The government plans to legally empower the proposed Debt Management Office (DMO) with the mandate to do debt profiling and debt stock analysis of borrowings of the Centre and states.
Though the work profile of DMO was to include these functions, the finance ministry wants to explicitly spell these out as it starts framing the draft legislation.
DMO is to take over the Reserve Bank of India’s function of managing government debt. It is likely to be in place by the second half of 2010-11. “We are in the process of taking internal approvals for the establishment of DMO, which will require a legislation. Once it has been finalised within the ministry, we will seek the ministry of law’s approval. Subsequently, Cabinet approval will be taken,” said a senior finance ministry official.
The finance ministry has also decided that till the DMO is created, the existing office, the middle office, within the ministry will be strengthened. The middle office currently has a three-member structure, with a director-level official as its head. The officials are dawn from RBI and are functioning independent of the ministry, though they are located within the ministry premises. “The middle office is taking care of the government’s debt strategy and stock monitoring, though the actual raising of debt is done by RBI. They are free to consult RBI. While going in for high fiscal deficit (borrowings), their views are taken in to account,” said an official.
Officials said while welcoming the creation of DMO, state governments have suggested it should aim at bringing down the cost of borrowing. “Usually state government bond yield rates are higher than those of the Union government and this was a major area of concern for them,” said the official.
Besides state governments, the ministry of finance has got suggestions from various stakeholders, experts and multilateral lending agencies like the World Bank, International Monetary Fund and the Asian Development Bank on a report of an internal working group set up for suggesting the structure of DMO. “Most of these suggestions were on the operational aspect of the terms of reference. They want that DMO’s activity should be broad-based,” said the official.
The underlying idea is to separate the functions of government debt management and monetary policy, both currently vested with RBI. It is felt that the present arrangement creates a conflict of interest. DMO will, however, continue to be staffed with RBI officials. “Officials will need to be drawn from RBI on deputation, since they have expertise in the area,” said the official.
Former deputy RBI governor Rakesh Mohan had earlier written a letter to the government, stating this was not the right time for a DMO, since government borrowings are very high. The Union government alone will borrow Rs 4.51 lakh crore during 2009-10, as against Rs 3.1 lakh crore during 2008-09. The ministry of finance is dismissive of his views, stating that it was not the RBI view and the central bank in all meetings have been supportive of the idea. “Besides, high fiscal deficit will need to be brought down and it will not continue like this. By the time DMO comes into being, it will be the next financial year,” said another official.
