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Shaji Vikraman

TWO years ago, in one of those rare instances, the work of a committee involving the Finance Ministry and the Reserve Bank of India, ultimately ended up as an internal report of North Block.

For, half-way through, the country's central bank reacted coldly to the proceedings although the genesis for the panel's work had originated from Mint Street.

The committee's mandate was to work out the broad contours for the setting up of a debt management office in India, already in place in several other countries.

After the report of the committee became an internal one, it was put up last year to the then Finance Minister, MrYashwant Sinha.

When the Minister realised that the central bank had not warmed up to the proposal, he quietly told his officials to take it easy.

The central bank led by the Deputy Governor, Dr Y. V. Reddy, had given plenty of hints that a separation of the debt function from the monetary policy management would hinge on a reduction of the fiscal deficit.

Some of the officials in North Block who had by then travelled to a few countries, such as Portugal, for instance, to see the Debt Management Offices in operation could only fret then.

A year down the line, they may have some cause for cheer.

Mr Sinha's successor in North Block, Mr Jaswant Singh, has now flagged off a proposal to strengthen the middle office and what is known as the front office for public debt. The project is courtesy grants provided by an international agency.

The aim may well be to have an independent public debt management office in the medium term or over a period of over three years as the Ministry's committee recommended.

On the internal debt front, the RBI being the principal manager of public debt is the front office with the middle office being the budget division of the Finance Ministry.

The back office would be in this case, the Comptroller and Auditor General.

On the external debt side, the Front office is the Fund-Bank, ADB and the EEC divisions with the middle office being the External Debt Management Unit in North Block. The back office is the Office of the Controller of Aid Accounts and Audit.

The first of the recommendations for the setting up of a separate office of public debt came from the Tarapore Committee on Capital Account Convertibility (CAC). Dr Reddy was also an advocate of this for a while.

The CAC committee had good reasons for recommending this. "Monetary management is often clouded by the monetary authority's concern about the Government's borrowing programme, and therefore, 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 said five years ago.

Since then, an informal working group within the RBI had been at work on this.

The Finance Ministry in the interim, utilising an IDF grant started work on strengthening the country's external debt management capabilities.

The Government has started looking beyond the model of the Debt Management

Office (DMO) which is part of the Her Majesty's Treasury in the UK. Hungary and Portugal have showcased their debt management offices.

Hungary had set up an independent DMO after working closely with the World Bank and the International Monetary Fund in the wake of its public financial crisis in 1994.

The DMOs, whether it be in the UK or New Zealand or the Australian Office of Financial Management (AOFM) uniformly have the objective of minimising the long-term cost of public debt, taking account of risks, lowering the cost of debt and cash management, improving the management of risk associated with governmental portfolios and as in the UK trying to promote new issuance techniques and structural changes to debt.

Some of these things are, indeed, being practiced now back home also.

After the belated realisation that it is carrying on its books, securities offering a coupon rate of well over 13 per cent, an attempt was made to take these off the debt. Only to back fire.

On the external debt side, however, it has been far more easy. The debt substitution and retirement exercise is very well on.

To think that a babu in North Block had once blocked all efforts to minimise the cost of the country's external debt.

The gentleman, despite the role he played in adding up the cost of external debt is doing very well, thank you! As a secretary in the Government of India. In the Jaswant Singh regime, where a clear signal has been sent that such babus cannot bask any longer in the sun (reflected in the proposal to repatriate a Joint Secretary to his parent cadre), the DMO proposal may well be kicked off.

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