech of 2007-08,the finance minister had proposed the setting up of an autonomous debt management office (DMO). Since 1997,various experts have suggested hiving off the debt management function from the RBI to an independent entity. The separation of the two has been followed by an increasing number of countries and is considered an efficient way of managing debt,which has different objectives from monetary management. The objective of debt management,as generally defined,is raising resources from the market at the minimum cost while containing the risks. In contrast,the objective of monetary policy in India is to maintain a judicious balance between price stability,economic growth and financial stability. Thus,the objective of debt management is subsumed in the overall objectives of monetary policy in India.
To implement the specifically focused debt management strategy,and choosing to separate debt from monetary management,governments emphasise the role assigned to debt management to preserve the integrity and independence of their central banks,to shield debt management from political interference and to ensure transparency and accountability in public borrowings. Even if there is a separate department with the requisite firewall conducting debt management within the central bank,the markets will suspect the influence of inside information on interest rates. This approach does not augur well for transparency in debt management. And when the central bank is balancing the different objectives of debt and monetary management,accountability is difficult to fix.
In India,after the budget announcement,the middle office was set up in the finance ministry but the separation has not taken place. The reasons offered by the committee on financial sector assessment,and others,are that global circumstances are not conducive in terms of volatile capital flows; deficits and debt levels are still high; the staff of the proposed DMO may not have the requisite skills; and there could be a conflict between the role of government as a debt manager and owner of public sector banks. But in the last two years,there have been several months when the RBI did not purchase or sell US dollars. Though the fiscal deficit is high,debt liabilities are not,especially compared to other countries like the UK and in Europe,where debt has increased to more than 100 per cent of GDP. Charles Goodhart from the London School of Economics said that when debt sustainability is a problem,as was the case for the UK after World War II,monetary and debt policy have to be closely integrated. But that is clearly not applicable to India.
It is difficult but not impossible to learn the art of debt management with the help of experts in the RBI. In any case,close coordination between the debt and monetary authorities would necessarily continue after separation. An autonomous DMO would imply an annual statutory report that would ensure that the government does not take undue advantage of owning public sector banks.
In India,various components of debt are managed by different offices of the Central and state governments,with the RBI playing a key role in raising market loans and treasury bills,accounting for more than half of total outstanding debt,or about 35 per cent of GDP. The ownership pattern of the government loans and treasury bills floated by the RBI reveals that nearly 35 per cent are held by commercial banks and an additional 10 per cent by primary dealers entities regulated by the RBI,a function that could conflict with the role of debt manager.
Therefore,the separation of debt management will help to establish transparency and assign specific responsibility and accountability to the debt manager. This could lead to integrated and more professional management of all government liabilities,currently dispersed in different offices,with a focused mandate to operate on sound economic and commercial principles. The strategy could ensure that resources are available to the government at competitive rates,prompting expenditure prioritisation and fiscal discipline in budget-making.
With better developed financial markets,the budget speech in 2013 could be an opportune time to complete the unfinished task of announcing an independent DMO.
The writer is RBI Chair professor at IIM,Bangalore. Views are personal