Post-budget moves

Further,as the budget indicated one-fourth of government spending today is on interest payments. The Central government is slated to raise more debt in the coming year than it has ever done in the past. The cost of this borrowing needs to be kept low. The bulk of government bonds are held by banks,the majority of which are public sector banks. Banks are statutorily required,through the Statutory Liquidity

Ratio,to hold one-fourth of their total assets in government bonds. So banks borrow from the public and redirect that money to the government. Regardless of how large the government debt is and whether the government has the ability to pay this debt or not,the Indian public is forced to (through the intermediation of banks) lend to the government. At the same time,the RBI,the government’s 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 borrowing from banks.

The establishment of a Debt Management Office has been advocated by the RBI and by a number of expert committees since 1999. A finance ministry working group has worked out the mechanics of how the DMO should be set up. The task before the government now is to swing into action.