Perhaps the government could consider setting up a statutory body to initially handle management of surplus funds, borrowings of public sector organisations and management of state government borrowings. Over time, this body may relieve RBI from public debt management responsibilities
As Reserve Bank of India (RBI) Governor and Finance Minister are on the same page with regard to having an independent Public Debt Management Agency. Therefore, perhaps the government could consider setting up a statutory body to initially handle management of surplus funds and borrowings of public sector organisations, management of state government borrowings (now being handled now by RBI on an agency basis (Section 21A of RBI Act) and such other responsibilities it may entrust to that organisation. As the organisation grows, it can help in building a retail market for government securities and gradually relieve RBI of public debt management responsibilities.
A newspaper report on 23 March 2015, on a presentation on the constitution of Monetary Policy Panel, which will come into being pursuant to the signing of the land mark Monetary Policy Framework Agreement (relating to inflation targeting), made by Finance Minister Arun Jaitley to the Reserve Bank of India (RBI)’s Central Board, opens with the following assertion:
“Differences emerged on Sunday between the Reserve Bank and the Finance Ministry over the structure of a committee that will set interest rates and take monetary policy decisions-instead of the central bank’s Governor.”
As several crucial policy issues were dodged during the past 10 years or so, broadly due to compulsions of coalition politics, there is a hurried rushing through of announcement of intentions by government and bodies responsible for implementation of government policy. Therefore, government should be extra-cautious to ensure that such hurry does not end up in destabilising existing institutions like RBI. For example, the Narendra Modi-led union government should not avoid revisiting half-baked recommendations of Financial Sector Legislative Reforms Commission (FSLRC) before rushing through implementation.
The shrewd Finance Minister has quickly got over the situation by forthright denial of any rift between North Block and Mint Road and committing that ‘Until RBI Act is amended, (RBI) Governor will take decisions’. Those who find happiness in fuelling friction may interpret this as a threat to RBI that ‘Fall in line else we have legislative powers to make you obey’. Such interpretations also will get currency because of the way in which several measures were taken during the pre-16 May 2014 days.
Back to the subject, the need for comprehensive changes in the Reserve Bank of India Act, 1934 had been foreseen by the writers of the Act who included the following clauses in the Preamble of the Act:
“And Whereas in the present disorganisation of the monetary systems of the world it is not possible to determine what is suitable as a permanent basis for the Indian monetary system; But Whereas it is expedient to make temporary provision on the basis of the existing monetary system, and to leave the question of the monetary standard best suited to India to be considered when the international monetary position has become sufficiently clear and stable to make it possible to frame permanent measures.”
Differences of views on the subject between RBI and the government should be seen in this context and should not be seen as ‘rift’, which will only divert attention from the main issue of making improvements in the monetary policy implementation architecture.
A god-sent opportunity for such a review was brushed aside by the FSLRC, which opted to re-invent structures and legislative instruments to help out a government from embarrassment caused by a weak Finance Ministry (not a weak Finance Minister) not equipped to argue its cases sensibly with statutory bodies and corporates.
Public Debt Management Agency
Intentions behind the proposal for an independent Public Debt Management Agency ‘outside’ RBI and government may be noble. But ultimately, as the agency will have to handle ‘debt’, which is dependent on credibility and clout of the borrower, for the moment, it is better to continue status quo. Every time a new initiative or decision is taken affecting financial sector, we have a legacy of vested interests trying to tilt the decision in their favour by putting a wedge between the government and the RBI. It is comforting to see that the present RBI Governor and Finance Minister have understood the game and are working in tandem.
For several reasons, it would be expedient to allow RBI to continue public debt management at least for another decade. One, there is no retail market for government securities and therefore government borrowing is dependent on commercial banks (which are mandated to maintain a certain percentage of their assets in ‘cash, gold or unencumbered approved securities’) and financial institutions. Two, the Reserve Bank has been managing public debt for several years well and this has helped the institution develop in-house expertise and skill which cannot be easily ‘transferred’ to a new organisation. Three, there is no guarantee that a new agency will be in apposition to function independent of the government and the RBI for reasons One and Two!
Since the RBI Governor and Finance Minister are on the same page in regard to having an independent Public Debt management Agency, perhaps the government could consider setting up a statutory body to initially handle management of surplus funds and borrowings of public sector organisations, management of state government borrowings (now being handled now by RBI on an agency basis (Section 21A of RBI Act) and such other responsibilities it may entrust to that organisation. As the organisation grows, it can help in building a retail market for government securities and gradually relieve RBI of Public debt management responsibilities.
(MG Warrier is former general manager, RBI, Mumbai and author of the 2014 book “Banking, Reforms & Corruption: Development Issues in 21st Century India”