The Reserve Bank of India last month said the global financial crisis warranted a relook at the plan to divest it of the job of handling public debt, but the government, which committed on this in the last Budget,is determined to go ahead.
A consultative committee attached to the finance ministry ? comprising members from across the political spectrum ? is expected to assess the likely implications of the move. The economic impact of the country?s growing internal and external debt will be gauged in the meeting, official sources told FE.
A high-level panel assigned to rewrite India?s financial sector law for their compatibility with the changed world order and mutual harmony had earlier supported the move to set up an independent Debt Management Office. The Financial Sector legislative Reforms Commission appeared to echo similar views expressed few years ago by the panel which examined the feasibility of Mumbai emerging as a global financial centre. The need to have a separate DMO was felt because the RBI, with its core function being that of a monetary authority, suffered from conflict of interest in its role as the manager of the country?s public debt. This would force the central bank to take sub-optimal decisions in ?subsidiary function? of debt management, it is contended.
Voicing its opposition to constituting a separate DMO, the RBI has, however, cited the rising fiscal deficit, the global financial crisis ? particularly the sovereign debt crisis in Europe ? and its efficient management of the government?s debt so far.
NK Singh, Rajya Sabha MP and a member of the committee that will be looking into the impact of country?s debt on October 30, told FE that he supports a separate and independent DMO to ensure that there is no conflict of interest in the debt management.
The government, sources said, was finalising measures to reduce fiscal deficit and was confident of bringing it down soon to manageable levels mainly through expediting its disinvestment programme, increasing revenue buoyancy and reducing wasteful expenditure.
The finance ministry is aiming to limit the fiscal deficit for 2012-13 at around 5.2-5.3% as against the Budget plan of 5.1%. It was 5.8% last fiscal, significantly more than 4.6% planned in the Budget.
The conflict of interest for the RBI works thus: When persisting inflation calls for increasing interest rates, the RBI may also have an interest in ensuring that the cost of borrowing for the government does not go beyond a certain limit.
The RBI has said that the rising borrowings of the government has an impact on the entire economy as it affects both liquidity and interest rates. The regulator has said that considering the growth in the fiscal deficit, both debt management and monetary policy should continue to be its functions. Besides, it has said that even with the government?s borrowings being considerably large, it has always ensured that its impact on the crowding out of private sector investment is kept as low as possible.
The RBI?s concerns also stem from the fact that a majority of the country?s banking sector is under the government control and therefore a DMO under the finance ministry would mean that the government?s interest would then conflict with the DMO?s ?independence?.
Former finance minister Pranab Mukherjee had said in his Budget speech that the government proposes to move Public Debt Management Agency of India Bill, 2012 (for a separate DMO) in the Budget Session of Parliament. As the issue needed more discussion, the move was later postponed. The finance ministry already has a Middle Office looking into public debt management issues. The idea is to merge it with the DMO when the latter is established.
Last month, after a meeting with RBI, the government had said that it will borrow only R2 lakh crore through bonds in the second half of 2012-13. This will take the total borrowings to R5.7 lakh crore this financial year, which is as per the budgeted limit. However, there were speculations of the borrowings exceeding its budgeted target by around R50,000 crore owing to the huge subsidies bill and the government?s focus on expanding welfare schemes with an eye on the polls.
Finance minister P Chidambaram had said during his intervention at the Planning Commission?s meeting that ?the estimated major subsidies (oil, fertilisers and food) in 2012-13 would be around 2.4% of GDP, and a sharp fall (to 1.9% of GDP) as assumed in the Plan may be over-optimistic?.
