The Global ANALYST, February 2016

The Debate Over (Public) Debt Management*

M G Warrier

The need of the hour is a holistic approach to management of public funds. Huge funds belonging to public are managed by GOI, state governments, RBI, banks, organisations like LIC and several PSUs. Even the entire ‘capital’ in the equity market belong to ‘public’. What needs to be ensured is having a regulatory and supervisory architecture that will ensure efficient management of all these resources.

Public Debt Management in India comprise market borrowings of central and state governments and the country’s external borrowings. While Reserve Bank of India is mandated to handle central government’s market borrowings and enabled to manage public debt of state governments under mutual agreements, external borrowings are directly managed by Government of India.

Present status of Public Debt Management
The executive branch of the government derives the powers to borrow upon the security of the Consolidated Fund of India, from the Constitution of India. Government (both Union and the States) implements the borrowing program. The
Reserve Bank draws the necessary statutory powers for debt management from
Section 21 of the Reserve Bank of India Act, 1934. While the management of Union Government's public debt is an obligation for the Reserve Bank, the Reserve Bank undertakes the management of the public debts of the various State Governments by agreement. The procedural aspects in debt management operations are governed by the Government Securities Act, 2006 and rules framed under the Act.

External debt (bilateral and multilateral loans) is managed by the Department of
Economic Affairs in the Ministry of Finance. All debt management functions for
marketable internal debt are undertaken in the Reserve Bank. These functions
comprise formulation of a calendar for primary issuance, deciding the desired maturity profile of the debt, size and timing of issuance, designing the instruments and methods of raising resources, etc. taking into account government's needs, market conditions, and preferences of various segments while ensuring that the entire strategy is consistent with the overall macro-economic policy objectives. Reserve Bank also undertakes the conduct of auctions and manages the registry and depository functions.

Move to have an independent Public debt Management Agency

The 2008 Report of the Internal Working Group on Debt Management had argued for the creation of an independent public debt management office. The Financial Sector Legislative Reforms Commission which considered setting up of a Public Debt Management Agency independent of RBI to manage public debt based its recommendation on the following premises:
(a)Some functions that are crucial to managing public debt are not carried out at present. For instance, no agency undertakes cash and investment management, and information relating to contingent and other liabilities is not consolidated.
(b) There is no comprehensive picture of the liabilities of the Central Government, which impedes informed decision making regarding both domestic and foreign borrowing.
(c) Public debt is increasingly obtained from private lenders, including both domestic and foreign entities.
The Commission felt that, under these conditions, the management of Government liabilities can grow in infinitely complex ways that could only be tackled by a specialised agency. The Commission believed that there are other institutional benefits in avoiding conflicting roles for the RBI.
The Commission says it had considered the views of the RBI in this regard. The RBI believed that “to achieve public policy objectives of ensuring growth, price stability and financial stability, co-ordination between monetary policy, fiscal policy and sovereign debt management is critical”.
Medium Term Debt Strategy (2015-18)

In January 2016, GOI and RBI have placed in public domain a Medium Term Debt Strategy (2015-18). The stated objective of the debt management strategy (DMS) is to secure the government’s funding at all times at low cost over the medium /long-term while avoiding excessive risk. The DMS has been articulated in medium-term for a period of three years and it may be reviewed annually and rolled over for the next three years. The scope of debt management strategy is restricted to active elements of domestic debt management, i.e., marketable debt of the Central Government only. Over time, the scope would be progressively expanded to cover the entire stock of outstanding liabilities including external debt as well as General Government Debt including SDL.

The debt management strategy revolves around three broad pillars, viz., low cost, risk mitigation and market development. Low cost objective is attained by planned issuances and offer of appropriate instruments to lower cost in medium to long-run, market conditions, preferences of various investor segments, improved transparency by way of a detailed issuance calendar. Following risk management tools have been adopted to reduce the risk associated with the sovereign debt:
a) Adoption of portfolio management practices and creating prudent debt structure by containing rollover risk through switches / buy back;
b) Lowering interest rate risk by keeping floating rate debt low;
c) Managing foreign currency risk by issuing debt in domestic currency, developing stable domestic investor base and calibrated opening of G-sec market to foreign investors; and
d) Reducing rollover risks by elongation of maturity and establishing limits on security issuances and annual maturities.

The above document says that Reserve Bank, in consultation with the Government, will continue its effort in development of the G-sec market by a series of measures such as introducing new instruments, expanding the investor base, strengthening market infrastructure, etc.

The move signifies the consensus between GOI and RBI about the need for mutual consultations and joint efforts in managing debt. Once it is accepted at the highest level that the formulation of policy, setting up institutions and putting necessary legislative support in place for management of the government’s finances and the country’s financial sector is a joint effort by GOI and RBI, which acceptance is slowly evolving, vested interests and media gossip will not be able to destabilise the relationship between North Block and Mint Road.

If it ain’t broke…

Speaking at the First State Bank ‘Banking and Economic Conclave’ at Mumbai on June 17, 2014, RBI Governor Dr raghuram Rajan made the following observations:

“Lest all this sound like an unthinking defence of regulatory turf, let me add that there are places where the RBI could give up powers. For instance, if the government wants to manage its own debt, there is no reason for the RBI to stand in the way. I don’t believe the government suffers any less from conflicts of interest in debt management (unlike the views of the FSLRC), but the RBI could well carry out the government’s instructions without any loss in welfare. I imagine, however, that the government will depend on deputations from the RBI for a while for advice.

Instead, think of my remarks as an attempt to draw out the important and undoubted benefits of the FSLRC report, while eschewing grand schemes with dubious chances of success. Undoubtedly our laws need reform, but that is no reason to try entirely new approaches to legislation, overlaid on entirely new regulatory structures, complemented by entirely new oversight over regulation.

Undoubtedly, we have also had occasions when regulators have exceeded their remit or been high-handed. But is that a reason to subject their every action to judicial second-guessing? Is there a reason we need more checks and balances, or are we trying to solve a problem that does not exist.

As the Chinese would say, let us recognize the value of crossing the river by feeling each stone before we put our weight on it. Let us not take a blind jump hoping that a stone will be there to support us when we land. Or in American, if it ain’t broke, don’t fix it!”
Management of Government’s Finances
Beyond Public Debt Management and management of External Borrowings, the need of the hour is a holistic approach to management of public funds. Huge funds belonging to public are managed by GOI, state governments, RBI, banks, organisations like LIC and several PSUs. Even the entire ‘capital’ in the equity market belong to ‘public’. What needs to be ensured is having a regulatory and supervisory architecture that will ensure efficient management of all these resources. GOI, at this stage, should institutionalise a system for guidance for managing public funds. That body should be responsible for research leading to adoption of internationally accepted best practices in fund management and providing guidance for ensuring efficient fund management by all organisations. Here efficiency can be improved only by skill development as different from technological innovations and allowing institutions to manage their human resources efficiently is of paramount significance.
(Writer is Ex_GM, Reserve Bank of India, Mumbai and author of the 2914 book “Banking, Reforms & Corruption: Development Issues in 21st Century India)
*Submitted version


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