ASIAN DEVELOPMENT BANK INSTITUTE, TOKYO, JAPAN

20th Annual Conference:

Managing Private and Local Government Debt in Asia

SUB-NATIONAL PUBLIC DEBT MANAGEMENT IN INDIA

Y.V. Reddy
30th Nov. 2017
Special Speech: Talking Points

OUTLINE:
I. Structure of Governments;
II. Structure of inter-governmental fiscal relations;
III. Institutional arrangement for Management of Public Debt;
IV. Features of Public Debt Management;
V. Debt Markets and Public Debt Management;
VI. Lessons of Experience
A) No Insolvency
B) Debt Restructuring as a Strategy
C) Rules and Discretion
D) Off-budget Borrowing
E) Way Forward
The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian
Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for
any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.
 I. Structure of Governments

1. India is a Union (Centre) of States: Federal as per the Constitution, 1950.

2. Division of Powers through Union List, State List and Concurrent List.

3. Union laws prevail normally and residuary powers with the Union.

4. In 1993, Constitution amended to mandate sub-state (local governments) for rural

and urban areas.

5. However, States continue to have absolute jurisdiction over local governments.

6. Currently, it is a three tier federation.

 II. Structure of inter-governmental fiscal relations:

1. The taxes of the Union are sharable while the taxes of the States are not.

2. The tax powers of the local governments are stipulated by the relevant laws of the
State governments.

3. The Constitution recognises dynamic nature of Union-State financial relationship.

Finance Commission is mandatory at least every five years.

4. In regard to local governments, State Finance Commissions are mandated by the

Constitution, but their functioning depends on the State governments.

5. Wide variation among States in the functioning and sources of revenue in regard to
local governments.
III.Institutional arrangement for Management of Public Debt:

1. The Constitution empowers Union and States to borrow on their own

2. The Constitution expects legislation on ceiling for debt

3. In 2003, ceiling on fiscal deficit was imposed in the Union and in most States also

4. State Government cannot borrow from foreign sources

5. State Governments cannot borrow without the consent of the Union in effect

6. The powers to borrowing of the local governments prescribed by the relevant

legislation of the State concerned

7. The components of public debt vary and market borrowings is one component, both
for the Centre and the State
(Continued)
III.Institutional arrangement for Management of Public Debt:

8. Debt of local governments is very small and market borrowing is negligible

9. Lending by Centre to States permissible, but over a period lending from the Centre
to States discontinued

10.Over a period, the share of market borrowings increase and lending from Centre to
States decreased

11.The RBI is legally designated debt manager of Government of India

12.RBI is debt manager for the States through an agreement with the States

13.In respect of local bodies, local arrangements are made for debt management and
borrowings.
 IV. Features of Public Debt Management

1. The major objective of debt management is common at all levels, namely, minimizing
the cost of borrowing.

2. But, in broader terms, it has to be consistent with other policies. These differ
between central level, state level and local level.

3. Central level has to consider macro-economic stability, the impact on financial

markets, and importance of government security rate being bench mark rate.

4. The state governments will have to take into account the permissible borrowing
program.

5. The local governments concentrate on minimising cost of borrowings.

6. RBI has to manage state government's debt keeping in view the needs of different
states and ensure consistency between the premium charged over the central
government bench mark rate.

7. The Finance Commission provides the overall fiscal framework for the centre and
individual states.

8. Recent FRBM Review Committee has been constituted which has recommended a new
regime for debt sustainability, debt ceiling and fiscal deficits.
 V. Debt Markets and Public Debt Management

1. Debt management at the center is carried out successfully with the help of financial
repression (SLR and CRR).

2. The issue is how much of financial repression should be extended to state government
securities.

3. Central or state governments do not issue sovereign bonds in foreign currency.

4. The share of external sources in public debt mainly through multilateral and bilateral
debt is coming down.

5. In regard to state governments also, the share of market borrowings has been
increasing. Hence, the growing importance of debt management at State level.
Further, exchange rate risk in regard to World Bank / ADB Projects has to be borne by
States.
 VI. Lessons of Experience

A. No Insolvency

1. The borrowings of state governments are limited to the borrowing program

approved by the government and it is administered by RBI.

2. Further, the debt servicing is charged (but not voted) by the legislature.

3. Debt is almost wholly in local currency with long maturity often fixed coupon.
Hence the liability is clear.

4. This mechanism of ways and means advances followed by overdraft with the
possibility of central government accommodation provides checks and balances.

5. Hence, the solvency is not an issue

(Continued)
 VI. Lessons of Experience

B. Debt Restructuring as a Strategy:

1. No debt restructuring due to inability to service, but only as part of overall fiscal
management.

2. Debt restructuring is confined to the debt owed by state governments to central

government.

3. Mostly restructuring is done on the recommendations of the Finance Commission.

4. During window of high liquidity, state governments were permitted to borrow and
pre-pay debt to the central government.

5. Some states did not avail market borrowings and some other states bought back
their own papers from the market.

6. RBI as debt manager recommended and implemented restructuring debts of the

States to the Centre, as appropriate.

(Continued)
 VI. Lessons of Experience

C. Rules and Discretion

1. Market discipline on States operates through the cost of borrowing to the States
as reflected in the differing premia over central government bench mark rate.

2. In extra-ordinary circumstances, centre uses the discretion to devise special

schemes such as in the case of power centre, or security considerations.

3. Rules are prescribed for approval of the borrowing programs. Exceptions are
made by the central government under extra-ordinary circumstances. All these
relate only to inter-governmental debt obligations.

D. Off Budget Borrowing

1. Off budget borrowings may be hidden because the budget is based on cash flow
basis and not accrual basis. Surrogate borrowings by government entities is not
unusual both at Centre and States.

2. The market borrowing programs are very few at the local government level and
are confined to cities.
(Continued)
 VI. Lessons of Experience

E. Way Forward

1. State Governments may take a view on their course of action if the Centre
creates its own independent Public Debt Office.

2. State Governments may consider establishing state level body or agency to

borrow from the market and lend to local bodies. It can act as a lead manager to
local bodies.