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A Separate Debt Management Office

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Book cover Public Debt Management

Part of the book series: India Studies in Business and Economics ((ISBE))

Abstract

In many countries, both advanced and emerging, during the recent global crisis, scope of fiscal policy was expanded and debt to GDP ratios increased significantly. Consequently, debt management became difficult and coordination between monetary and debt management assumed significance. The setting up of separate debt management office will help to establish transparency, and assign specific responsibility to and accountability on the debt manager. The strategy could ensure that resources are available to the government at competitive market rates of interest prompting expenditure prioritization and fiscal discipline in budget making.

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Notes

  1. 1.

    This aspect was also partially covered by Singh (2005).

  2. 2.

    In case the two are not separated, then debt management policy eventually becomes subservient to the monetary policy as the monetary authorities attempt to use debt instruments to strengthen monetary policy signals and to enhance the credibility of the central bank.

  3. 3.

    Fed Reserve’s victory (Under Paul Volcker) over inflation in the USA was institutionalized in legislation and practices that granted central bank greater autonomy and, in some cases, formal independence from long-standing political constraints. Now many central banks could be trusted to do the right thing; and they delivered (El-Erian 2013).

  4. 4.

    Cukierman (1992) discusses some of the structural reasons that led to flow of credit from the central bank to the government and eventually erosion of its independence—(i) underdeveloped financial markets, (ii) inelastic supplies of funds with respect to real rate of interest, (iii) large outstanding domestic debt and (iv) inelastic revenue and expenditure of the government with respect to income.

  5. 5.

    If debt management activity is also undertaken by the central bank, then the profits may be substantially large.

  6. 6.

    Blommestein and Thunholm (1997) suggest that another way to restrict the transfer of seigniorage to the government is to maintain the real value of reserves and capital.

  7. 7.

    Debt Management is again becoming a critical element in the overall conduct of policy, as events in Greece have evidenced. Debt management can no longer be viewed as a routine function which can be delegated to a separate, independent body. Instead, such management lies at the crossroads between monetary policy and fiscal policy.

  8. 8.

    Stockholm Principles (2011) were promulgated by debt managers and central bankers from 33 advanced and emerging market economies.

  9. 9.

    Initially, central bank independence was based on two main arguments which no longer apply because of multiple objectives being assigned to a central bank—first, politicians can exploit expansionary monetary policy’s positive short-run effects at election time, without regard for its long-run inflationary consequences. Second, central banks have a clear comparative advantage in dealing with monetary issues and can therefore be trusted to pursue their targets independently.

  10. 10.

    In fact, this was a key factor in shaping the new arrangement.

  11. 11.

    Thorat et al. (2003).

  12. 12.

    However, there is a unique small saving scheme run by the Government of Kerala.

  13. 13.

    Total Deposits constitutes of Post Office Saving Bank Deposits, MGNREG, National Saving Scheme 1987, National Saving Scheme, 1992, Monthly Income Scheme, Senior Citizen Scheme, Post Office Time Deposits: 1 year Time Deposits, 2 year Time Deposits, 3 year Time Deposits, 5 year Time Deposits; Post Office Recurring Deposits, Post Office Cumulative Time Deposits, Other Deposits. Saving Certificates constitutes of National Savings Certificate VIII issue, Indira Vikas Patras, Kisan Vikas Patras, National Saving Certificate VI issue, National Saving Certificate VII issue, Other Certificates. Public Provident Fund.

  14. 14.

    This is an important development for the reason that while the revenue deficit of the consolidated general government fully reflects total capital expenditure incurred, in the accounts of the Centre; these transfers are shown as revenue expenditure. Therefore, the mandate of eliminating the conventional revenue deficit of the Centre becomes problematic. With this amendment, the endeavour of the government under the FRBM Act would be to eliminate the effective revenue deficit. Similarly, at state level also, some of the capital transfers to local bodies or parastatals could get reflected as revenue expenditure. By understating capital expenditure, this might lead to a divergence between the national accounts data on capital formation on the government accounts and the conventional public finance data that is gleaned from the Budgets (GoI 2013).

  15. 15.

    The reasons offered by the Committee on Financial Sector Assessment (GOI and RBI 2009).

  16. 16.

    Data on lending rates sourced from RBI and relate to five major Public Sector Banks up to 2003–04. For other years, data relates to five major banks.

  17. 17.

    Kumar and Kumar (2012) attempted to verify the interest rate conflict, underlying the idea of separation of debt management, empirically and conclude that the relationship between policy rates and government market borrowings is statistically insignificant.

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  1. Department of Economics, Indian Institute of Management Bangalore, Bangalore, India

    Charan Singh

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  1. Indian Institute of Management Bangalore (IIMB), Bengaluru, Karnataka, India

    Charan Singh

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Singh, C. (2016). A Separate Debt Management Office. In: Singh, C. (eds) Public Debt Management. India Studies in Business and Economics. Springer, New Delhi. https://doi.org/10.1007/978-81-322-3649-8_6

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  • DOI: https://doi.org/10.1007/978-81-322-3649-8_6

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