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Plans for debt management office put on the backburner

Shaji Vikraman

IN the early part of 2000, a couple of officials from the Finance Ministry and the Reserve Bank of India undertook a trip to a couple of countries to take a look at their management of public debt.

The initiative for this could be explained by the fact that the Government had then just chosen to introduce the Fiscal Responsibility and Budget Management Bill in Parliament. The Bill when it is enacted would signal the end of the current practice of t he Reserve Bank of India providing direct support to the Government during primary issuance of securities. In other words, the Government cannot no longer count on the Central banker's support if a primary issue of the Government devolves.

Initially, the right noises were made by policymakers on this proposal. After meeting up with officials at the Debt Management Office (DMO) in the UK under the HM Treasury and in Portugal, a committee formed for a DMO in India consisting of officials fro m the Finance Ministry and the RBI sat down to work.

Half-way through the assignment, there appeared to be a change of heart in the proposal to de-link the Public Debt Office (PDO) from RBI and to possibly make it a division within the Finance Ministry. When RBI declined to sign on the final report of the committee, the North Block officials had no option but to make it into an internal committee report.

The reasons are not too far to seek. In the Monetary Policy in April and later at a function in Mumbai last month where Dr Venugopal Reddy spoke about fiscal transparency, the RBI's reservations on separation of the debt management function from monetary management were in evidence.

To quote Dr Reddy: ``It is necessary to distinguish between market-related operations in the primary market, secondary market and operations in non-market related securities. It can be argued with some justification, that participation of the RBI should continue in the primary market as long as fiscal deficit is relatively high and the financial markets are not well developed.''

Further, Dr Reddy goes on to say that such a justification, as a transitional measure, will not be easy to advance in favour of non-market related interest rates to be charged by a central bank.

The RBI's stance spelt out earlier by Dr Bimal Jalan and later by Dr Reddy has riled some bureaucrats in the North Block. According to the fuzzy logic of one official who was involved in the exercise to set up the Debt Management Office, it is the Centra l Government which should be worrying more about the fiscal deficit, more than the RBI. It is our problem, why should the RBI be so hassled, the gentleman was heard asking.

Perhaps, it was out of frustration, for not being able to move forward on the proposal. The report on setting up of the DMO, now an internal Finance Ministry tome, had recommended that the new office could be set up in under a couple of years. The transi tion from PDO of the RBI to DMO should take place in one-and-a-half years, the report had said.

But now, after gauging the RBI Governor's mind and also the Finance Minister who is hardly keen on a spat on this, officials at North Block have consigned the report to a cupboard in the economic division. The report is on course to be put on ice.