Public Debt Management Agency (PDMA)
Public Debt Management Agency (PDMA) is a specialized independent agency that manages the internal and external liabilities of the Central Government in a holistic manner and advises on such matters in return for a fee. In other words, PDMA is the Investment Banker or Merchant Banker to the Government. PDMA manages the issue, reissue and trading of Government securities, manages and advises the Central Government on its contingent liabilities and undertakes cash management for the central government including issuing and redeeming of short term securities and advising on its cash management.
PDMA was proposed to be established in India through the Finance Bill, 2015. As a corollary of the decision to create a PDMA, the RBI or the Central Bank in India was given the task of inflation targeting under a monetary policy framework agreement. However, the creation of PDMA was put on hold due to the difference of opinion on the matter and the relevant clauses were dropped from the Finance Bill, 2015 while the latter was passed.
PDMA is considered to be set up with the objective of "minimising the cost of raising and servicing public debt over the long-term within an acceptable level of risk at all times, under the general superintendence of the central government". This will guide all of its key functions, which include managing the public debt, cash and contingent liabilities of Central Government, and related activities.
Need for PDMA
The need for PDMA was felt due to the following reasons:
- Fragmented jurisdiction in public debt management: Before the creation of PDMA, the central Bank or RBI used to manage the market borrowing programmes of Central and State Governments. On the other hand, external debt was managed directly by the Central Government. Establishing a debt management office would consolidate all debt management functions in a single agency and bring in holistic management of the internal and external liabilities.
- Some functions that are crucial to managing public debt were not carried out. For instance, no agency used to undertake cash and investment management and information relating to contingent and other liabilities were not consolidated. Hence, there was no comprehensive picture of the liabilities of the Central Government, which impeded informed decision making regarding both domestic and foreign borrowing.
- An autonomous PDMA can be the catalyst for wider institutional reform, including building a government securities market, and bring in transparency about public debt.
- It is considered as an internationally accepted best practice that debt management should be disaggregated from monetary policy, and taken out of the realm of the central bank. Most advanced economies have dedicated debt management offices. Several emerging economies, including Brazil, Argentina, Colombia, and South Africa, have restructured debt management in recent years and created an independent agency for the same. The sources of these conflict of interest in RBI managing the Government debt, as listed out in the 2008 report of the Government are as under:
- There is a severe conflict of interest between setting the short term interest rate (i.e. the task of monetary policy) and selling bonds for the government. If the Central Bank tries to be an effective debt manager, it would lean towards selling bonds at high prices, i.e. keeping interest rates low. This leads to an inflationary bias in monetary policy.
- Where the Central Bank also regulates banks, as in India, there is a further conflict of interest. If the Central Bank tries to do a good job of discharging its responsibility of selling bonds, it has an incentive to mandate that banks hold a large amount of government paper. This bias leads to flawed banking regulation and supervision, so as to induce banks to buy government bonds, particularly long-dated government bonds. Having a pool of captive buyers undermines the growth of a deep, liquid market in government securities, with vibrant trading and speculative price discovery. This, in turn, hampers the development of the corporate bond market - the absence of a benchmark sovereign yield curve makes it difficult to price corporate bonds.
- If the Central Bank administers the operating systems for the government securities markets, as the RBI currently does, this creates another conflict, where the owner/ administrator of these systems is also a participant in the market.
Genesis of the thinking on an independent debt management office is traced back to the Committee on Capital Account Convertibility (1997) and the Review Group of Standing Committee on International Financial Standards & Codes (2004). Both were in-house reports from RBI.
Based on the significant shortening of the maturity profile of the Government debt (65% of the Government debt was short term in nature with below 5 year maturity as identified in the 1995-96 Annual report of RBI), the Shri S S Tarapore led Committee on Capital Account Convertibility observed that monetary management is often clouded by the monetary authority's concern about the Government's borrowing programme and therefore, the Committee recommended that 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. It was of the view that the RBI should totally eschew from participating in the primary issues of Government borrowing. The Committee was of the view that these measures would go a long way towards better fiscal management and also enable vastly improved monetary management which will be necessary in the context of capital account convertibility (CAC).
