Public Debt Management

Efficient debt management implies minimizing the cost of borrowing for the government, considering the risks. In India, the responsibility of public debt management is divided between the Central and state governments, and the Reserve Bank of India (RBI). In this chapter, briefly, the origins of debt management and its significance, globally and domestically, are discussed. The logic for having the need for this book, and the summary of chapter scheme, summarizing main ideas in each of the next eight chapters as well as the round table are presented.

This chapter delves into the historical background in which debt management was undertaken by the RBI and emphasizes that the RBI has been successful in meeting the objectives of debt management. The process of managing public debt is a challenge with implications for financial stability in the short to medium term, and inter-generational equity in the long run. There could be possibility of conflict of interest between different roles of the Government. At the same time, involvement of the central bank in managing volatility and expectations due to large government borrowings makes central bank’s hands-on involvement necessary. This paper elucidates the challenges and presents arguments for not separating debt management from the RBI.

Debt policy in India is driven by the principle of financing Government in a sustainable pattern and cost-effective manner. The Government is adopting active debt management strategies, in terms of buyback and switches of outstanding debt, for a prudent debt maturity profile.

This paper aims to highlight cash and debt management scenario of states in India. Each of the states is in different situations in terms of debt and deficit management and fiscal space. There has been a sharp increase in the level of debt of states because of poor revenue performance. State governments cannot raise external loans, but as resources are directly transferred to the states in recent years, risks and benefits are borne by the states now. Inflexible sources of borrowings, debt ceiling, and interest rates on state securities make the job of state governments much more complicated and challenging.

The objectives of cash management are to maximize liquidity, control cash flows and maximize the value of funds, while minimizing the cost of funds. The Indian cash management system is still underdeveloped and there is further scope for improvement to deliver “more bang for the buck”. The paper highlights basic objectives of cash management policy, in general, and reviews the cash management system in Central Government, highlighting some of its salient features as it has evolved overtime. Cash management in India has largely been passive though in recent years, auctioning of government’s cash balances has been initiated.

In many countries, both advanced and emerging, during the recent global crisis, scope of fiscal policy was expanded and debt to GDP ratios increased significantly. Consequently, debt management became difficult and coordination between monetary and debt management assumed significance. The setting up of separate debt management office will help to establish transparency, and assign specific responsibility to and accountability on the debt manager. The strategy could ensure that resources are available to the government at competitive market rates of interest prompting expenditure prioritization and fiscal discipline in budget making.

In the pre-reform period till 1980s, debt management remained passive and was not market oriented. Ever since the onset of financial sector reforms, the proposal for separation of debt from monetary management, and setting up of an independent Debt Management Office (DMO) gained prominence. As part of new financial regulatory architecture, an independent DMO is one among the seven new institutions proposed by the Financial Sector Legislative Reforms Commission in India. It has been viewed that as both debt and monetary management became market oriented, the potential conflict between the two has surfaced. When the RBI is entrusted with the responsibility of both debt and monetary management, its market interventions and even its interest rate policy can be clouded by debt management objectives. The fiscal–monetary nexus in that sense cannot be underestimated. Separation of debt management can help in resolving this conflict.

Fiscal Policy intervention, in terms of changes in government spending or in taxes, or in taking recourse to borrowing from the central bank or from the market gained currency in the aftermath of Great Depression of 1930s, dominated the policy initiatives of the government world over for four decades. However, reliance on heavy government borrowing and spending to support economic growth had its own drawbacks resulting in vicious cycle of deficit and debt, high inflation rate, high interest rates, crowding out of private sector investment. As documented in the contemporary literature, there are evidences of deficit bias which are possibly contributed by political populist measures. With growing fiscal stress across countries, irrespective of the level of economic development, it is widely recognized that the discretionary fiscal policy would not always be effective in contributing to fiscal sustainability and stability. Consequently, many countries introduced medium-term fiscal consolidation programs, which were mostly followed by fiscal rules (with or without legislations).

This paper discusses the evolution of fiscal balances and public debt ratios in developing Asia from the mid-1990s to 2010 and investigates the conditions for public debt sustainability in the region. The economies in this region have derived great benefits from having relied on rapid economic growth and low interest rates, which together have been exerting a persistent downward pressure on debt ratios. The main emphasis is on the historical and prospective evolution of public debt indicators under different macroeconomic assumptions. The discussion revolves around debt sustainability implications of a negative interest rate–growth differential, a characteristic of the macroeconomic environment in Asia during the last two decades. The debt sustainability analysis shows overwhelming evidence of a generally benign outlook for public debt sustainability in the region.

The round table at the end of the conference saw difference in opinions on the matter of separation of debt from monetary management in India. This chapter captures the debate and discussion that follows the analysis by different authors. Issues of separation of debt and monetary management, and debt sustainability are focused in this discussion along with the question of feasibility of FRBM restrictions in an emerging country like India.