Questions of autonomy apart, time is not yet opportune to experiment with new institutions for debt management when there is no dispute over the expertise developed by the RBI. When efforts are on to ensure financial stability, let us not destabilise existing institutional framework merely in the name of following examples abroad

A media report says, “The finance ministry is also expecting a more cordial relationship with Rajan on other issues such as setting up of a Debt Management Office (DMO) in the ministry”. If the finance minister (FM) is able to exert sufficient pressure fast enough, to be more specific, before Dr Raghuram Rajan, governor of the Reserve Bank of India (RBI), is able to comprehend the history and context of public debt management in India, one will not be surprised to find the present team in RBI managing public debt getting government of India (GoI) label and getting rechristened as DMO, which is part of the finance ministry.

There is no irrationality in the government taking over and managing public debt on its own when the fiscal policy management has matured. However, the haste with which the finance ministry is trying to go through the process is unwarranted. Such a move at this juncture will destabilise one more arm of the government as the ministry is already burdened with several other preoccupations and compulsions arising from loss of credibility, compulsions of coalition politics and a host of other relationship issues with regulators and financial institutions including banks.

It is in the interest of country’s financial stability, which is the basis for economic development, not to disturb the present arrangement, at least until the government is in a position to take up the comprehensive review of the monetary system envisaged in the preamble of the RBI Act. The desperation with which FM pleads with public sector units (PSUs) for higher dividends to make up for the shortfalls in fiscal planning is an indication; one can imagine what can happen to government borrowing dependent only on the ‘ownership rights’ of a coalition government which is pulled and pushed by weak partners.

But who will listen? The present move from the political leadership is to usurp the power to borrow, from an institution which is still left with some semblance of integrity and credibility.

Unlike the government’s experiences in disinvestment management, or several flip-flops in resources management in general, RBI has been managing smoothly the public debt of central government under Section 21(2) and that of state governments by agreement as provided for under Section 21A of the RBI Act, 1934 for several decades. It is in the interest of the country’s financial stability which is the basis for economic development, not to disturb the present arrangement at least until the government is in a position to take up the comprehensive review of the monetary system envisaged in the preamble of the RBI Act.

At one stage, it was alleged that the human resources and manpower issues were the ground on which the RBI opposed the shifting of debt management to the finance ministry. It was common knowledge that even if the work is transferred to them, the finance ministry will have to initially depend on in-house expertise developed in RBI over decades of effort. Having said that, there is no denying the fact that trade unions and finance ministry have focused on HR-related issues.

As government under the existing disposition has enough authority to ‘direct’ RBI in an eventuality, there is no need to hurry through this piece of legislation at a time when more attention should be paid to clear the mess which is already there on the drawing board of parliament.

Like personal borrowings, if well managed and well-balanced between consumption and asset creation purposes, public debt will serve developing countries like India well. Presently we borrow for whatever purpose credit is forthcoming and spend tax payers’ money and windfall gains from sources like spectrum auction, sale of mining rights etc and divestment of holdings in public sector companies without any regard to the sources of funds or respect for national priorities. We borrow amounts as small as $300 million from abroad to fund microfinance when individuals in India can afford building monuments and houses worth much more than that and thousands of crores of rupees flow down the drain in celebrations. National level financial institutions talk about lending to small borrowers at interest rates as high as 25% to 30% per annum while banks pay interest on deposits at 3.5% to 7.5% a year. The gravity of the situation is compounded by the unacceptably high levels of corrupt practices. Someone should initiate a comprehensive study of sources and uses of public funds in India. Better still, if the study could cover funds raised from public by banks and corporates also.

On separation of the debt management office from the central bank, the consistent RBI position has been that the central bank would be in a better position to hold the responsibility of debt management. In the present scenario, when RBI and other regulators have to reiterate day-in and day-out that they enjoy statutory autonomy, one can only think of the unenviable position of a DMO ‘independently’ functioning directly under FM’s control. Questions of autonomy apart, time is not yet opportune to experiment with new institutions for debt management when expertise already developed by RBI in this work area is not in dispute. When efforts are on to ensure financial stability, let us not destabilise existing institutional framework in the financial sector, merely in the name of following examples abroad.

It is common knowledge that RBI would be in a better position to carry on the responsibility of debt management for which it has developed expertise over time. The position of a DMO ‘independently’ functioning directly under FM’s control can become embarrassing. Time is not yet opportune to experiment with new institutions for debt management when expertise already developed by RBI in this work area is not in dispute. When efforts are on to ensure financial stability, let us not destabilise existing institutional framework in the financial sector, merely in the name of following examples abroad.

Unlike the recent experiences in disinvestment management by government, RBI has been managing smoothly the public debt of central government under Section 21(2) and that of state governments by agreement as provided for under Section 21A of the RBI Act, 1934 for several decades. It is in the interest of country’s financial stability which is the basis for economic development, not to disturb the present arrangement at least until the government is in a position to take up the comprehensive review of the monetary system envisaged in the preamble of the RBI Act.

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(MG Warrier is former general manager of Reserve Bank of India.)