Six months into the fiscal, a large number of announcements in the Union Budget 2015-16 related to the financial sector seem to have been formulated and set in motion but for the long-pending proposal to set up an independent agency to manage Central government borrowings.
Plans to set up a Public Debt Management Agency (PDMA) now seem to have been put on the back burner and senior government officials indicate that it is unlikely to be taken up any time soon.
“The PDMA is unlikely to be set up during this financial year. Discussions are on and various committees are working on it but it will take more time to fructify,” said a person familiar with the development.
The proposal to set up an independent debt management agency has been announced by successive finance ministers and it was taken up by finance minister Arun Jaitley in this year’s Union Budget in February.
But two months later, during the discussion on the Finance Bill, 2015, in May, the finance minister withdrew the proposal to include the provisions for setting up the PDMA from the Finance Bill.
“Since the RBI has been handling public debt management, the government, in consultation with the RBI, will prepare a detailed roadmap separating the debt management function and the market infrastructure from the RBI and having a unified financial market,” he had announced.
Sources said that while the government is still very much keen to set up the PDMA, it will require more time
“Just because both the monetary policy committee and the PDMA require amendments to the RBI Act, they cannot be clubbed together. There has been agreement on the monetary policy committee and an agreement has also been signed. Discussions on the PDMA are on,” said the person, adding that even if a decision is taken, the transition to a fully functioning debt management office (DMO) will take some time.
The need for an independent debt manager for the Centre is becoming more underlined as its borrowings cross over Rs 6 lakh crore and it tries to lower its fiscal deficit to less than 4 per cent this fiscal.
The original plan was that PDMA would eventually start managing the borrowing programme of states as well. While the RBI is mandated to manage Centre’s borrowings, it has also signed agreements with states for overseeing their borrowing programmes.
As a precursor to a fully functional DMO, a Middle Office was set up in September 2008, which reports to the joint secretary in the Budget division of the finance ministry. Its responsibilities include working a on a legal framework for setting up PDMA, developing a centralised database on government liabilities and disseminating debt related information to the public.
Meanwhile, in September 2014, the finance ministry had set up an expert panel under former finance secretary Dhirendra Swarup to review global best practices and work out a roadmap for setting up the PDMA. With a term of one year, the panel is expected to submit its report later this month.
While former finance minister Yashwant Sinha had set up a committee of officials from the finance ministry and RBI to work on the proposal, it was also mooted by the more recent Financial Sector Legislative Reforms Commission that submitted its report in 2013.
The rationale for the recommendation is simple – it would permit the RBI to focus more fully on its responsibility of setting the monetary policy as well as do away with the conflict of its twin roles as the manager of government debt as well as its banker.
The model is followed internationally in most developed economies including the United Kingdom and Sweden.
However, concerns have often been raised by the RBI over the proposal stressing that the proposed agency must be independent both of the finance ministry and the central bank. Finance ministry officials often point out that even former ministry officials have changed their stance on the issue after moving to the central bank.
The International Experience
United Kingdom: Set up in 1998, the Debt Management Office is part of the Treasury and operates at arm’s length from the ministers. It is responsible for debt and cash management for the UK government as well as lending to local authorities and managing some designated public sector funds.
Sweden: The Swedish National Debt Office was set up in 1789 and is responsible for providing banking services for the Central government, raising loans and managing Central government debt and providing state guarantees and loans.
The US: The Office of Debt Management is part of US Treasury and provides advice to the Assistant Secretary for Financial Markets on matters relating to the US Treasury’s debt management policy, the issuance of Treasury and federally-related securities, and financial markets.