Public Debt Management in India: Role of the central bank

PUBLIC DEBT MANAGEMENT IN INDIA: ROLE OF RBI

What follows is the review of the book “Public  Debt Management ---Separation of Debt from Monetary Management in India” (edited by Dr Charan Singh) by PP Ramachandran.

Hope the book will reopen a healthy debate on the controversies still current, got initiated through a "dictated" report submitted by Financial Sector Legislative Reforms Commission. Dr Raghuram Rajan who had his own mind, did do whatever was possible to borrow time to rectify the damage intended to be caused to India by Srikrishna. I cannot comment on the book as I've not seen it. Probably, there will be very few individuals in India who may buy  the book, priced in five digits.

I think the arguments put forth for continuing Public Debt Management with RBI in Chapter III.4 “Public Debt Management” in my book "Banking, Reforms and Corruption: Development Issues in Twenty-first Century India" which was reviewed by PP Ramachandran in 2014(Free Press Journal) may still remain valid .

Congratulations to Charan for helping RBI in keeping the options open. If still GOI usurped the responsibility to manage Public Debt in a hurry, India's central bank should remain prepared to take the responsibility back, to borrow a phrase from Hillary Clinton, sooner than many of us can imagine 

Warm regards

M G Warrier

Public Debt Management ---Separation of Debt from Monetary Management in India

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 Edited by Charan Singh ; Published by Springer ; Pages 211; Price Rs. 10,099/-

 ( Import, 25 Nov 2016)

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The Editor Charan Singh is RBI Chair Professor of Economics at the I I M, Bengaluru. He was for over two decades in the Reserve Bank where he dealt with debt management and fiscal policy implementation. His credentials for editing a book on public debt are impeccable.

The book contains papers discussed at the Debt Management Module under the aegis of the Ninth Annual  International Conference on Public Policy and Management organised by the I I M, Bengaluru in 2014. The Conference was aimed at exchange of ideas among international scholars, academia and policy makers connected with debt management.

The Keynote address was given by H.R.Khan, then Deputy Governor of R B I. There are seven other contributors including two experts from Asian Development Bank.

Public debt management is the process of evolving and implementing a strategy of managing government debt which garners the requisite amount of borrowings, achieves cost / risk aims and also attains  governmental goals. In this direction measures have to be taken to promote efficient primary and secondary markets for government securities.

The position as it is obtaining in India is that public debt management is divided between the Central and State governments and the  R B I. The R B I  manages the market borrowings of both Central and State governments. External debt is managed directly by the Central government. The R B I  is statutorily entrusted with the maturity pattern, calendar of borrowings, instrument design and other related issues in close consultation with Government.

A Middle Office was set up in the Finance Ministry in 2008 to formulate debt management policy for the Central Government. There were some steps taken to set up an Independent Debt Management Office in the Finance Ministry. However there was a serious reluctance to accept this by R B I  since there exists in R B I a separate Department and during critical economic periods need for coordination would be intense and Government lacks the expertise in this field.

The inaugural address of H.R.Khan explores the historical background and asserts the success of R B I  in achieving the objectives of debt management. According to him, R B I took adequate care of rollover risk, exchange rate risk and interest rate risk. R B I  has also contributed to a strong government securities market. He argues for a continuation of the existing system as involvement of the central bank in managing market volatilities and market expectations becomes necessary and central bank’s hands-on involvement is much better as is clear from the experience in recent years.

Peeyush Srivastava explores the aims and strategy  of debt management of the Government. Government should ensure meeting the financial requirements in a sustained pattern and cost-effective manner. He discusses in depth debt restructuring, consolidation of securities, market management mechanism and management of government cash surplus.

The cash and debt management in States are discussed in detail by Ritvik Pandey. He presents an analysis of State debt, sources of their borrowings and related issues. He explains Ways and Means and overdraft facilities available to the States. He throws light on debt cycle, inflexible sources of borrowing and interest rates on State Government securities.

Kanagasabapathy, who has immense first-hand experience in the  R B I , calls for a holistic approach to debt management. He strongly commends an Independent Debt Management Office (IDMO)  that should be a policy-oriented agency and allot the operational part to the   R B I as a banker and fiscal agent to  Government. The IDMO should handle both Central and State loans. A separate debt management office on the basis of the Financial Sector Legislative  Reforms Commission would result in debt management becoming wholly subservient to the Finance Ministry without any independent status. He suggests a Debt Management Corporation as an R B I  subsidiary with share holding of  Central and State Government and handle the debt of both Centre and States.

The Editor Charan Singh has given a lucid history of debt management. Separation of debt management from monetary policy is essential to preserve the integrity and independence of the central bank. Such a separation is in the interest of the economy as it grows and facilitates the development of financial markets.

The  two experts from the Asian Development Bank study the evolution of fiscal balances and public debt ratios in developing economies of Asia covering 24 countries. Countries in this region have reacted responsibly to increasing debt ratios through fiscal tightening and prudent fiscal policies.

A final chapter called “ Round Table” offers a discussion on debt sustainability and its separation from monetary policy authority. There is a vigorous and healthy discussion of the pros and cons of making debt management agency function of the government.

The volume—which has a valuable number of tables, charts and graphs -- is a very useful, meaningful discussion of the problem of public debt and is of immense use to policy makers, economists, bankers and students of India economics.

The volume is a part of the India Studies in Business and Economics dealing with research in areas of economics, business and management science.

P.P.Ramachandran.