Public Debt Management (eBook)

Charan Singh is RBI Chair Professor of Economics at the Indian Institute of Management, Bangalore, India. Earlier, he was a Senior Economist at the Independent Evaluation Office (IEO) of the International Monetary Fund (IMF), Washington DC from August 2009 to November 2012. He earned his doctorate in Economics from the University of New South Wales, Sydney, Australia and was a visiting scholar (post-doctorate studies) for more than a year each at Department of Economics, Harvard University, and the Stanford Center for International Development, Stanford University. Dr. Singh has worked extensively for more than two decades in the Reserve Bank of India where he joined as a Research Officer in 1984. His extensive career in the Reserve Bank included many assignments in operational and research departments, include half a decade in debt management, in addition to fiscal policy management. Prior to joining the Reserve Bank, Dr. Singh worked, for a short period, as a Management Trainee in Punjab National Bank. His current policy interests include fiscal policy and debt management, monetary policy, and international economics.

Preface 6
Contents 8
Editor and Contributors 9
Abbreviations 11
List of Figures 13
List of Tables 16
List of Charts 18
List of Graphs 20
1 Introduction 21
1.1 Separate Debt Management Office in India 21
1.1.1 Debt Management in India 22
2 Public Debt Management: Reflections on Strategy and Structure 28
2.1 Introduction 28
2.2 Role of Reserve Bank and the Government in Public Debt Management: Legal and Institutional Framework 29
2.3 Debt Management Strategy 30
2.3.1 Policy Objectives 30
2.3.2 Cost Minimisation 31
2.3.3 Risk Mitigation 31
2.3.4 Rollover/Refinancing Risk 32
2.3.5 Exchange Rate Risks 32
2.3.6 Interest Rate Risk 35
2.4 Developing the G-Sec Markets 35
2.5 Institutional Arrangements for Sovereign Debt Management 36
2.5.1 Post-crisis Lessons 39
2.6 Concluding Thoughts 40
3 Debt Management of the Government 42
3.1 Introduction 42
3.2 Objectives and Strategy of Debt Management 42
3.2.1 Strategy 43
3.3 Debt Profile 44
3.3.1 Central Government Liabilities 44
3.3.1.1 Public Debt 44
Internal Debt 44
External Debt 45
3.3.1.2 Public Account Liabilities 45
3.3.2 General Government Debt 47
3.3.3 Status 48
3.3.4 Public Debt—Central Government 48
3.3.5 External Debt 49
3.3.6 Maturity Profile of Debt 50
3.3.7 Profile of New Issuances 50
3.3.8 Investor Profile 52
3.3.9 Average Interest Cost 53
3.4 Active Debt Management 53
3.4.1 Impact on Fiscal 54
3.5 Debt Position of State Governments 54
3.5.1 Composition of State Government Debt 54
3.6 Sustainability of Debt and Combined Liabilities 56
3.6.1 Sustainability Indicators of Debt 56
3.7 Summary and Conclusion 57
References 58
4 Cash and Debt Management in States 59
4.1 Introduction 59
4.2 Legal Framework 60
4.3 Trends in State Debt 61
4.4 Sources of State Debt 63
4.4.1 Loans from the Centre 64
4.4.2 External Loans 64
4.4.3 Loans from National Small Savings Fund 64
4.4.4 Loans from FIs 65
4.4.5 Public Account 65
4.4.6 Market Loans 65
4.4.7 Investments for Cash Management 66
4.5 Issues Pertaining to State Debt 70
4.5.1 Debt Ceiling 71
4.5.2 Inflexible Sources of Borrowing 71
4.5.3 Deficit–Borrowing Mismatch 71
4.5.4 Rates on State Securities 72
4.6 Have States Fared Better or Worse 73
4.7 Conclusion 73
5 India’s Experience with Cash Management 74
5.1 Introduction 74
5.2 Historical Facts and Developments 75
5.3 Recent Developments 78
5.4 Assessment of the Indian Cash Management System 80
5.5 Conclusion 83
References 83
6 A Separate Debt Management Office 84
6.1 Introduction 84
6.2 Some Basics of Debt Management 85
6.3 Separate Debt Management Office— A Traditional View 86
6.3.1 Central Bank Independence 88
