The government on Friday released a draft Bill to create a debt management office, which would be a statutory corporate body acting as an agent of both the central and state governments.
To be called the National Treasury Management Agency (NTMA), the body would have considerable operational autonomy to carry out debt management, cash management and management of contingent and other liabilities of the Centre and the states. The agency would manage their debt to help them meet financing needs, while minimising their costs within acceptable levels of risk.
The draft states that the agency should be run by professionals?having a chief executive, management committee, an advisory board, among others, and would focus on developing the debt market in India. It also suggests that the agency should appoint an internal audit committee and an external auditor like the Comptroller & Auditor General of India. The Centre should hold minimum 51% equity in this agency, with states sharing rest.
In the longer term, NTMA should also be widening the portfolio of debt instruments being offered to the market, issuing primarily rupee-denominated bonds, foreign currency-denominated bonds and inflation-indexed bonds. At least 10% of the bond issuance of any year should be in each of these three classes of bonds, so as to keep all the three markets alive and viable, the draft suggests.
?The objective of NTMA would be to minimise the medium-to long-term cost of the debt with due regard to the risks in the debt portfolio, besides promoting development of the domestic debt market,? it says. The finance ministry expects to incorporate public suggestions in the draft by January end.
Finance minister P Chidambaram had proposed creation of such an agency in Budget 2007-08 to separate monetary management and debt management functions of the Reserve Bank of India. The central bank managing public debt generates a series of conflicts that affect economic and financial policy negatively.
There is a severe conflict 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 tries to be an effective debt manager, it would be inclined to sell bonds at high prices, i.e. keeping interest rates low. This leads to an inflationary bias in monetary policy, the report says. For example, a one percentage point increase in interest rates can push up the interest costs of the government by about Rs 1,15,000 crore annually, an official explained.
A separate agency would eliminate these conflicts, enabling the central bank to focus on monetary policy and modify the short-term interest rate to stabilise the domestic business cycle, while the debt manager acts as the ?investment banker? for the government, selling bonds and engaging in other portfolio management tasks in close coordination with its client, the budget division in the ministry of finance.
NTMA would also act as a single centralised database of onshore and offshore liabilities of the government and help reduce financial repression on financial firms such as banks who are mandated to buy government bonds. Banks are now required to invest at least 24% of their total deposits in government securities.
The working group that prepared the draft Bill has proposed that NTMA be set up in Delhi, with flexibility to open branches in other parts of the country. Most advanced countries have a separate debt management office and emerging economies like Brazil, Argentina and South Africa have adopted this practice.
Investment manager
• NTMA proposed to have functional autonomy
• To manage debt, cash and liabilities of Centre & states
• Centre to have 51% equity, with states sharing the rest
•To issue bonds linked to Re, forex and inflation