Privatise first

Bringing to fruition a proposal that had been revived by Jaswant Singh in 2003, after it had lain dormant for six years, the finance minister has announced that the Reserve Bank of India will be relieved of its responsibilities in regard to managing the government's debt, also known as public debt. In theory, this is a very good thing. Central banks should focus on conducting monetary policy, not be distracted by other duties. They should also not face a conflict of interest, inherent in a situation when the central bank manages the government's debt. It sets the interest rates with regard to the needs of the economy; but since it is the duty of the agency that manages the public debt to make sure that such debt is incurred at least cost, the RBI faces pressures that run contrary to its duty in running monetary policy. International practice also suggests that such a separation is good. That is why the RBI and the finance ministry have been mulling such a separation for at least a decade.

But it is useful to ask, in spite of the obvious merits of the separation""not to mention the recommendations of an expert committee as far back as 1997""why the RBI has continued to manage government debt. Yashwant Sinha as finance minister went into the issue, then decided to let things be. The key problem, then and now, is that the public sector banks buy the entire government debt. If the job of managing the public debt is moved to an agency directly under the finance ministry, as Mr Chidambaram has now said it will be, the government can influence not only how much debt the public sector banks should buy, but also at what price. This is not how public debt offices work in other parts of the world, principally because the banks there are largely privately owned. In the Indian situation, the obvious danger is that, as in China, bank depositors will end up financing the government. Indeed, a little reflection will show that this is what used to happen till a quarter-century ago.

That said, it should also be mentioned, as the current RBI Governor, Y V Reddy, did when he was deputy governor of the RBI, that a pre-requisite for the separation is a reduction in the fiscal deficit. The same point was also made by the first Tarapore committee on capital account convertibility. It had said: "Monetary management is often clouded by the monetary authority's concern about the government's borrowing programme, and therefore steps should be initiated to separate the debt management policy from monetary management and to this effect, the government should set up its own office of public debt."

The question now is: has the borrowing programme come under control? And if a public debt office is in fact being set up, isn't it time also to consider whether 80 per cent of the banking system should continue to be in government ownership? It might seem silly to ask the question, or to have any real expectations on this front, when everyone knows that the Left will not allow any privatisation, but that does not make the question any less relevant or important.