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The Budget for 2015-16 had announced the setting up of PDMA amid opposition from RBI, but the government dropped the provisions from the Finance Bill on Thursday. In addition, contentious issues such as amendments of Section 45U and 45W of the RBI Act have also been withdrawn. These would have taken away money market regulation from the central bank.
People in the know say one of the strongest reasons for the U-turn is a recognition that there is a lack of capability within the government to immediately take over a function the central bank has been performing for years.
To manage the government’s borrowings, which is increasing every year (it was Rs 6 lakh crore last year) without any market volatility, that is, keeping the yields under control, is seen as a mammoth task and something that needs experienced hands. The debt management office in the finance ministry, which compiles data and acts as a coordinating agency between various stakeholders, still has officials on deputation from RBI.
This is something even RBI Governor Raghuram Rajan was concerned about. In an interview to Business Standard in 2013, he had said the question wasn’t who manages the debt, but who was capable of doing the task. “To my mind, the conflict of interest issues are overblown on either side. If it is in RBI, there will be some conflicts of interest; if it is in the finance ministry, there will be some other conflicts of interest. The precise location of the DMO is not the central issue. The issue is to get the capabilities to man that office. And, I believe, right now, the capabilities lie with RBI. RBI personnel will be involved in manning that debt office, at least for the foreseeable future. When capabilities emerge in the government or the finance ministry, there could be a discussion on who mans that office,” Rajan had said.
The government seems to have listened to the governor. There were other reasons, too. Central bank staffers wrote a strong letter to members of Parliament as well as chief ministers of various states highlighting the problems if RBI was stripped of such powers.
In the letter to chief ministers, they raised the issue of managing states’ debt — since RBI also manage states’ debts and the PDMA is not very clear on what happens to that function.
“The PDMA, if it materialises, will look after the central government’s debt. The Budget is silent on state governments — who will look after them. The central government before taking such proposal did not consult the state governments. By not doing the required consultation, the states have been bypassed in such a vital matter,” the letter said.
The letter went on to say the changes had been proposed in haste, without proper application of mind and without building a national consensus.
Central bank watchers say such an important issue should not have been just ‘annexed’ in the Finance Bill and should have been done through a separate Bill. The merit of this argument, they say, dawned on Finance Minister Arun Jaitley, one of the sharpest legal minds in the country.
“It seems bureaucrats are in a hurry to push a few things but the law makers later realised certain issues need greater consultation. There are three recent examples: One, the Income Tax Returns form; two, the minimum alternate tax on foreign institutional investors; and three, the taking away of the RBI’s powers to regulate money market instruments,” said a central bank watcher.
Once the dust settles on the PDMA issue, the focus will shift to the formation of the monetary policy committee — another contentious issue which the government and RBI will need to resolve.
RBI wants more of its representatives on the committee, which will decide interest rates and will be accountable for its actions. while the government will like to have more say. A committee appointed by RBI, which was headed by one of its deputy governors, Urjit Patel, suggested a five-member panel, three of whom (including the RBI governor who is the chairman) should be from the central bank. The government was not keen on such a framework.
The government appears to have listened to RBI’s concerns on PDMA and government securities regulation but, in return, it might want to have more say in the monetary policy committee. That, many say, is the compromise formula that has been worked out between the two.
