Public Debt Managment System I IASTarget IAS Target

Public Debt Managment System

22 Feb 2020

Category : Economical Issue

Topic: Public Debt Managment System

Public debt disbursals and Public debt receipts are borrowings and repayments during the year, respectively, by the government. The difference between disbursals and receipts is the net deposit to the public debt. Public debt can be divided into internal and external debt. Internal debt carries, ways and means advance, securities against small savings, market stabilisation schemes, and treasury bills. The Union Finance Ministry has aim to establish Public Debt Management Agency (PDMA) with the objective of developing bond markets in the nation. PDMA will rationalize government borrowings and better cash management for developing bond markets.

Need for PDMA

  • Fragmented jurisdiction in public debt management
    Prior to the set-up of PDMA, the central Bank or RBI used to manage the market borrowing programmes of State and Central Governments. On the other side, external debt was managed directly by the Central Government. Setting up a debt management office would unite all debt management functions in a single agency and bring in holistic management of the internal and external liabilities.
  • Some functions that are important to handling public debt were not carried out. For example, no agency used to accept cash and investment management and information relating to contingent and other liabilities were not consolidated. Therefore, there was no comprehensive picture of the liabilities of the Central Government, which hindered informed decision-making regarding both domestic and foreign borrowings.
  • An autonomous PDMA can be the catalyst for wider institutional reform, involving building a government securities market, and bring in clarity about public debt.
  • It is considered as an internationally accepted best practice that debt management should be disaggregated from monetary policy, and taken out of the domain of the central bank. Most advanced and modern economies have dedicated debt management offices. Various emerging economies, including Colombia, Argentina, Brazil, and South Africa, have reframed debt management in recent years and structured an independent agency for the same.

The sources of these conflicts of interests in RBI managing the Government debt, as mentioned in the 2008 report of the Government are as under:
  • There is a critical debate of interest between setting the short term interest rate (i.e. the task of monetary policy) and selling bonds for the government. If the Central Bank strives to be an effective debt manager, it would incline towards selling bonds at high cost, i.e. falling interest rates down. This leads to an inflationary bias in monetary policy.
  • Where the Central Bank also controls banks, as in India, there is a further clash of interest. If the Central Bank strives to do a good job of settling its responsibility of selling bonds, it has an incentive to mandate that banks carry a large amount of government paper. This bias leads to unsound banking regulation and supervision, so as to make banks to buy government bonds, especially long-dated government bonds. Having a pool of captive buyers weakens the growth of a deep, liquid market in government securities, with exciting trading and speculative price discovery. This, results in, impedes the development of the corporate bond markets - the absence of a benchmark sovereign profit curve makes it harder to price corporate bonds.
  • If the Central Bank governs the operating systems for the government securities markets, as the RBI presently does, this creates another clash, where the administrator / owner of these systems is also a contributor in the market.

Background

Last Finance Minister Pranab Mukherjee was first announced the establishment of PDMA in Budget 2011-12. Though RBI was first to pinpoint the need for PDMA in its Annual Report 2000-01 and it was also bolstered by the Financial Sector Legislative Reforms Commission (2013).

Important features of PDMA in finance bill 2015

  • The government, in discussion with RBI, will make a road map to follow a separate debt management agency along with the global practice.
  • A road map would be made for a unified financial regulator, in-line with regulatory powers on G-secs, currency and derivatives possibly going to the Securities and Exchange Board of India (Sebi)
  • RBI will be left with the powers to only control banking system and decide monetary policy
  • To establish such an agency and transfer the regulation of G-secs from RBI to Sebi
  • The government and RBI will launch out a scheme for a separate debt management agency
  • Central Government is authorized to issue orders on Policy to PDMA and latter is bound by that.
  • PDMA is a corporate body to be run on the permits or loans received from the Central Government
  • PDMA is exempted from all kinds of taxes
  • Accounts of PDMA are audited by the CAG (Comptroller and Auditor General) and the CAG audited report and annual report are to be rendered in Parliament.
  • The Board of Directors include nominee directors of both RBI and Central Government.
  • Amassing and publishing information about its cash assets, auguring the future cash requirements and issuing and redeeming such short term securities needed to meet the cash requirements etc.
  • Issue of government securities and management of the registry of holders and making payments to them. However, the terms and conditions of G-Secs would be suggested to the PDMA and hence, central government would be liable to meet the obligations arising from the financial transactions empowered by it and undertaken by the PDMA.
  • Purchasing, trading and re-issuing in G-Secs
  • Arranging Contingent liabilities of the Central Government including reduction in quantum ,developing ways for its measurement and cost of such liabilities and advising central Government on its contingent liabilities. Also advising central Government on management of cash assets