6.3.2 Need for Coordination 90
6.4 Separate Debt Management Office—Post-Crisis Debate 92
6.5 Debt Management in India 95
6.6 Important Role of the RBI 97
6.7 Coordination Between RBI, Government and Markets 98
6.8 Fiscal Responsibility Legislations 98
6.9 Need for a Separation of Debt and Monetary Management 100
6.10 A Discussion on the Views Against Separation 102
6.11 Conclusion 105
References 106
7 Financial Regulation and Independent Debt Management Office 109
7.1 Introduction 109
7.2 Rationale for an Independent Debt Management Office 110
7.2.1 RBI de Jure is not Autonomous or Independent 110
7.2.2 RBI’s Role in Debt Management is Limited 111
7.3 What Should Be the Overarching Role and Scope of the IDMO 112
7.3.1 Market Loans of State Governments 112
7.3.2 Cash and Investment Management 113
7.3.3 External Debt 114
7.3.4 Other Liabilities 114
7.4 Issues Concerning Organisational Structure of the IDMO 114
7.4.1 Functions of IDMO 115
7.5 Relevant Proposals in the Financial Sector Legislative Reforms Commission 116
7.5.1 Functions 117
7.5.2 Independence and Other Relevant Issues for the PDMA 118
7.6 Conclusion 119
References 119
8 Fiscal Responsibility and Budget Management Act: An Indian Perspective 121
8.1 Introduction 121
8.2 Literature Review and Country Experience 122
8.2.1 Conceptual Framework 122
8.2.2 Effectiveness of Fiscal Rules 123
8.2.3 Fiscal Rules and Procyclicality 124
8.2.4 Fiscal Rules and Sub-national Governments (SNG) 124
8.2.5 Cross-country Experiences of Fiscal Rules 125
8.3 Evolution FRBM Act in India 127
8.3.1 Genesis of FRBM Bill/Act 2003 127
8.3.2 Structure and Content of FRBM Act 2003 128
8.3.3 FRBM Act 2003 and Rules 2004 128
8.3.4 Amendment to FRBM Act 2003 in 2012 129
8.3.5 Medium-Term Fiscal Statement (MTFPS) 129
8.3.6 Review of FRBM Act by FC XIV 130
8.3.7 Fiscal Road Map Recommended by FC XIV 130
8.4 Fiscal Developments in India Under FRBM Act 131
8.4.1 Trends in Deficit Indicators 131
8.4.2 State Government 132
8.4.3 General Government (Central and State Governments) 132
8.4.4 Trends in Liabilities 133
8.4.5 Trends in Revenue Receipts 133
8.4.6 Trends in Expenditure 134
8.5 Emerging Issues 136
8.5.1 Fiscal Consolidation 136
8.5.2 Postponement of Quantitative Targets 137
8.5.3 Quality of Fiscal Consolidation 137
8.5.4 Introduction of Effective Revenue Deficit a Classic Case of Creative Accounting 138
8.5.5 Financing Pattern of Fiscal Deficit 139
8.6 Policy Options 139
8.6.1 Amendment of FRBM Act in Respect Deficit Rules 140
8.6.2 Expenditure Pattern in Respect of Capital Outlays 140
8.6.3 Institutional Arrangement for Repayment of Market Borrowings 140
8.6.4 Cash Management 141
8.7 Conclusions 142
Annex 143
References 145
9 Public Debt Sustainability Assessments for Developing Asia 147
9.1 Introduction 147
9.2 Public Debt and Fiscal Performance in Developing Asia 149
9.3 Fiscal Reaction Functions and Asia’s Fiscal Prudence 156
9.4 SeThe Interest Rate–Growth Differential and the Debt Stabilizing Primary Balance 161
9.5 Debt Sustainability Analysis Based on Macroeconomic Forecasts 168
9.6 Assessing the Impact of Shocks in the Deterministic and Stochastic Debt Sustainability Analysis Frameworks 174
9.6.1 Standard Debt Sustainability Analysis Stress Tests 175
9.6.1.1 Stochastic Simulations 179
9.7 Conclusion 185
Appendix 9.1: Data Issues 186
Appendix 9.2: Data Availability and Sources 188
Appendix 9.3: Regression Analysis Samples and Functions 196
Appendix 9.4: Estimating Fiscal Reaction Functions 201
Appendix 9.5: Assumptions Underlying the 2011–16 Baseline Projections 203
Appendix 9.6: Data Issues in Stochastic Debt Sustainability Analysis 205
Appendix 9.7: The Stochastic Simulation Analysis 206
References 207
10 Round Table 209
10.1 Introduction 209
10.2 Discussion 210