While analysing the process of monetary policy formulation, Shri Y V Reddy and Shri C M Vasudev led Review Group of Standing Committee on International Financial Standards & Codes observed that there is a strong interaction between RBI's responsibilities in the areas of monetary policy and internal debt management leading to a situation of monetary policy function becoming somewhat subservient to debt management. In view of the Committee, Debt Management function puts RBI in a situation of direct conflict of interest. While discussing transparency, accountability and autonomy of RBI, the Advisory Group was of the view that RBI needs by way of autonomy, headroom to operate monetary policy and this is possible when debt management is separated from monetary policy and the fiscal situation is in reasonable balance. However, Committee recommended that RBI would continue to maintain orderly conditions in the government securities market by operating in the secondary market via open market operations, an important instrument of monetary policy. The Group suggested that RBI and Government should progressively work towards greater clarity in publicly setting out the objectives of monetary policy. In regard to setting up of objectives of monetary policy, the Group was of the view that besides making it easy for the public to comprehend the instruments and objectives of monetary policy, there is merit in authorities clarifying issues in monetary and financial policies in simple language to general public. The Advisory Group recommended for setting up a Monetary Policy Committee (MPC) on the lines of Board for Financial Supervision (BFS) from the next financial year. Also, it recommended that MPC should hold meeting on monthly basis on a predetermined date and issue a short statement immediately after the meeting.
Further, for an effective functional separation enabling more efficient debt management as also monetary management, the second Committee on Fuller Capital Account Convertibility in 2006 headed by Shri. S S Tarapore recommended that the Office of Public Debt should be set up to function independently outside the RBI.
Creation of a debt management office was also one of the recommendations of the Percy Mistry Committee (or the High Powered Expert Committee [HPEC]) on Making Mumbai an International Financial Centre which submitted its report to Ministry of Finance in 2007. HPEC believed that the function of a public debt management office should be either completely independent – in the form of an autonomous agency – or placed in the Ministry of Finance rather than in a regulatory institution like RBI to avoid any perception of conflicts-of-interest in the eyes of regulated financial firms. Following this, in Union Budget 2007-08 speech, vide para 106, Finance Minister proposed to set up an autonomous Debt Management Office (DMO) and, in the first phase, a Middle Office was set up inside Ministry of Finance to facilitate the transition to a full-fledged DMO.
Simultaneously, Ministry of Finance formed an Internal Working Group, Chaired by Shri. Jahangir Aziz, to analyse how best to move forward on establishing a DMO. Report of the Internal Working Group on Debt Management (October 2008), suggested creating a "National Treasury Management Agency (NTMA)" as an independent public debt management office and proposed a draft bill for the same. The Working Group envisioned an agency that will manage debt for the Centre and States, with the overarching objectives of meeting their financing needs, while minimising borrowing costs within acceptable levels of risk. NTMA was also to undertake cash management, management of contingent and other liabilities, risk assessment, and advisory functions. The proposed NTMA were to act at all times as the agent of the Central and of State Governments. Therefore, the draft Bill tried to ensure that the NTMA is adequately accountable to its principals. At the same time, it aimed to ensure that the NTMA does not face counterproductive constraints, so that the Central and State Governments can benefit from focussed debt management expertise.
Dr Raghuram Rajan chaired Committee on Financial Sector Reforms (2009) constituted by the Planning Commission pointed out that internationally, there has been a strong movement towards establishing independent debt management offices (DMOs) which is now considered as the best practice, and favoured it.
Justice B. N. Srikrishna chaired FSLRC or Financial Sector Legislative Reforms Commission report (2013) also recommended setting up the independent "Public Debt Management Agency (PDMA) at the earliest. Committee observed that management of public debt requires a specialized investment banking capability for two reasons:
- Debt management requires an integrated picture of all onshore and offshore liabilities of the Government. At present, this information is fragmented across RBI and the Ministry of Finance. Unifying this information, and the related debt management functions, will yield better decisions and thus improved debt management.
- A central bank that sells government bonds faces conflicting objectives. When RBI is given the objective of obtaining low cost financing for the Government, this may give RBI a bias in favour of low interest rates which could interfere with the goal of price stability.
FSLRC mostly followed the suggestions of the Jahangir Aziz Committee report of 2008 and suggested to keep (a) debt management distinct from monetary management (b) to include the tasks of cash management and contingent liabilities of the Government in debt management and to integrate all these functions into a single agency called "Public Debt Management Agency" (PDMA) which is similar in functions to "National Treasury Management Agency" suggested by the Aziz Committee. A legislative bill to this effect -the draft financial code - was also developed by the FSLRC.
While implementing the FSLRC Committee Recommendations, Union Budget 2015-16, as part of the Finance Bill, 2015 introduced legal provisions for creation of a PDMA and accordingly amended the other relevant Acts - like Government Securities Act, 2006 The RBI Act, 1934, Securities Contracts Regulation Act 1956 etc. Further, the Government Securities Act, 2006 was also repealed in the process. However, shifting the jurisdiction of Government securities markets to SEBI created some difference of opinion and in the ensuing debate the proposal had to be dropped from the Finance Bill when it was passed.
Features of PDMA as outlined in the Finance Bill, 2015
Structure & Administration
- PDMA is a body corporate to be run on the grants or loans received from the Central Government and from other sources as may be prescribed by the central government.
- PDMA is headed by a chief executive officer (CEO) and he has powers of only general direction and control in respect of all administrative matters of PDMA.
- PDMA can set advisory councils if it wishes to do so
- PDMA is empowered to create by-laws
- The Board of Directors include nominee directors of the Central Government and RBI.
- Being an agency of the Government, the Central Government has the right to terminate the services of a Member of the Board even before the expiry of her tenure on grounds of moral turpitude, unsound mind, insolvency and for abuse of position.
- Further, Central Government is empowered to issue directions on Policy to PDMA and latter is bound by that.
- Members and employees of the PDMA or any other person who has been delegated any function by PDMA shall be deemed to be "public servants" within the meaning of Section 21 of the Indian Penal Code.
- PDMA can establish offices either in India or abroad
- Accounts of PDMA are audited by the Comptroller and Auditor General of India (CAG) and the CAG audited report and annual report are to be laid in Parliament.
- Legal protection is given for actions taken in good faith
- PDMA is given exemption from all kinds of taxes for all its operations
- collecting and publishing information about public debt, including borrowings by the central government.
- issue of government securities (in demat or electronic form) and maintenance and management of the registry of holders (which would actually be maintained by the Depositories) and making payments to them; However, the terms and conditions of G-Secs would be prescribed to the PDMA and hence, central government would be liable to meet the obligations arising from the financial transactions authorized by it and undertaken by the PDMA.
- purchasing, re-issuing and trading in G-Secs
- Managing Contingent liabilities of the Central Government including developing ways for its measurement, reduction in quantum and cost of such liabilities.
- advising central Government on its contingent liabilities
- Undertaking Cash management of the Central Government including acquiring information about its cash assets, predicting the future cash requirements and issuing and redeeming such short term securities required to meet the cash requirements etc.
- Advising central Government on management of cash assets
Relationship of RBI with central Government after the removal of debt management functions (as contained in Finance Bill 2015)
The Constitution of India gives the executive branch of the Government the powers to borrow upon the security of the Consolidated Fund of India. Reserve Bank as an agent of the Government (both Union and the States) implemented the borrowing program. The Reserve Bank draws the necessary statutory powers for debt management from Section 21 of the Reserve Bank of India Act, 1934. While the management of Union/Central Government's public debt is an obligation for the Reserve Bank, the Reserve Bank undertakes the management of the public debts of the various State Governments by agreement. The procedural aspects in debt management operations were governed by the Government Securities Act, 2006 and rules framed under the Act. The debt management functions comprised of formulation of a calendar for primary issuance, deciding the desired maturity profile of the debt, size and timing of issuance, designing the instruments and methods of raising resources, etc. taking into account government's needs, market conditions, and preferences of various segments while ensuring that the entire strategy is consistent with the overall macro-economic policy objectives. Reserve Bank also undertakes the conduct of auctions and manages the registry and depository functions.
