Thursday, May 14, 2015

To PDMA or not PDMA?

The finance minister has withdrawn the provisions in the budget related to the creation of an independent agency for managing public debt and moving the regulation of the secondary market for government debt from RBI to Sebi.

Some in the media have interpreted this as a victory for the RBI governor; others have suggested that the PMO got the finance minister to back off. I have no comments on these reports. Be it noted, however, that what is now proposed that the finance ministry will work with the RBI on the creation of a PDMA.

Former finance minister P Chidambaram has blasted both the finance minister and the RBI governor and demanded explanations from both. In an article in the Indian Express, he wrote:
RBI was among the first to recognise the conflicts of interest and, therefore, in its Annual Report 2000-01, proposed the idea of a PDMA. It was supported by the Percy Mistry Committee on Making Mumbai an International Financial Centre (2007), the Raghuram Rajan Committee on Financial Sector Reforms (2008), the Jahangir Aziz Internal Working Group on Debt Management (2008), and the Financial Sector Legislative Reforms Commission (2011). The reports of the two last named bodies also suggested a draft law to create the PDMA...

Mr Rajan is the Governor of RBI. He chaired a committee that supported the two reforms. Even a few weeks ago, he publicly backed an independent PDMA. If the RBI that he heads is now opposing the reforms — proposed through statutory changes — he is obliged to disclose the RBI’s reasons and also explain why he changed his own views. Equally, Mr Jaitley is obliged to explain why he gave in to RBI’s opposition, what is the “further consultation” with RBI expected to yield, and what is the time line for the next move on the two proposals....
Fair enough. But the question is not whether we need a PDMA. The question is whether it is needed right now. After missing the FRBM target for the fiscal deficit for several years, the government promises to meet the target in 2017-18. Until then, its borrowing needs will be substantial. And banks will have to finance the borrowing needs. That means the RBI must use the SLR weapon to mobilise funds for the government. If primary debt is independent of RBI, then the RBI cannot stipulate an SLR- as many have pointed out.

The only solid argument that people are able to make for a PDMA is that there is potential conflict of interest where the RBI is concerned- the RBI cannot set interest rates while also trying to raise debt for the government at the cheapest rate. But many ex-RBI governors have categorically stated that this conflict is only notional- it does not exist in practice.

Interestingly, opinion among former RBI top brass seems to be divided. On TV the other day, I heard D Subbarao saying he did not see a great need for an independent PDMA. It appears, however, that C Rangarajan is favour.

The sensible thing to do is to plan a PDMA properly- remember, the expertise in the area resides mostly in the RBI today. So, proper staffing and training has to be planned for before we can think of an independent agency.

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