Proposed Public Debt Management Agency (PDMA): Requirement, Features, Issues

In an effort to streamline the borrowings of the government and achieve better cash management, the Finance Ministry in 2016 established the Public Debt Management Cell which is to become Public Debt Management Agency in two years time. It is an interim arrangement in the RBI itself but it is to be given a separate statutory status from that of the RBI. The aim is to segregate the debt management function of the RBI and allot it to an independent agency.

Features of PDMC

Composition

The PDMC is to be headed by the Joint Secretary (Budget) of the Department of Economic Affairs. In order to ensure that the transition takes place from the PDMC to PDMA, a Joint Implementation Committee has been appointed. It is supervised by the Monitoring Group on Cash and Debt Management. There are 15 debt managers on staff from various units like RBI, Budget Division, current Middle Office and some other government units.

Functions

Some of the major functions of the PDMC are:

• To prepare plans for the government borrowings both under the categories of market borrowings and other borrowings.
• To manage the liabilities of the government
• To monitor the cash balances
• To improve the forecasting of cash
• Enhancing the liquidity and efficiency of the market to make it ready for floating of government securities.
• To advise the government on capital market operations, investment, administration of the rates of interest on small savings.
• To develop an Integrated Debt Database System which shall act as a centralized database of all the liabilities of the government on the basis of real time

How is the Separation of Functions to be done?

The PDMA has to develop in a gradual manner to get some time to coordinate with the RBI to avoid clashing of responsibilities. The circular which introduced it has also emphasized that the PDMC’s functions should be limited to be advisory in nature in order to avoid conflict with the statutory functions of the RBI.

Why do we need to Separate Functions of RBI from PDMA?

The need for an independent body for the purpose of public debt management had been emphasized since 1997 with the Committee on Capital Account Convertibility (an in-house Committee of RBI) mentioning its requirement for the first time. Since then, the need has been emphasized upon in several reports until the FSLRC Report of 2013 wherein the need was expressed due to the following reasons:

• The act of debt management has to be conducted on an integrated basis, referring to both the onshore and offshore liabilities of the Government. But at present, these two liabilities are managed separately by the Ministry of Finance and RBI. A unified way of dealing can ensure a more focused approach on the debts.
• The central bank which has the objective of both selling the government bonds and obtaining low cost financing, can be biased towards low rates of interest which has the capacity to affect price stability.

Some of the general reasons are:

Institutional reforms

The introduction of PDMA can pave the way for an institutional reform for building an efficient government securities market and transparency in public debt in India.

Internationally accepted practice

Separation of public debt management from the activities of central bank is also an internationally recognized practice for debt management. It is prevalent in most of the advance economies and developing economies like Colombia, South Africa and Brazil.

Omission of certain debt management functions

The RBI being involved in several functions, ignored certain incidental debt management functions like cash and investment management and there was no consolidation of the information relating to the contingent and other liabilities.

Conflict of interests

One obvious conflict of interest is with respect to the selling of government bonds as has been pointed out by Justice SN Balakrishna in the FSLRC Report. The biasness is further aggravated by the power of RBI to regulate all the banks in India. It has an incentive in making a mandate for the banks to hold a large amount of government paper. So, it may have flaws with respect to supervision and regulation of the banks, so that banks get induced to buy the long term government bonds. This definitely affects the liquidity of the government securities market as there is only a group of captive buyers. It can also lead to speculations in their prices. Further, the role of owner and administrator being vested on one institution can create a huge conflict of goals.

Consolidation

Consolidating all the debt management functions can result in a holistic and more focused approach towards these debts-both internal and external liabilities.