COMMENTARY

Economic & Political Weekly EPW June 28, 2014 vol xlix nos 26 & 27
23
Debt Management in India
Need for Separation and Independence
K Kanagasabapathy, Charan Singh
A discussion of the long-standing
proposal to establish a Public
Debt Management Agency that
would be independent of the
central bank. There is need
for a separation but there must
be greater clarity than at
present on the independence the
agency will enjoy from the
central government.
E
ver since the onset of nancial
sector reforms in India in the ear-
ly 1990s, the proposal for separa-
tion of debt management from monetary
management and the setting up of an
independent Debt Management Ofce
(DMO) has been prominently discussed.
As both debt and monetary management
became market-oriented, the potential
conict between the two has surfaced.
The Reserve Bank of India (RBI), being the
major investor in government securities,
its market interventions through open
market operations in government securi-
ties and liquidity management operations
through the Cash Reserve Ratio (CRR) or
the Liquidity Adjustment Facility (LAF) is
highly susceptible to be clouded by debt
management objectives. The strength of
scal-monetary nexus in that sense
cannot be underestimated. As the role of
the RBI is restricted to management of
market loans, debt management should
be viewed in a holistic manner while
structuring the new DMO. The interests
of all stakeholders, namely, the central
government, state governments and the
RBI also need to be kept in view.
The public debt of the country has
been estimated at 66.0% of GDP at end-
March 2013 and the trend in the rise of
public debt reveals domestic debt has
been steadily increasing (Table 1).
The major components of domestic
debt are internal debt, small savings,
provident funds, and reserve funds and
deposits (Table 2). The Constitution of
India provides for the option of placing a
limit on internal debt, both at the centre
and the states, but no such limit has been
imposed so far. Internal debt, the most
prominent component of domestic debt,
consists of markets loans, Treasury bills
and other bonds issued by the central
and state governments.
The overall amount of total market
borrowings is decided in consultation
with the Planning Commission, state
governments, the central government
and the RBI. The RBI also advises the
central and the state governments on
the quantum, timing and terms of issue
of new loans for each of the tranches.
While the volumes of market borrowings
have increased substantially, the owner-
ship pattern of market loans has under-
gone signicant change too the share
of commercial banks has declined and
that of insurance and provident funds
has increased over the years.
The government also offers a variety
of small savings schemes to meet the
varying needs of different groups of
small investors. In respect of each
scheme, statutory rules are framed by
the central government indicating vari-
ous details including the rate of interest
and the maturity period. Small saving
instruments can be classied under the
following three heads: postal deposits,
savings certicates and public provident
fund (PPF), with PPF being a small
K Kanagasabapathy is a former director,
EPW Research Foundation and Charan Singh

teaches Economics at IIM Bangalore.
Table 1: Public Debt of the Government
Year In Rs Billion As Per Cent of GDP
External Debt Domestic Debt Public Debt External Debt* Domestic Debt Public Debt
1980-81 134.8 582.5 717.3 9.0 38.9 47.9
1990-91 663.1 3373.0 4036.1 11.3 57.5 68.9
2000-01 1899.9 14141.1 16041.0 8.7 64.9 73.7
2010-11 2788.8 48291.9 51080.7 3.6 61.9 65.5
2011-12 3229.0 55575.5 58804.5 3.6 61.9 65.5
2012-13 3320.0 62849.0 66169.0 3.3 62.7 66.0
* Historical values.
Source: RBI.
Table 2: Components of Domestic Debt of
the Government (in %)
Year Internal Small Reserve Domestic
Debt Savings Funds and Debt
Deposits and Deposits
Provident and Other
Funds Accounts
1980-81 60.6 22.6 16.8 100.0
1990-91 51.3 23.3 25.4 100.0
2000-01 67.4 13.0 19.6 100.0
2010-11 70.7 16.6 12.7 100.0
2011-12 73.5 15.2 11.2 100.0
2012-13 75.9 14.1 10.0 100.0
Source: RBI.
COMMENTARY
June 28, 2014 vol xlix nos 26 & 27 EPW Economic & Political Weekly
24
component.
1
The ownership pattern of
small savings is not available, though a few
ad hoc surveys have been undertaken.
Over the past three decades the share
of internal debt and market loans has in-
creased while small savings and reserve
funds declined from about 39% in end-
March 1981 to 24% in end-March 2013.
In fact, there is lack of comprehensive
analysis of the liabilities of the c entral
and state government and their distribu-
tional aspects, which impedes informed
decision-making regarding domestic bor-
rowing and thus calls for separation of
debt management.
