Why an independent public debt management office may not be a feasible idea

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Published: February 25, 2019 9:02:02 PM

It is important for the government to bring down its cost of borrowings as its overall budgetary borrowing are expected to hit a record of over Rs 7 lakh crore in FY2019-20.

RBI building in Mumbai. (Representational Image).

The government’s idea of setting up an independent authority to manage its debt may not be feasible as the entire system works on the Reserve Bank of India’s authority over the institutional investors, mostly public sector banks.

In the absence of a well-developed government securities market in the country, this independent debt management office may not be able to bring down the cost of borrowings for the government, a former RBI official told Financial Express Online.

“Most of the government securities are purchased by public sector banks, insurance and pension funds. As the sectoral regulator, the Reserve Bank is able to nudge public sector banks to subscribe to government securities, ” he said, requesting not to be named.

Addressing a conference on the Future of Banking in India in New Delhi, Niti Aayog Vice Chairman Rajiv Kumar had last week said that an independent public debt management office (PDMA) was an idea whose time had come. Lamenting the high cost of credit, Rajiv Kumar had said that it will help bring down the cost of borrowings for the government.

It is crucial for the government to bring down its cost of borrowings as puts huge burden on the government’s resources. In the interim budget presented early this month, the government has estimated that it will need to borrow a record Rs 7 lakh crore in 2019-20, and almost 95% of will be used in interest payment of earlier loans.

“An independent public debt management office will not be able to reduce the cost of borrowing in absence of a well developed government securities market with sufficient depth,” said the former RBI official, adding that if the government is so keen to take away this role from the Reserve Bank then let them test the idea with one or two state governments.

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