Life after debt

: Perhaps the only major economic policy institution that has not been reformed since reforms began, RBI, is also for the first time bang in the middle of many vigorous debates. And one hopes in a democracy with as solid a tradition of intellectual economic thinking as India’s, these arguments are heralding a change. Proof in small measure comes from, as reported in this newspaper on Friday, the firming up of the formula by which RBI will be divested of its job of managing public debt. The finance ministry did little on its budget promise to set up a debt management office and, as frequently happens in India, a committee was set up. Frequently, again, such committees don’t achieve much. But this committee, headed by the finance ministry’s recently appointed principal economic advisor, seems to be serious. Therefore, a new public entity that will manage debt and an interim body that will advise on creating this entity are both ideas that seem to have a lot of traction. If India is lucky, this may get done within the UPA’s term, and will doubtless be the most important, perhaps the only, major reform undertaken by this government.

RBI is possibly not jumping for joy. But its resistance — for 16 months it couldn’t find officers who could participate in the exercise — on this is perhaps getting weakened. Certainly, there’s zero intellectual basis for keeping debt management with the central bank — the same entity shouldn’t set short-term interest rates for monetary policy, long-term interest rates for public debt and monitor banks who are major buyers of public debt. That RBI has been doing this for so long is proof of India’s shoddy approach to central banking. This reform should be the beginning of more tightening of RBI’s brief as well as the related reform of making India’s bond markets come up to the standards of its equity markets. For one, bond and equity markets should be regulated by the same monitor, Sebi. RBI won’t like that either. But there’s plenty in the rough blueprint of financial sector reforms — as detailed in the Patil, Mistry and Rajan committee reports — that RBI won’t like.

Major reforms never happen while keeping the reformed one happy, though. The controller of capital issues couldn’t have been happy when it was told its time was up. A big section of the inspector raj wasn’t thrilled when...