Answer:

Public debt management is the process of establishing and executing a strategy for managing the government's debt in order to raise the required amount of funding, achieve its risk and cost objectives. Policy paper of the Ministry of Finance in 2010 stated that the overall objective of the Central Government’s debt management policy is to:

♤ meet Government’s financing needs at the lowest possible long term borrowing costs and

♤ to keep the total debt within sustainable levels.

♤ support development of a well-functioning and vibrant domestic bond market.

Recently Government has planned to relieve RBI of Public Debt Management role and is planning to bring in Public Debt Management Agency (PDMA) in two years’ time. The rationale behind such a move can be understood as following:

♤ Bringing together all government borrowings under one roof is propagated as a key reason for the creation of an independent PDMA. At present, the RBI is responsible for all internal debt management functions, while external debt falls under the purview of the Department of Economic Affairs under the Ministry of Finance (MoF).

♤ A separate agency, which assigns specific responsibilities and is accountable on its own, will lead to a more transparent and efficient system. This is seen as a necessary step towards deepening of the bond market.

♤ It would resolve the conflict of interest that arises when the RBI manages the government’s debt, as it leads to a conflict of interest with its role as monetary authority working to contain inflation and ensure financial stability.

♤ Separation of debt management will allow the central bank to focus on monetary policy of setting short terms interest rates. It would relieve the RBI of the burden of contending with twin incentives pulling in opposite directions in scenarios such as when rising inflation demands an increase in policy rates but the government wants takers for its debt offered at lower rate.

Countries like US and UK have an independent debt management office.

Though it is a welcome move, there are certain challenges that need to be addressed to ensure successful debt management by an agency other than RBI-

♤ A full fledge PDMA will require amendments to the RBI Act, and that might delay the procedure.

♤ Fears of market volatility caused by the shifting of responsibility to a new agency needs to be addressed.

♤ Government debt although largely domestically held, is one of the highest among the Emerging Markets and with nominal growth rate not keeping pace with nominal interest rates, debt-GDP ratio will rise.

♤ With new investments conspicuous by their absence and the export outlook unexciting, the government understandably wants to lend recovery a helping hand. But if higher public spending is not accompanied by higher revenues, fiscal and primary deficits will increase, stoking government debt.

♤ Chance of demand supply mismatch in government bond and higher government borrowing may crowd out private investment. Hence, the challenge of remaining independent and coordinating with RBI needs to be resolved for the success of the new agency.