Government of India Volume I: Analysis and Recommendations

PUBLIC DEBT MANAGEMENT
State Governments, the public debt management agency should co-ordinate the Central
Government borrowing calendar with the borrowings of State Governments to ensure
that the auctions of new issues are appropriately spaced.
The operations of the public debt management agency should also keep in mind investor
preferences and the ultimate objective of public debt management, i.e., to meet
the financial needs of the Central Government in an efficient manner over the long run.
However, the final decision will rest with the Central Government. Once the Central Government
has made decisions on the key questions, its remit would be executed by the
public debt management agency.
Over the medium-term, the public debt management agency’s focus is likely to shift
towards building voluntary demand for Indian Government paper. It may consider a
range of alternatives such as issuing inflation-indexed bonds or issuing in foreign currency,
aiming to establish mechanisms that help address market concerns regarding inflation,
exchange rate and credit risk, so as to minimise the interest cost paid by the Central
Government in the long run.
As things stand today, external debt includes loans received from foreign Governments
and multilateral institutions. The foreign currency borrowing of the Central Government
takes place through multilateral and bilateral agencies. There is no direct borrowing
from international capital markets. Further, State Governments cannot directly
borrow from abroad and have to go through the Central Government as the sovereign
risk is borne by the latter. Considering all these, both internal and external debt should
fall under the scope of the public debt management agency.
Wherever feasible, the public debt management agency should establish limits for
various categories of risk and overall risk. It must also seek to insure against these risks
inherent in its portfolio. It should also develop a framework that helps identify the risks
in the portfolio more efficiently, such as those associated with public debt management
operations, refinancing, contingent liabilities, impact of sovereign credit ratings issued
by credit rating agencies and global and domestic business cycle risks. It should also coordinate
with the fiscal and monetary policy functions, and actively engage with credit
rating agencies and the private sector and build relationships with market participants.
12.3.2. Cash management
The Central Government has been consistently running large fiscal deficit over the years.
In this situation, cash surpluses do not arise except for very short periods of time, due
to temporary mismatches between receipts and expenditures within a given financial
year. However, the public debt management agency should be tasked with the function
of managing and investing surplus cash of the Central Government whenever such a situation
arises in future.
There is also a need for the efficient management of cash balances across various departments
and ministries of the Central Government. Currently, a large part of the funds
received by the various departments and ministries of the Central Government are held
as surplus cash. This results in inefficient cash management for the Central Government
as a whole. This is because the Central Government might be required to borrow in the
market in a deficit situation even while some of its ministries hold on to surplus balances.
The cash balance position of the Central Government is also closely linked to the
balances of State Governments, since the latter temporarily place surpluses with the Central
Government. The frictional factors that contribute to the unintended liquidity crunch
from time to time can be avoided if better cash management practices are introduced
by both Central and State Governments in harmony with their public debt management
practices.
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 115