Public Debt Management of the Union Government in India
Objectives of Public Debt Management in India
See the definition of public debt in India here.
The overall objective of the Central Government’s debt management policy, as laid out by the Central Government's status paper in November 2010 is to “meet Central Government’s financing needs at the lowest possible long term borrowing costs and also to keep the total debt within sustainable levels. Additionally, it aims at supporting development of a well-functioning and vibrant domestic bond market”.
Apart from this declared objectives, timely availability of resources for Government is ensured in a non-disruptive manner for the market. Various institutional arrangements are also put in place accordingly.
Government published its first Debt Management Strategy (DMS) document (earlier published across various documents of the Government and RBI) on December 31, 2015.The scope of DMS is restricted to active elements of domestic debt management, i.e., marketable debt of the Central Government. Over time, the scope would be progressively expanded to cover the entire stock of outstanding liabilities including external debt as well as General Government Debt including state development loans (SDL). The objective of the debt management strategy (DMS) is to secure the government's funding at all times at low cost over the medium/long-term while avoiding any excessive risk. The DMS has been articulated for the medium-term for a period of three years and would be reviewed annually and rolled over for the next three years.
India is not formally using the IMF / World Bank Medium Term Debt Strategy and Debt Sustainability Analysis. (See the IMF Guidelines here). Many countries across the globe follow / target Medium Term Public Debt Strategy specifying the debt targets to be met and the strategies for achieving the same. In India, such a framework / document is not in existence. However, in the Medium Term Fiscal Policy Statement laid before the Parliament, a two year target for outstanding liabilities is incorporated. In the Fiscal Policy Strategy Statement laid before the Parliament, Government outlines the prudent debt management strategies so as to ensure that the public debt remains within sustainable limits and does not crowd out private borrowing for investment.
As per the Fiscal Policy Strategy Statement of 2012-13 the public debt management policy of the Government is driven by the principle of gradual reduction of public debt to GDP ratio. This is with the objective of further reducing the debt servicing risk and to create fiscal space for developmental expenditure. On the financing side, the Government policy focuses on the following principles
- greater reliance on domestic borrowings over external debt,
- preference for market borrowings over instruments carrying administered interest rates,
- consolidation of the debt portfolio and
- development of a deep and wide market for Government securities to improve liquidity in secondary market.
Finance Minister in his Budget Speech for 2010-11 had indicated his intention to bring out a status paper giving detailed analysis of the government’s debt situation and a road map for curtailing the overall public debt. Accordingly, a paper was brought out in November 2010, titled Government Debt: Status and Road Ahead with detailed analysis on status of Central Government debt. At the same time, it also charts out a well calibrated roadmap for reduction in the overall debt as percentage of GDP for the general government during the period 2010-11 to 2014-15.
Subsequent to the issue of DMS in 2015, the Government's borrowing programme is being planned and executed in terms of DMS. The present debt profile of the Central Government is analysed with regard to cost, maturity and potential risk factors. The risk analysis contains metrics such as average time to maturity, analysis of the redemption profile, average time to re-fixing, percentage of outstanding debt maturing in next 12 months, etc. The DMS revolves around three broad pillars, viz., low cost, risk mitigation and market development. Low cost objective is attained by planned issuances and offer of appropriate instruments to lower cost in medium to long-run, taking into account market conditions and preferences of various investor segments. Low cost also attained by improved transparency by way of a detailed issuance calendar. Scenario analysis, which contains expected cost of debt based on the assumptions of future interest and exchange rates and future borrowing needs, is included in MTDS. Debt sustainability indicators, such as debt to GDP, average time to maturity and interest expense to GDP, are projected. Stress tests of the debt structure on the basis of the economic and financial shocks, to which the government is exposed, are conducted.
The latest version of the status paper for the year 2017-18 is available here.
Accounting of Debt and risk measurements
For all practical purposes India runs a Single Treasury Account. Both cash flow method and accrual accounting methods (see comparison between the two methods here) are used for measuring the cost of public debt. Risk of the debt portfolio is measured in terms of different parameters which include future cash flows and level of projected deficit and borrowings. Based on the different scenarios, internal limits are defined.
Meetings with Primary Dealers (investors who take government securities in bulk and then redistribute to their clients) are generally held twice a year, or more depending on the market conditions. Issuance plans and debt strategy are discussed in general terms with the investors.
Institutions responsible for management of public debt
The Constitution of India gives the executive branch of 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) used to implement 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 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 jurisdiction of various institutions responsible for public debt management is given below:
- Reserve Bank of India – Domestic Marketable Debt i.e., dated securities, treasury bills and cash management bills.
- Ministry of Finance (MOF); Office of Aid and accounts Division – external debt
- Ministry of Finance; Budget Division and Reserve Bank of India – Other liabilities such as small savings, deposits, reserve funds etc.
For monetary and fiscal coordination, there is a cash and debt management committee which meets regularly. The members comprise of officials from RBI and MOF.
The Central Government’s Budget for 2007-08 announced setting up an autonomous debt Management Office (DMO) and, in the first phase, a Middle Office was set up in September 2008 in the Ministry of Finance to facilitate the transition to a full-fledged DMO. The Middle Office would be merged into the Debt Management Office (DMO), when it is established. The functionalities presently carried out by RBI and Ministry of Finance will be undertaken by the Middle Office in a phased manner to ensure a smooth transition from the existing arrangements. The responsibilities of the Middle Office can be seen here.
To take forward the process of financial sector legislative reforms, the Government had proposed to move the Public Debt Management Agency of India Bill, 2012 in the Parliament. However, instead of moving a separate bill, Government introduced the creation of Public Dent Management Agency (PDMA) through the Finance Bill of 2015, presented along with the Union Budget of 2015-16. Consequent amendments to RBI Act and Government Securities Act was also proposed and the latter was proposed to be repealed. The agency was to set up with the objective of minimizing the cost of raising and servicing public debt over the long term within an acceptable level of risk at all times, under the superintendence of the central government. Alternatively one could say, this is now the legal objective of public debt management policy in India.
However, the proposals mentioned above in the Finance Bill 2015 could not be agreed upon in the Parliament. Accordingly, Clauses relating to the creation of PDMA, amendments to the RBI Act 1934 and the Government Securities Act 2006 were withdrawn from the Finance Bill, 2015.