The issue of public debt management has always been on the discussion table. There are, as usual, differing views on whether or not the RBI should handle the issues of management of public debt, as well as monetary policy, with there being compelling arguments on both sides. Charan Singh, a very distinguished economist with experience in both the central bank and academia, weaves together a very interesting collection of articles authored by various experts on the subject.
The view, which comes from authors like former deputy governor of RBI HR Khan, argues that the two can’t be separated and the central bank in India has done a very creditable job in handling this dilemma. The RBI has been known to be fairly independent, which has been proved over the years, and hence to say the conflict of interest that potentially exists has not been handled adeptly would be incorrect. In fact, based on the factual, it can be argued that if the RBI was subservient to the government, it should have been lowering the interest rate all the time to ensure that the cost of borrowing is kept down. But the allegation often made is that it has not lowered interest rates in a timely manner and been very hawkish on inflation due to an obsession with the CPI. Therefore, in terms of actual developments in the market, the RBI has handled the situation without any bias and has not let the issue of public debt come in the way of monetary policy formulation.
What then can be the arguments against a single authority handling both the issues? It is true that whenever one searches the global arena for templates, there are always several cases where the two functions are handled separately by different institutions. Hence, there are case studies that support the creation of a separate public debt management agency. Here, Singh provides a good argument that around 50% of government debt, which includes both central and state, goes beyond market borrowings like small savings, and is handled outside of the RBI. So why not have even this part of debt transferred to a centralised entity? The counter-argument could, however, be that a large part of these liabilities are exogenous in nature and cannot be controlled, and hence do not quite require management as such. But then it can be said that there will be better alignment in interest rates across various debt instruments, such as small savings and market borrowings, in case there is a unified agency.
On the Public Debt Management Agency (PDMA), K Kanagasabapathy, who has also worked with the RBI, has argued that it would still be better to move gradually to its creation, as it will enhance coordination efforts. But it should be independent from both the RBI and government, which is interesting and challenging, considering that the latter would be appointing members to the PDMA. This agency, it has been suggested, will also additionally handle the cash balances of railways, post, telecom, pension funds, etc. This should definitely spur some deep thinking on the concept of separation of responsibilities of public debt and monetary policy formulation.
There are other papers on the FRBM and fiscal discipline where the issue of flexibility and prudence are also addressed by authors in the final round table. Interestingly, a point made on fiscal consolidation is quite compelling where author RK Pattanaik talks of the four ‘Fs’, which have to be considered. The first is ‘fiscal empowerment’, where the objective should be to maximise fiscal revenue. The second is ‘fiscal transparency’, which is really important, as creative accounting is often used to make the numbers look palatable. Here, for example, the system of recognising expenditure when it is actually made allows the scope to defer payments for expenditure incurred so as to show better fiscal numbers for a year. Such rollovers should be avoided.
Third, ‘fiscal marksmanship’ has been spoken of where there should be less deviation between budgeted, revised and actual numbers. This is, of course, difficult, but finance ministers have to be conservative to begin with. Often in order to placate the markets, FMs tend to overstate expenditure on the capital side when presenting the budget and then cut back on the same to balance at the end of the year. Last, ‘fiscal space’ should be provided, wherein counter-cyclical polices are pursued to manage fluctuations in the economic environment.
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On state finances, there is an interesting paper by R Pandey where he points out that there is less flexibility in raising resources for these sub-sovereigns. Ironically, it is because of this constraint that states have been better able to comply with the fiscal targets, as they cannot go beyond what is allowed through market borrowings. But this can be a drawback when it comes to choosing sources of funding, especially on the external front, where it has to be done through the centre. In this context, it is also argued that states also have little reason to perform, as all state debt is treated on a par, as there is the system of ‘automatic deduction mechanism’ for repayment of market debt by the RBI, which ensures that there can never be a default. A more competitive environment on state performance rating on the fiscal side can make the cost of borrowing different for various entities. The takeaway is that there is an urgent requirement to bring in reforms in this area.
This book is a must for policymakers, as well as academicians, and should stoke greater debate on the subject, as we move towards the resolution of this dilemma. Singh has put together the papers and deliberations that took place at the ninth Annual International Conference on Public Policy and Management in this volume, which should find a prominent place on your shelf.
The author is chief economist, CARE Ratings.