Public Debt Management of the Union Government of India

Public debt management by the Union Government of India refers to the framework, policies, and institutional mechanisms through which the central government borrows, manages, and services its debt obligations. It aims to ensure that borrowing requirements are met at minimal cost with prudent levels of risk, while contributing to overall macroeconomic and financial stability.

Background and Legal Basis

The constitutional authority for the Union Government to borrow is derived from Article 292 of the Constitution of India, which empowers the Government of India to raise loans upon the security of the Consolidated Fund of India. Borrowings and debt management fall exclusively under the Union List of the Seventh Schedule, granting Parliament legislative control over the subject.
The legal framework for managing debt is supported by key statutes:

• The Government Securities Act, 2006 provides a comprehensive structure for issuing, managing, and regulating government securities.
• The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 enforces fiscal discipline by setting targets for deficits and public debt and mandates transparent reporting and long-term fiscal policy planning.

Together, these provisions ensure that debt management is conducted within a transparent, accountable, and sustainable fiscal framework.

Objectives of Public Debt Management

The main objectives guiding public debt management are as follows:

1. Cost and Risk Balance: To minimise the cost of borrowing over the medium to long term, while keeping risks within acceptable limits.
2. Ensuring Funds Availability: To ensure timely and reliable access to funds for financing government expenditure and refinancing maturing obligations.
3. Development of the Securities Market: To foster a deep and liquid government securities market that provides a benchmark yield curve for other borrowers.
4. Transparency and Accountability: To promote openness in debt operations through regular publications, performance monitoring, and adherence to legislative and fiscal guidelines.

Institutional Framework

Public debt management in India involves multiple institutions working in coordination:

• The Department of Economic Affairs (DEA) under the Ministry of Finance formulates policy and strategy for public debt management.
• The Reserve Bank of India (RBI) acts as the agent of the central government for managing public debt. It undertakes the issuance, servicing, and redemption of government securities, conducts auctions, and maintains accounts of the government’s domestic debt.
• The Comptroller and Auditor General (CAG) ensures audit and oversight of debt operations to assess compliance and efficiency.
• Proposals have been made to establish an independent Debt Management Office (DMO) to separate debt management from monetary policy functions, ensuring greater autonomy and accountability.

Instruments and Borrowing Operations

Types of Borrowing Instruments

The Union Government raises funds through various instruments, broadly classified as:

• Treasury Bills (T-Bills): Short-term instruments with maturities of 91, 182, or 364 days.
• Dated Government Securities (G-Secs): Long-term securities with maturities ranging from 5 to 40 years, forming the backbone of domestic debt.
• External Borrowings: Loans from multilateral and bilateral agencies, and occasional sovereign bond issuances in foreign currencies.
• Small Savings and Other Liabilities: Instruments such as National Savings Certificates, Provident Funds, and other public accounts.

Auction and Issuance Mechanism

Government securities are issued primarily through auctions conducted by the RBI. Auctions can be competitive, where participants bid for yield or price, or non-competitive, allowing smaller investors to participate without bidding. The issuance is planned through an annual borrowing calendar announced in advance to enhance transparency and predictability.
Techniques such as switching operations, buy-backs, and reopenings are employed to smooth the maturity profile, manage rollover risks, and maintain liquidity in key benchmark securities.

Risk Management Framework

Public debt management involves the mitigation of several key risks:

• Refinancing Risk: The risk of having to refinance maturing debt at higher interest rates or under unfavourable conditions.
• Interest Rate Risk: The impact of changing interest rates on debt servicing costs.
• Liquidity Risk: The possibility that certain securities may not be easily tradable in the secondary market.
• Currency Risk: Exposure to exchange rate fluctuations in the case of external debt.

To address these risks, the government follows a strategy of diversifying debt instruments, extending the average maturity of its portfolio, and maintaining an appropriate mix of fixed and floating rate instruments.

Trends and Performance

Over recent decades, India’s debt management strategy has evolved towards greater professionalism and prudence. The government has progressively increased the average maturity of its debt portfolio, reducing rollover risks. The weighted average cost of borrowing has shown a general downward trend, reflecting better macroeconomic management and market confidence.
Interest payments continue to form a significant portion of total expenditure, indicating the importance of effective debt servicing strategies. The debt-to-GDP ratio remains an important indicator monitored for fiscal sustainability, with targets guided by the FRBM framework.
The development of a robust domestic debt market has also provided reliable access to funds, reducing dependence on external borrowing and mitigating currency risks.

Challenges and Criticisms

Despite progress, several challenges persist in India’s debt management framework:

1. Institutional Separation: The absence of a fully independent debt management agency has led to overlaps between debt management and monetary policy.
2. Transparency: Although reporting standards have improved, there is scope for more granular data disclosure on the composition, maturity, and risk profile of public debt.
3. Market Depth: Liquidity in the secondary market for certain long-term securities remains limited, constraining market efficiency.
4. Interest Rate Volatility: Fluctuating global and domestic interest rates increase uncertainty in refinancing costs.
5. Fiscal Pressure: Persistent fiscal deficits and high interest outlays impose strain on public finances.
6. State Coordination: As state governments also borrow from the market, effective coordination between central and state debt programmes is vital to avoid competition for limited domestic savings.

Reforms and Future Directions

To strengthen public debt management, several reform measures have been suggested and gradually implemented:

• Establishment of a statutory, independent Debt Management Office to improve professional oversight and coordination.
• Enhanced disclosure and transparency, including publication of detailed debt statistics, strategy documents, and risk metrics.
• Deepening of the government securities market through introduction of market makers, active trading platforms, and improved settlement systems.
• Adoption of active liability management tools, such as debt buy-backs and switches to manage redemption pressures.
• Continuous efforts to achieve fiscal consolidation in line with FRBM targets and maintain debt sustainability.
• Better Centre–State coordination to optimise borrowing strategies and reduce aggregate cost of public debt.