Since 1935, The Reserve Bank of India (RBI) has been undertaking the responsibility of managing public debt for the Indian government. Among the advanced world economies, India’s sovereign debt position has a crisis free track record and also boasts of a rational debt-GDP ratio.
The idea of shifting Public Debt Management (PDM) from Reserve Bank of India (RBI) to the Public Debt Management Agency (PDMA), which is under the aegis of the Indian government, was reportedly first debated during 2007-2008. The RBI as the manager of public debt tries to keep the interest rate of government securities low and on the other hand, it also firms up interest rate to keep inflation under leash. Reported conflict between these two important functions of RBI prompted the government to separate public debt management from the ambit of RBI’s functions. This move has gathered momentum since 2017 following its provisional appearance in a bill floated in 2015.
First Appearance through the Financial Bill
The aim of transferring the job of public debt management from RBI to a proposed PDMA was first placed through the Finance Bill 2015. But government had to withdraw this bill because of stiff parliamentary opposition.
Samir Ghosh, the General Secretary of All India Reserve Bank Employees Association (AIRBEA) told BE, “RBI decides on the interest rates, which vary depending on the various economic parameters of the country like inflation, demand constraints, money flow in the market, etc. RBI has been managing both these functions involving interest rates and public debt management from its inception. There has not been any problem.”
He categorically added, “It is not true that as a debt manager the RBI adamantly decides at which rate it will borrow. Interest rates are decided by the market. If the RBI offers too low a rate, it will not get the money. Hence, it has to move in tandem with the market rate. RBI cannot be away from the existing market trends. To borrow money for its clients, that is, central and state governments, the RBI auctions to banks, insurers, mutual fund entities, etc., to settle interest rates at which the money is to be borrowed. So the situation is not at all conflicting as stated in the government proposal.”
Moreover, Ghosh explained the advantage of RBI dealing with PDM. He said, “If RBI is not into the management of central government debt, it is not possible for it to do that for the states. Being the debt manager of the central Government, RBI has a separate arrangement of agreements to deal with the public debt management of the states in India, excluding Jammu and Kashmir. As an underwriter of the public debt of states and the central government, the RBI simultaneously floats loans for the central government and state governments. They ensure that the loans floated by the state governments are also sold off. For that, they pursue different financial bodies to contribute to various loans. All the state loans get subscribed and no state government suffers. But if the public debt management goes to an autonomous agency, the agency will not have that much control over the financial investors. The question of credit ratings of the states also arises. The states which are in the better financial positions will have a better credit rating and investors will invest in those states being assured of return of their invested amount and of higher returns. When the RBI is the debt manager, it stands as the guarantor. That guarantee cannot be ensured by separate agency. In that case, states will naturally compete with each other to get money from the investors. Eventually the poorer states will have to offer higher rate of interest to get funds. In this arrangement, the poorer states will suffer more. This is totally against the federal quality of the country’s economy. When the state governments will offer varying interest rates, the market as well as interest rates equilibrium will be disturbed. Due to the above logic, the government is facing strong opposition to implement this proposal.”
The countries like, Singapore, Taiwan, Hong Kong, Denmark, Chile, Uruguay, Ireland, Iraq, Sri Lanka, Tanzania, Germany, Japan, China, Italy, etc., have given the responsibility of their government debt management to their central banks. Denmark and Ireland had different systems but now have their central banks managing their public debt. In some countries like Greece, Portugal and Ireland, the independent debt management services issued short term/foreign debt in a disproportionate manner and exposed the respective governments to financial risks.
Ratan Khasnabis, an eminent economist pointed out, “Public debt burden acts reversely with inflation. If the inflation increases, public debt management decreases and vice versa. And inflation is controlled by monetary management, which is regulated by the Reserve Bank of India. If public debt management is controlled by an autonomous agency and separated from the RBI, it will be delinked from money management and ultimately have an overall delinking effect on Indian economy, which is not at all looked for.”
The ‘Theory of Conflict’ that is being promoted by the government to justify this move is also denied by Nobel Laureate American economist James Tobin who according to a written document of United Forum of Reserve Bank Officers & Employees, stated, “....debt management is not a task that is divisible in two provinces, monetary control on the one hand and management of interest-bearing debt on the other. The programme is a unit, and it is anomalous to attempt to split it into administrative packages....... There is no neat way to distinguish monetary policy from debt management......it is not merely that monetary action and debt management interact........ They are one and indivisible; debt management lies at the heart of monetary control.”
The envisioned Public Debt Management Agency will only be concerned about its own functionalities. But debt management influences interest rate movements and supply of financial market funds. PDMA may create problems by increasing risky debt and affecting economic equilibrium as witnessed by some European nations. Financial equilibrium can only be achieved from well-coordinated monetary policy exercises, exchange control and public debt management.