The Centre’s decision to delete the clauses that would have stripped the Reserve Bank of India (RBI) of its regulatory powers over the bond markets, as well as the provision for the creation of an independent Public Debt Management Agency (PDMA) from the Finance Bill 2015-16, is a pragmatic one. Given that India’s current fiscal position exceeds the limits mandated under the Fiscal Responsibility and Budget Management Act (and likely to be so for another couple of years) and that inflation targeting has just been made the RBI’s primary monetary policy objective, this is perhaps not the best time to entrust management of the government’s borrowing programme to a new agency. Also, it is but proper that such a major reform measure is not an item in the Finance Bill, but part of a separate statutory amendment that is thoroughly debated in Parliament before being finalised. The same applies to the (now withdrawn) bid to transfer regulation of the bond markets away from the RBI to the markets regulator SEBI. This was part of the recommendations of the Srikrishna Committee’s report on financial market reforms. Simply implementing one part of the recommendations, by shifting bond markets to SEBI, would have created confusion in the minds of market players. If the Centre believes that a uniform financial markets code and a single regulator is the way forward, it should lay down a broad roadmap to achieve that goal. Hopefully, future finance ministers will take a cue from Arun Jaitley, and resist the temptation to push in major reforms through the Budget, which is better restricted to issues of revenue and expenditure management.

That said, the Centre needs to press ahead with the creation of an independent PDMA, and iron out issues such as borrowing by States and staffing at the earliest. Contrary to popular belief, it is mispricing in the Indian bond markets that has kept corporates out, and not crowding out by the Centre’s own borrowing. As both the banking regulator and monetary manager, the RBI’s actions under either head (say, by tweaking the SLR limits) have inevitably impacted the bond market as well, leading to price distortion. India’s long-term infrastructure funding needs of over $1 trillion cannot be met unless the bond market deepens and pricing of government bonds gets more closely aligned with fundamentals.

Of course, merely creating a PDMA is not enough. Greece, for instance, set up an independent public debt office back in 1999, but is currently on the brink of a default which threatens to derail the global economy. Regardless of the degree of autonomy enjoyed by the public debt manager in executive action, it is a given that such an agency will have to work closely with both the Centre and the RBI to be successful. For India’s PDMA to work, the Centre will ultimately have to rein in its fiscal profligacy. Paying a more market-related price for its borrowing would be a good start.