The United Forum of Reserve Bank Officers and Employees has asked if the Centre had sounded out the States while proposing big changes to RBI functions and powers in the Finance Bill, 2015.
“Any change in the system could create problems for the States,” a note sent by the forum to all MPs, members of RBI central board, chief ministers, heads of political parties and trade unions said. And it would definitely go against the spirit of federalism.
As per clause 21A(b) of the RBI Act 1934, the RBI ‘may by agreement with the government of any state undertake the management of the public debt of and the issue of any new loans by that state,’ the note said.
All States barring Jammu and Kashmir have entered into such agreements with RBI by virtue of which it happens to be their debt manager too.
If proposed amendments are passed, issuance and servicing of state government securities by RBI would become problematic.
This is so because the state governments are not covered under the proposed amendment of Government Securities Act, 2006 by virtue of which only Central debt will be shifted to the proposed Public Debt Management Agency.
Government securities This agency is entrusted with responsibility of Central debt as per chapter VII of the Finance Bill. “So who then will take care of the issuance and servicing of state government securities? Did the Finance Ministry spare a thought and discuss this with the States?”
Again, RBI going out of the picture as authority of issue and management of public debt would mean that the States which float their bonds would have to fend for themselves, the note said.
This is because the central bank would not be anymore available to deliver a nudge to potential investors, mainly banks, to invest their funds.
Going by the market logic alone, banks and other investors would cherry-pick from among those States which have the best financials.
Others will have to offer higher rates of interest to persuade investors. This would only strain their finances further.
As the debt manager of both the Centre and States, the RBI has been servicing their debt including payment of interest and principal.
If some States were financial dire straits, RBI as the banker would come to their rescue as lender of the last resort so that investors were absolutely assured of their payments.
This guarantee will not be there once the proposed public debt management agency takes over since it cannot act as banker to state governments and issue overdrafts.
This will dissuade investors from investing state government bonds. Such state government bonds will remain undersubscribed much to the detriment and cost to the country’s federal polity, the note said.