No interest

The government has formed a panel to decide the setting up of a middle office for the Debt Management Office. A separate DMO has been advocated by the Reserve Bank of India and by a number of expert committees,from 1999 onwards. The budget speech of 2007-08 announced the governments decision to set up a DMO in which the first phase was the setting up of the middle office. A finance ministry working group on this issue has worked on the mechanics of how the DMO should function. This was two years ago. Almost no progress has been made on the DMO since then. Now,after two years,yet another panel has been set up to finalise the structure of the middle office. Is this another example of the slow speed with which the UPA government executes its decisions?

One-fourth of government spending today is on interest payments. The Central government is borrowing more now than it has ever done in the past. The cost of this borrowing is high. One job of the DMO is to reduce the cost of borrowing. The second is to take this responsibility away from the RBI. Today the RBI acts as the governments debt manager. At the same time,the RBI,the governments investment banker,also regulates banks. It can offload government bonds onto banks and overlook the interest rate risk when it comes to bank supervision. While explicit costs remain high,implicit costs through higher risk in the banking system are high. Also,when banks are forced to lend cheaply to the government,they recover their costs of deposits from the private sector. This shifts the burden to individuals and households borrowing from banks.

The RBIs massive bureaucracy,of course,has a vested interest in retaining as many functions as it possibly can. And while the RBI may have reason to justify its continued role in the regulation of banks in the post-crisis period that is,after all,the direction in which mainstream thinking on regulation has moved it has no leg to stand on to defend its debt management functions. The ball is therefore squarely in the governments court on the DMO,and it can,and must,force the RBIs hand on the matter. Unfortunately,the slow speed or lack of implementation of even the smallest and least controversial decisions has become the hallmark of the government. The formation of committees to reach a consensus is not particularly useful if the government then does not move forward on executing the proposals.