Like its predecessor, the Narendra Modi government also seems to be following a policy of announcing reforms and then withdrawing it unilaterally. The proposal for a Public Debt Management body announced with much fanfare by the Finance Minister Arun Jaitley in the annual budget speech in February, has now been rolled back.
"Since the RBI has been handling public debt management, the government in consultation with the RBI will prepare a detailed roadmap separating the debt management function and the market infrastructure from the RBI and having a unified financial market" Jaitley said.
Business Standard has for long argued for separation of the public debt management function from Reserve Bank of India, as is now the norm with central banks internationally. The conflict of interest between the monetary and debt management functions of the RBI has been much commented upon. Here is a post-Budget editorial arguing that a debt management agency must have genuine independence to work properly.
The tragic part is that the Debt Management Office is a really old proposal. In his 2007, commentary on the budget, Ajay Shah had argued on these very pages about the desirability of a DMO.
The Debt Management Office has turned into a perennial game of ping-pong between the MOF and the RBI with conflicting reports coming every few months. The debate over the creation of such a body is now 8 years old and the budget speech by Arun Jaitley gave an impression that it had been settled but this move now proves such notions wrong.
What could have stopped the government? Well, as this editorial argues, if debt management is taken away from the RBI, it may no longer find it in its interest to force banks to hold government debt through India’s high statutory liquidity ratios, or SLRs.
READ: Form and substance
For a government strapped for cash and looking to borrow, that would have been a problem.