With the Union Finance Ministry reworking its proposal for setting up the Public Debt Management Authority, the Reserve Bank of India has won its biggest battle in its 80-year history.
The watered-down proposal no longer envisages that the RBI relinquish control over the task of managing the Centre’s borrowings. Instead, the proposed authority, to be housed in the Finance Ministry and staffed mainly by government officials, is being given “limited functionality”. It will take over merely the “front office” for the management of the Centre’s borrowings, while the control over the “back office” will remain with the RBI.
The authority will be set up through an executive order. The Finance Ministry has put on the back burner its earlier move of amending the RBI Act for setting up the authority. The new plan is to move amendments to the RBI Act for statutory status to the authority and for full transfer of control not before another year or two, the source said.
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“It has now been decided that the transfer of control over the management of government debt from the RBI will not be complete,” a top Finance Ministry source told The Hindu. “The RBI has opposed the Ministry’s earlier proposal of complete transfer of control to the authority and not wanting to adopt a confrontational position, the Finance Minister has decided not to disturb the RBI set-up.”
In Parliament last month, Union Finance Minister Arun Jaitley withdrew the amendments to the RBI Act announced in his Budget speech in February.
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With the Reserve Bank of India retaining control over the Centre’s borrowings, Governor Raghuram Rajan’s views appear to have prevailed.
Mr. Rajan told The Hindu in early April that concerns about a central bank also being the public debt management authority, “though not entirely unwarranted were perhaps overblown … In my many years of watching the RBI, I haven’t seen it change monetary policy because it is worried about anything other than inflation … but if there are perceptions of conflicts in the RBI, then there is some rationale to having an independent agency.”
He had cautioned, “But if that agency is too close to government, then we should be careful … Government owns a number of entities in the economy today, public sector banks, LIC, etc., so that same conflict that existed in the RBI shouldn’t be transferred to an entity that has closer links with the government.”
Last month, during the debate on the Finance Bill in Parliament, Union Finance Minister Arun Jaitley had, in an unexpected move, withdrawn the amendments to the RBI Act announced in his Budget speech in February, and said he would move a fresh proposal after consultations with the central bank.
Ideally, Dr. Rajan had explained, “You want to get an independent public debt management agency, which really is not powerful enough to force debt into anybody’s hands … So, an entity, which is purely professional, not a huge bureaucracy but which manages and designs the placement of government debt, which it is in many other countries.”