Separation of Debt Management
In India, the issue of separation of debt
from monetary management has been
discussed in detail for more than a
d ecade. Such separation of debt would
p rovide the RBI with necessary independ-
ence in monetary management and an
environment to pursue an ination target,
if assigned by the government. The sep-
aration of debt management would also
provide focus to the task of asset-liability
management of government liabilities,
undertake risk analysis and help to
prioritise government ex pen diture through
higher awareness of interest costs. The
need for setting up a specialised frame-
work on public debt management which
will take a comprehensive view of the
liabilities of government, and establish
the strategy for low-cost nancing in
the long run has been advocated by
various expert committees since the
late 1990s (Table 3).
Financial Sector Legislative
Reforms Commission
Last year, the Financial Sector Legislative
Reforms Commission (FSLRC) also exam-
ined the issue and presented its report in
two parts: Volume I the text of the nd-
ings and recommendations and Volume II
the basic framework of a draft law in
March 2013. The FSLRC proposed crea-
tion of a specialised statutory Public Debt
Management Agency (PDMA) that will be
equipped to manage the liabilities of the
government in a holistic manner. The
analytical part of the report (Volume I)
clearly states that the PDMA would have
an independent goal and objective but
would operate as an agent of the central
government. The principles of govern-
ance, including transparency and ac -
countability will apply to all functions
of the agency, its committee and the
council. The governance and operations
of the PDMA would be handled through
a two-tiered arrange ment, guided by an
advisory council and run by a manage-
ment committee. The composition of
the advisory council and management
committee will be broadly similar, with
representation from the RBI and the
central g overnment. The management
committee should be headed by the chief
executive of the agency, and the adviso-
ry council should be headed by an inde-
pendent chairperson.
The objective of setting up the PDMA is
to provide a specialised framework on
public debt management in the country
that takes a comprehensive view of the
liabilities of the government, and estab-
lishes the strategy for low-cost nancing
in the long run. In brief, the PDMA would
undertake the following functions:
(a) Debt Management: Preparation of
an annual calendar for the central gov-
ernment borrowings and repayment in
consultation with the RBI and other
stakeholders. The PDMA will be empow-
ered to make recommendations, even if
on a daily basis, and will also be respon-
sible for ensuring integrated approach to
debt management, including external
debt for the central government.
(b) Cash Management: Coordinate
with the departments, ministries and
agencies of the central government and
the RBI to estimate, monitor and manage
daily cash balances. Also advise the gov-
ernment on measures to promote ef-
cient cash management practices and to
deal with surpluses and decits.
(c) Contingent Liabilities: Management
and execution of implicit and explicit
Table 3: Summary of Reports on Debt Management
Year Source Recommendations
1997 Report of the Committee on Capital Account Convertibility Setting up of an Office of the Public Debt (OPD)
1997 A working group on Separation of Debt Management from Separate Debt management office as a company under the Indian Companies
Monetary Management Act
2000 The Advisory Group on Transparency in Monetary and Financial Policies Independent Debt Management Office, in a phased manner.
2001 The RBI Annual Report 2000-01 Separate DMO.
2001 The Internal Expert Group on the Need for a Middle Office for Public Establishing an autonomous Public Debt Office.
Debt Management
2004 The Report on the Ministry of Finance for 21st Century National Treasury Management Agency.
2004 The Fiscal Responsibility and Budget Management (FRBM) Act Prohibits the Reserve Bank from participating in the primary market for central
government securities with effect from April 2006.
2006 Fuller Capital Account Convertibility Set up of Office of Public Debt outside RBI
2007 The Union Budget 2007-08 Establishment of a DMO in the government.
2008 The High Level Committee on Financial Sector Reforms Structural change of public debt management, such that it minimises financial
repression and generates a vibrant bond market. Set up independent DMO.
2008 Internal Working Group on Debt Management Establishing a DMO.
2012 Report of the Working Group on Debt Management Office Independent DMO.
2012 The Financial Sector Legislative Reforms Commission Approach Paper Separation of debt management with specialised investment banking
capability for public debt management.
2013 The Financial Sector Legislative Reforms Commission Specialised framework to analyse comprehensive structure of liabilities of the
government, and strategising minimal cost techniques for raising and servicing
public debt over the long term within an acceptable level of risk.
Source: Various Reports, GoI and RBI.
COMMENTARY
Economic & Political Weekly EPW June 28, 2014 vol xlix nos 26 & 27
25
contingent liabilities. As well as evalua-
tion of the potential risk of contingent
liabilities. The central government will
seek PDMAs advice before issuing any
fresh guarantees as it affects the overall
stability of the public debt portfolio. The
PDMA will also advise the central govern-
ment about the fees to be charged.
