Finance minister Arun Jaitley Thursday rolled back the proposal to set up an independent public debt management agency, ending tensions with the central bank which will continue to be the sole regulator of government bonds, for now.
The government would consult the Reserve Bank of India and come up with a roadmap for the debt agency in line with global practices, Jaitley said, without offering any timeline.
“We have decided to delete the PDMA provisions from the finance bill for this financial year,” Jaitley told the Lok Sabha. He was initiating a debate on the finance bill, 2015.
In his budget speech on February 28, the minister had proposed a PDMA to serve as the government’s investment banker and manage public borrowing.
The proposal — seen as the biggest overhaul of India’s money market operations — would have taken away from the RBI the regulation of a substantial part of the money market and shifted it to the Securities and Exchange Board of India.
There were fears that empowering of Sebi would turn the capital market watchdog into a “super financial regulator”, given its control over the equities and commodities transactions.
“Since the RBI has been handling public debt management, the government in consultation with the RBI will prepare a detailed roadmap separating the debt management function and the market infrastructure from the RBI and having a unified financial market,” Jaitley said.
The RBI acts as the government’s banker and that sometimes conflicts with its other major task -- controlling inflation. As the banker, the RBI has to keep interest rates low but has a tough balancing act to do when prices rise as it has to keep lending rates high.
“(It) perpetuates the conflict of interest within the RBI from being a regulator of government securities and simultaneously being both a trader in government securities,” Jaitley said.
The minister said an independent debt management office was in keeping with the best international practice followed by countries such as the US and the UK. “…neither public debt is managed by central bank nor is regulation of GSec (government securities), currency and derivative with the central bank,” he said.
The RBI, in its annual report in 2000-01, had first proposed a separate agency to manage government debt. Several other independent panels made similar suggestions for a PDMA, equidistant from the government and the RBI.
The finance bill, which was passed by a voice vote in the Lok Sabha, also exempted some foreign investors from minimum alternate tax, a kind of income-tax on companies. It tweaked indirect taxes on iron ore, raw silk and rubber and exempted the Centre’s social security schemes from paying service taxes.