Life after debt

Perhaps the only major economic policy institution that has not been reformed since reforms began, RBI, is also for the first time bang in the middle of many vigorous debates. And one hopes in a democracy with as solid a tradition of intellectual economic thinking as India8217;s, these arguments are heralding a change. Proof in small measure comes from, as reported in this newspaper on Friday, the firming up of the formula by which RBI will be divested of its job of managing public debt. The finance ministry did little on its budget promise to set up a debt management office and, as frequently happens in India, a committee was set up. Frequently, again, such committees don8217;t achieve much. But this committee, headed by the finance ministry8217;s recently appointed principal economic advisor, seems to be serious. Therefore, a new public entity that will manage debt and an interim body that will advise on creating this entity are both ideas that seem to have a lot of traction. If India is lucky, this may get done within the UPA8217;s term, and will doubtless be the most important, perhaps the only, major reform undertaken by this government.

RBI is possibly not jumping for joy. But its resistance 8212; for 16 months it couldn8217;t find officers who could participate in the exercise 8212; on this is perhaps getting weakened. Certainly, there8217;s zero intellectual basis for keeping debt management with the central bank 8212; the same entity shouldn8217;t set short-term interest rates for monetary policy, long-term interest rates for public debt and monitor banks who are major buyers of public debt. That RBI has been doing this for so long is proof of India8217;s shoddy approach to central banking. This reform should be the beginning of more tightening of RBI8217;s brief as well as the related reform of making India8217;s bond markets come up to the standards of its equity markets. For one, bond and equity markets should be regulated by the same monitor, Sebi. RBI won8217;t like that either. But there8217;s plenty in the rough blueprint of financial sector reforms 8212; as detailed in the Patil, Mistry and Rajan committee reports 8212; that RBI won8217;t like.

Major reforms never happen while keeping the reformed one happy, though. The controller of capital issues couldn8217;t have been happy when it was told its time was up. A big section of the inspector raj wasn8217;t thrilled when the licensing policy was abolished. FERA8217;s demise reduced influence and extra-official earnings for many financial monitors. Time RBI got really unhappy.