Government of India Volume I: Analysis and Recommendations

PUBLIC DEBT MANAGEMENT
Table of Recommendations 12.3 Operationalising agency role with independent objectives
The combination of being an agency with independent objectives and agent of Government has operational implications
of the following nature:
1. While the public debt management agency will always act on instructions from the Central Government,
the draft Code should allow it to have the discretion to decide on the details of how it implements those
instructions in accordance with its objectives.
2. Throughout the process of implementing the instructions it receives, the public debt management agency
must ensure that the objectives are met.
3. If, however, the instructions do not enable its objectives to be met, the public debt management agency must
have the opportunity to place its objections to the instructions on record.
4. This should be done through mandating a regular consultation and feedback process between the agency
and the Central Government, which should take place throughout the agency’s exercise of its functions.
5. When issuing instructions, the Central Government must be obliged to consider the views of the public debt
management agency, and would have full knowledge of the objectives of the agency as laid down in the draft
Code.
6. If there is a disagreement between the two, the public debt management agency would be statutorily bound
to meet the instructions, but through the consultation and feedback process, it would have placed on record
its inability to meet its objective.
7. The accountability mechanism – routed through the Central Government and eventually to Parliament –
would take into consideration all the efforts made by the public debt management agency with regard to
achieving its objective, and the objections, if any, it would have already placed on record to this effect.
Table of Recommendations 12.4 Objectives of the public debt management agency
Table 12.1 states that the draft Code must create a public debt management agency that functions with independent
goals and objectives, while remaining an agent of the Central Government. Accordingly, the draft Code charges the
public debt management agency with the objective of minimising the cost of raising and servicing public debt over the
long-term within an acceptable level of risk at all times. This will guide all of its key functions, which include managing
the public debt, cash and contingent liabilities of Central Government, and related activities.
12.3. Objectives and functions of the public debt management
agency
Table 12.4 sets out the objectives of the public debt management agency. It is important
to recognise the tension between the short-term and the long-term. A public debt manager
can always obtain gains in the short run through tactical decisions which appear to
be expedient or immediately yield gains of a few basis points. But these tactics could well
be damaging in the long run, if they reduce the confidence of market participants. Hence,
the objective of the public debt management agency must be clearly defined in the draft
Code as undertaking those actions which minimise the cost of borrowing of the Government
in the long run. This should rule out an array of short-sighted tactical actions, such
as exploiting informational asymmetry against market participants, exploiting regulatory
constraints faced by market participants, and so on.
The key functions of the public debt management agency would be to undertake
public debt and cash management for the Central Government. In addition to these, the
various functions of the public debt management agency include the management of
contingent liabilities, research and information, and the fostering of a liquid and efficient
market for Government securities. These functions are summarised in Table 12.5.
12.3.1. Public debt management
The public debt management agency should advise the Central Government on the composition
of debt instruments including the proportion of domestic to foreign debt instruments,
alongside a thorough debt-sustainability analysis. Given the rising fiscal needs of
114 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION