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BIG TASK
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New Delhi, Jan. 20: The government has kept alive a draft cabinet note on a bill that seeks to shift the task of managing its debt from the Reserve Bank of India to a separate authority.
The proposal was initiated last year, when Pranab Mukherjee was the finance minister, but was put on the back burner because of objections from the RBI.
However, officials said the finance ministry planned to bring the cabinet note later this year.
The move is aimed at avoiding a conflict of interest in the RBI’s role.
In many developed and emerging market economies, such as the UK, the sovereign debt management function has been detached from the central bank, officials pointed out.
Besides, the government will not move the cabinet note without the RBI’s approval.
Officials said the government can address the RBI’s reservations by continuing to involve the central bank in the proposed Public Debt Management Agency of India (PDMAI), the country’s sovereign debt office.
If a new agency is set up, the RBI’s sovereign debt management division will have to be co-opted by the government.
The central bank’s objections are based on the high level of fiscal deficit and the high government debt-to-GDP ratio.
The fiscal deficit during April-November was Rs 4.13 trillion, or 80.4 per cent of the budgeted deficit for the full fiscal (2012-13).
Also, the gross public debt-to-GDP ratio is one of the highest among emerging economies at nearly 70 per cent at the end of the first half of 2012. In contrast, China’s debt to GDP ratio stands at about 26 per cent, Brazil’s at 67 per cent and Russia’s at less than 10 per cent.
Under these circumstances, the RBI feels bringing debt management under a government agency may lead to a conflict of interest where the Centre will be both a debt manager as well as the owner of a substantial portion of the banking sector.
Besides, it may not be appropriate for a central government authority to take over debt management for the state governments.
Officials said these issues would be taken up with the RBI and could be resolved by not only continuing to involve the RBI in the debt management agency but also by keeping it at an arm’s length from the government just as the RBI is kept.
“Autonomy is one of the ways to ensure that the government does not misuse the PDMAI,” officials pointed out.
The move to create a separate debt management agency isn’t new. It has been recommended by several expert committees in the past, including those headed by former finance secretary and chairman of the Thirteenth Finance Commission Vijay Kelkar, former World Bank official Percy Mistry and IMF’s former chief economist Raghu Rajan.
In his budget speech of 2007-08, finance minister P. Chidambaram had proposed a debt management office.
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