Tuesday, November 25, 2008

NTMA - asking for bankruptcy

India’s bond market is nowhere near the maturity level of its equity markets. Reasons are not so hard to seek since equity offers ownership while debt carries an obligation to repay. When a debt paper is issued and if it is held till maturity, the obligation to repay rests with the issuer. But if it is allowed to be traded, the issuer gets back in the picture only if the instrument allows recourse. Naturally, when it comes to soverign (or Public Debt raised by Government) debt, our policy makers played safe and entrusted RBI to be the custodian, issuer, manager and Regulator of its financial needs. It suited just fine.

Earlier in the 2007-08 Budget, the monetary and debt management aspects of RBI is sought to be separated. On Friday, the government released a draft Bill to create a statutory corporate body called the National Treasury Management Agency (NTMA) to carry out debt management, cash management and management of contingent and other liabilities of the Centre and states – in the process stripping RBI of this responsibility. Former Finance Secretary S.Narayanan blows the whistle in his Livemint column.

Primarily Mr.Narayanan’s concerns are –

(a) Moral hazard – Minus the regulatory oversight by RBI, that it has ably executed for the last 60 years, NTMA functioning under the budget division of the ministry could become a carte blanche for Finance Ministers to raise funds at will. The propensity for excessive borrowings by the Governments are well documented in the past. Our budget deficits are a direct result of that profligacy.

(b) Mortgage of sovereignty - The draft Bill envisages that government bonds will be available for sale in India and abroad. It means that for the first time since independence, we will be offering sovereign bonds to overseas investors. Earlier, finance ministers and governments have shied away from this, for committing a sovereign to a debt that can be called outside the country has been a very sensitive and emotional issue. It has been a principle so far that the sovereign, the state, would not issue debt overseas.

(c) Fiscal discipline – It will in effect, empower immature policy makers to design debt instruments that they hardly understand. The recent mortgage crisis in the US that is still playing out, breaking banks after banks in the process, stands ample testimony to all likely outcomes.

As the citizen of this country, we’re already exposed to the recursive cycles of inflation and deflation. As a nation of savers, we are already parking most of our savings with the Governments (Post Office savings, PF, PPF, NSS, NSC, RBI bonds, Sr.Citizen bonds etc.) A tradeable bond market will only enable some dubious corporates to stick their trash debt paper to some unsuspecting and gullible public. We know the allegiances of Finance Minister Chidambaram, Petroleum Minister Murli Deora, Telecom Minister A.Raja et al. Now we don’t want self-imposed bankruptcy added to that. Do we?

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