Niti Aayog calls for separate debt management agency

Mumbai/New Delhi: A separate Public Debt Management Agency (PDMA) to manage the government’s market borrowings and public debt could soon be a reality. The government think-tank Niti Aayog’s Vice Chairman Rajiv Kumar on Friday batted for setting up an independent debt management office outside the purview of Reserve Bank of India, saying it was "an idea whose time has come".

“It is important for this particular office be separate, because then you can pay much more attention on public debt management. That will help the government bring down the cost of its debt,” Kumar said at an event in New Delhi.

According to economists, with a borrowing of Rs 6-7 lakh crore a year, the incremental saving to the government from the PDMA mechanism could be over Rs 4,000 crore to Rs 5,000 crore.

The idea of a public debt management agency, or PDMA, was proposed by Finance Minister Arun Jaitley in his February 2015 Budget speech, though it has not yet been implemented.

At present, the government debt, including market borrowing, is totally managed by the central bank, for which the government has to decide how to segregate different functions in the RBI.

Kumar, however, said, “the government has been very courageous to give the central bank the statutory authority for the inflation targeting. Therefore, who then looks after growth, employment, debt and other legal things etc in the country? I think those are the things that need to be discussed.”

The main focus of the PDMA was to resolve issues relating to conflict of interest as the RBI decides on the key interest rates as well as undertakes buying and selling of government bonds.

According to G Ananth Narayan, Professor at SPJ Institute of Management and Research, "Liquidity management, regulations, intervention, monetary policy and acting as a merchant banker to the government are all different activities. While some people do make a case that there is a need for co-ordination among these activities, one could argue that a dedicated, independent merchant banker could manage the government borrowing programme to the better satisfaction of the government."

Ajay Manglunia, Executive Vice-President and Head-Fixed Income Advisory at Edelweiss Financial Services, said, “PDMA is a very crucial function, looking at the current complexities with respect to timings, diversification of the investors and linkages the world over. It’s rather more important to have full attention and a dedicated resource for this activity. It is a further step to have a dedicated PDMA cell that would focus on merchant banking for the government.”

The idea of separating public debt management from the Reserve Bank of India was initiated in 1991, and since then, a plethora of reports culminating in the comprehensive Aziz Committee report in September 2008 had vouched for it.

Most OECD countries have already established dedicated debt management units. Several emerging economies like Brazil, Argentina, Colombia, and South Africa have also restructured and consolidated debt management.

There are three primary reasons commonly cited in economic literature as to why debt and monetary management cannot go together. One, the possibility of keeping interest rates low by the central bank goes against inflation targeting. Second, the issue of financial repression/mandated statutory liquidity ratio for government bonds. Third, the central bank being an owner as well as operator of government securities creates conflict of interest.