All these functions will be transferred to PDMA in respect of the central government. As per the Finance Bill 2015 RBI was required by law to provide all necessary information and assistance to the effective functioning of PDMA.
With the creation of PDMA, RBI is given the explicit task of inflation targeting and reducing its earlier focus on multiple objectives like growth, financial stability, monetary management, debt management etc.
RBI may still be managing the borrowing requirements of the state governments as per the agreement it has entered into with them earlier.
Though debt management is taken out of RBI, it would continue to function as the banker to the Government. As a banker to the Government, the RBI would perform the same functions for the Government as a commercial bank performs for its customers. It would maintain accounts of the Government; receive deposits from, and make advances to the Government; provide foreign exchange resources to the Government for repaying external debt or purchasing foreign goods or making other payments.
Contrary views: why central bank should continue to do debt management functions in India
Creation of a PDMA was a matter of intense debate in India. Many, at some phase even RBI, believed that debt management functions should be continued with RBI for the following reasons.
- Historically RBI had been managing the debt at a lower cost while keeping the interest rate in line with the requirements of the economy.
- Theoretical formulations can conjecture conflicts of interest; the validity of assumptions need to be tested by evaluation of experience/performance and on that count, conflict of interest cannot be established with regard to Reserve Bank.
- The FRBM Act, 2003 which precluded the Reserve Bank from participating in the primary auction of the Government bonds has resolved the conflict of interest with the monetary policy. Monetary signalling in India is now done by the repo rate (policy rate) under the liquidity adjustment facility (LAF) and not the bond yields. On the other hand, Government’s ownership of majority stake in public sector banks (which own 70 per cent of banking sector assets) could be a source of conflict of interest with its role as debt manager, either directly or through an agency controlled by it.
- Commercial Banks hold more G-Secs than what is warranted under Statutory Liquidity Ratio (SLR). In India, at present, SLR is more of a prudential requirement than a captive quota for G-Secs.
- The size and dynamics of government market borrowing has a much wider influence on interest rate movements and systemic liquidity. An autonomous PDMA, driven by specific objectives exclusively focusing on debt management alone, may not be able to manage this complex task involving various trade-offs. It may even be compelled to issue more short term debts and enlarge the space for foreign investors making economy more vulnerable to the risk of capital flight.
- The significant impact of the Government borrowing on the broader interest rate structure in the economy and, therefore, on the monetary transmission process in financial markets, makes it a critical component of the macroeconomic management framework. Overall coordination by RBI hence becomes important.
- It may not be true that what has been practiced in some other countries would come true for India. The institutional arrangements for debt management must take into view the country specific context and requirements. The experience of debt management offices in the Euro area (especially Greece, Portugal and Ireland) has been less than satisfactory and has resulted in creating financial instability in the entire Euro Zone.
Expected Outcomes from PDMA
The Public Debt Management Agency (PDMA) will bring both India’s external borrowings and domestic debt under one roof and would usher in better debt management practices such as creating a "medium term debt strategy framework", just as the case for fiscal deficit. This may also lead to gradual reduction of Statutory Liquidity Ratio (SLR) and frees up the lending space of commercial banks. Further, deepening of the Indian Bond market is one vital factor in promoting investment in India. The process of bringing the Indian bond market at the same level as India’s world class equity market is proposed to be initiated by setting-up PDMA. In addition, while paving the way for a vibrant government securities market, PDMA would also pave the way for a vibrant derivative market based on it, such as interest rate derivatives.
Status of PDMA
The creation of PDMA is put on hold as the proposals mentioned above in the Finance Bill 2015 could not be agreed upon in the Parliament. Accordingly, Clauses relating to the PDMA, amendments to the RBI Act 1934 and the Government Securities Act 2006 were withdrawn from the Finance Bill, 2015. The Finance Minister also announced that the Union government would now work on a roadmap for the PDMA and unified financial market regulator in consultation with the RBI.
Public Debt Management: Reflections on Strategy & Structure Keynote Address by H R Khan, Dy Governor RBI at IIM Bangalore, August 2014