On the other hand, if Reliance wanted fresh borrowing of 20 per cent of its balance sheet, this is not a simple matter. This amounts to fresh borrowing of Rs 30,000 crore. This comes on top of existing debt of Rs 40,000 crore. The bond market will view this with some nervousness. Reliance would have to think about keeping the costs of the debt low.

How would Reliance go about this? In all likelihood, Reliance would hire investment bankers to think about what kinds of bonds are to be issued: their maturity, currency composition, target investors. Special discussions with investors, would explain the outlook for the company, and why it had the ability to repay this debt.

In other words, informal mechanisms for debt management are acceptable when the borrower is starting from a sound position. But when the existing indebtedness of the borrower is large, fresh bond issuance is a non-trivial problem. It requires special thought and care to do this properly.

How are these principles relevant in the case of the Indian government? The true fiscal deficit for 2008-09 for the Centre and states will probably work out to 12 per cent of GDP, which is comparable to the levels prior to the 1991 crisis. Next year, this highly indebted entity is going to be borrowing on a massive scale.

How does the management of government debt work in India today? First, markets have only a hazy idea what the total borrowing of the Government of India is. The lack of transparency on off-budget items and public sector enterprises is enhanced by lack of timeliness in deficit numbers for the states. Not even good guesstimates are available for the total Public Sector Borrowing Requirement (PSBR). This is unlike OECD countries where decisions to borrow more are based on informed estimates at least about the total size of the debt and the current borrowing of the total public sector and government, including lower tiers of government.

... contd.