(d) Research and Information: Must
have a complete view of the entire liabil-
ity structure of the central government
for maintaining and managing informa-
tion systems. Disseminate information
and data; and conduct and facilitate
research relating to its functions.
(e) Foster a Liquid and Efcient Market
for Government Securities: This includes
advising the regulators and the central
government on the policy and design of
the market to ensure low-cost nancing.
Thus the PDMA must ensure growth and
diversity in investors and intermediaries,
fair play, competition in intermediation,
cost-minimising mechanisms for issuance
and trading. Measurement of liquidity
and market efciency, and presentation
of an annual report on the progress of
the Government of India sovereign bond
market, is also essential.
According to FSLRC Volume I, the plac-
ing of all contingent liabilities in the single
debt ofce will facilitate the scrutiny of
issuances, record keeping, risk assess-
ment, pricing, audit and approval by
Parliament. This will help in better coor-
dination of the debt management func-
tion, operational efciency, risk assess-
ment, accountability and responsibility.
There are limitations on the functions of
the PDMA and these mainly pertain to
expanding its role to the state govern-
ments as the management of state debt
is a state subject. However, the PDMA
would be obliged to undertake those
functions related to the state government
which has implications for the central
governments debt portfolio. This would
involve maintaining a database on state
government debt and coordinating the
central governments borrowing calen-
dar with that of the state government.
The state governments may choose the
PDMA to manage their debt and the PDMA
should be empowered to offer technical
assistance to state governments to set up
their own PDMAs if required.
Conict
There, seemingly, is a conict in the two
volumes of the FSLRC. While in Volume I,
it is clear that independence of debt
management is of paramount importance,
the situation is different in Volume II,
which stipulates that the PDMA will
always act on instructions from the
central government. But if the instruc-
tion does not enable its objectives to be
met, then the PDMA must have the
opportunity to place its objections on
record. The central government should
be obliged to consider the views of the
PDMA and if there is a disagreement b
etween the two, then the PDMA would be
statutorily bound to meet the instructions,
by very clearly articulating on record its
inability to meet the objectives. The ac-
countability mechanism routed through
the central government and eventually
through Parliament would pay cogni-
sance to the effort made by the PDMA
in achieving its objectives and the
objections raised.
Moreover in Section 389 of the draft
law (FSLRC Volume II), it is stated that
the central government may issue to the
PDMA, by an order in writing, directions
on policy from time to time. The debt
agency is bound by any directions issued
under this section in the exercise of its
powers or the performance of its func-
tions under this part.
A disconnect between the recommen-
dations in Volume I and the draft code in
Volume II of the report is notable. The
draft code clearly indicates that the inde-
pendence of the PDMA would not be en-
sured. The objective or a preamble clear-
ly delineated in Volume II states that the
Debt Agency has the objective of minimis-
ing the cost of raising and servicing public
debt over the long-term within an accept-
able level of risk at all times, under the
general superintendence of the Central
Government.
In view of the conict in the two
volumes of the report by the FSLRC,
the policy stance on independence of
the PDMA is not transparently clear. In
this situation, the present arrangement
under the RBI seems to be more
independent than the status envisaged
for the PDMA. Therefore, this aspect of
the independence of the PDMA has to be
revisited in the FSLRC.
Note
1 Total deposits constitutes of post ofce saving
bank deposits, MGNREGA, National Saving
Scheme, 1987, National Saving Scheme, 1992,
Monthly Income Scheme, Senior Citizen
Scheme, Post Ofce Time Deposits: one year
time deposits, two year time deposits, three
year time deposits, ve year time deposits; Post
Ofce Recurring Deposits, Post Ofce Cumula-
tive Time Deposits, other deposits. Saving cer-
ticates constitutes of National Savings Certi-
cate VIII issue, Indira Vikas Patras, Kisan Vikas
Patras, National Saving Certicate VI issue,
National Saving Certicate VII issue, other cer-
ticates and Public Provident Fund.
References
Government of India (2008): Report of the Inter-
nal Working Group on Debt Management
Technical Report, Department of Economic
Affairs, Ministry of Finance.
(2013): Report of the Financial Sector Legisla-
tive Reforms Commission, Volume I, Analysis
and Recommendations, Ministry of Finance.
(2013): Report of the Financial Sector Legisla-
tive Reforms Commission, Volume II, Draft
Law, Ministry of Finance.
(2013): Middle Ofce (Debt Management),
Department of Economic Affairs, Ministry of
Finance.
Kanagasabapathy, K and C Singh (2013): A Sepa-
rate Debt Management Ofce: Rationale, Scope
and Structure, WP No 431, Indian Institute of
Management Bangalore.
Reserve Bank of India (2013): Handbook of Statis-
tics on the Indian Economy.
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