Managing debt

Centre must tread carefully on independent DMO idea

It is tempting to interpret Reserve Bank of India Governor Duvvuri Subbarao’s recent statement questioning the need for setting up an independent debt management office as an early indication of yet another turf war between the monetary policy authority on Mumbai’s Mint Road and the fiscal policy authority in Delhi’s North Block. The two authorities have not seen eye to eye in the recent past on many other issues including the one that led to the creation of the financial stability and development council or FSDC with the finance minister as its chairperson. The finance ministry under Pranab Mukherjee was keen on setting up the FSDC that would undertake macro-economic supervision of the economy along with co-ordination among all financial sector regulators. However, the RBI had expressed its opposition to the proposal arguing that the new council could undermine its autonomy. The finance ministry had responded by agreeing to make the RBI governor the chairperson of the only sub-committee created under the Council, and subsequently also the vice chairman of the inter-regulatory co-ordination committee.

The difference this time is that the idea of creating a debt management office or DMO is several years old and is rooted in strong economic logic. The central bank ideally should not undertake the responsibility of managing the government’s debt issues and this job should vest with an independent body. Moreover, the proposal, first mooted in 2007, has crossed several stages and the finance ministry will soon place a legislative bill in Parliament. To raise questions over the need for creating a separate debt management office at this stage, therefore, can draw the charge that the RBI is merely worried about losing its power over this function, not mindful of what clearly should be a better and more effective system.

On the other hand, however, the central bank has good reasons to feel worried over the loss of its debt management functions to an independent body. One, it has a few thousand employees who are now engaged in managing the debt issues for the government. Transferring this function to a new body will thus pose a formidable human resources challenge. Two, if indeed the debt management functions should not vest with the central bank, the government must ensure that the new body is sufficiently empowered to function independently and not merely as an extension of the finance ministry. Three, in light of the recent surge in the government’s fiscal deficit, the finance ministry should consider reviewing the logic and relevance of creating an autonomous debt management office. The finance ministry, after all, had mooted the idea of an independent DMO, when the government’s fiscal deficit was on a decline. However, with a rising fiscal deficit, there is perhaps need to retain for some more time the government’s debt management functions with the central bank, which has undertaken this responsibility with fair competence so far. Finally, the central bank is a federal institution that occupies a neutral position between the Centre and states. Given the debt requirements of states, in an era of diverse political parties running state governments, debt management should vest with RBI rather than a central institution. While the idea of an autonomous debt management office is good, these issues cannot be brushed aside. So, better to place the proposal on the backburner for now.