Opinion Incomplete agency
A debt management office is a long-delayed idea. But it may need statutory backing.
A debt management office is a long-delayed idea. But it may need statutory backing
Three years after then finance minister Pranab Mukherjee first announced the setting up of the Public Debt Management Agency (PDMA) during his budget speech in 2011, Finance Minister P. Chidambaram has reported that the PDMA bill is ready but that the agency will be set up as a non-statutory body, and will start functioning in the coming financial year. A broad majority, including the Financial Sector Legislative Reforms Commission, has come out in favour of divesting the RBI of government debt management and handing it over to an independent agency. But given that the long-delayed proposal will now be revived through executive order, there are questions of its scope and the turf wars it could potentially trigger.
As the regulator of the banking sector and given its control over monetary policy — and therefore on interest rates and inflation — the RBI is implicated in a conflict of interest if it also manages government borrowings. A central bank’s incentives are not aligned or internally consistent if it is charged with accessing low-cost debt on behalf of the government on one hand, and has to raise interest rates in response to inflation on the other. Or, if it can corner banks into holding more government bonds by adjusting the statutory liquidity ratio upwards as a part of its regulatory powers. And while a central bank acting as a debt manager may hope to reduce the government’s real debt burden by encouraging inflation in the economy, it is also supposed to be on guard against price rise.
By curtailing the role of the RBI and the finance ministry, an independent PDMA will also discipline the government by forcing it to face the bond market more fully. But by establishing the agency through administrative notification rather than an act of Parliament, it is an open question whether it can still be vested with the originally envisaged scope and powers. Given that the RBI maintains that, at least as of now, it alone has the capability to manage the government’s debt portfolio and Governor Raghuram Rajan’s belief that the conflict of interest issues are overstated, the lack of statutory backing for the agency may touch off a turf war. As seen in the case of the Pension Fund Regulatory and Development Authority, even if the agency gets off the ground without Parliament’s nod, the government will ultimately have to seek its approval to shore up its powers.
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