The RBI is the debt manager for both the Central Government and the State Governments. It is also the regulator of Government securities market. RBI also advises the Government at the time of formulation of annual Borrowing Programme. The Public Debt Act, 1944, provides the framework under which government securities are issued and serviced. Under the RBI Act, 1934, RBI is the manager of Central Government debt by statute. RBI manages the debt of state governments on the basis of separate agreements. External debt of the Government is managed by the Ministry of Finance. As a debt manager for the both Central and State Governments, RBI in consultation with the Government, manages the maturity profile, timing of issue, composition of debt and the type of instruments issued. Operationally, RBI deals with the issue, servicing and repayment of government debt.

'Sustainability' of a country's public debt has become an important issue among policy makers, academicians, credit rating agencies and multilateral institutions. Sustainability of debt is critical from the central banking perspective also due to a variety of reasons. A number of central banks advise the government on debt management. Further, an unsustainable debt level is likely to have a major impact on monetary policy objectives. Also the government securities market is important for the domestic capital, money and forex market. The level and composition of public debt have a significant bearing on a country's economic development and its ability to withstand shocks and crises. If public debt pre-empts a large part of the savings of the economy, it leads to crowding out of private investment. Excessive borrowing, apart from increasing the tax burden of future generations, can also increase interest rates, thus making private investment more expensive. If the cost of servicing debt accounts for a large part of government revenue, funds available for desirable items like health, education and infrastructure get reduced. It is, therefore, essential, particularly for developing countries, that not only is the level of debt kept within sustainable limits, but its cost, composition and risk profile is managed efficiently.

We started reforms process in 1991-92. Let us see how various indicators of public debt have behaved since then.

Revenue Deficit (Difference between revenue receipts and revenue expenditure)

As regards Central Government, in 1990-91 the Revenue deficit as per cent of GDP was 3.3. There was improvement for the next few years. Till 1997-98, with the exception of one year (1993-94 - 3.8%), the ratio was below that level and averaged 2.8%. Thereafter, till 2001-02 the ratio averaged 3.9%. For the period from 1991-92 to 2001-02, the average was 3.1%.

In recent years, interest payments have accounted for about 50% of Revenue Receipts of Centre. The ratio has increased from 40.3% in 1991-92 to 50.5% in 2001-02. As far as the States are concerned, the Revenue Deficit - GDP ratio was 0.9% in 1990-91. Till 1997-98 the ratio was more or less at that level (average 0.8%). For subsequent four years, the average level was 2.6%. The Fiscal Responsibility and Budget Management Bill, 2000, which is before the Parliament, envisages `Zero' revenue deficit for the Centre by 2006. The Eleventh Finance Commission has put the target at 1% for Centre and 0% for States by 2004. These targets are indicative of future direction.

Gross Fiscal Deficit - [GFD = Total Expenditure (including loans, net of recoveries) minus revenue receipts (including external grants) and non-debt capital receipts]

In 1990-91, GFD of Centre was 6.6% of GDP. There was some improvement in the position in subsequent years. The average ratio for the period worked out to 5.0% of GDP. For the last four years (1998-1999 to 2001-02) the ratio averaged 5.5%.

The Fiscal Responsibility and Budget Management Bill, 2000 envisages the ratio at 2% by March 2006. The Eleventh Finance Commission (2000) recommended the ratio at 4.5% for Centre, 2.5% for States and 6.5% combined by 2004-05.

As far as States are concerned, the GFD as a per cent of GDP was 3.3 in 1990-91. In subsequent years, till 1997-98, the ratio declined and averaged 2.7%. However, the ratio showed increase thereafter and averaged 4.4% for the period 1998-99 to 2000-2001.

For the Centre and States, the combined GFD ratio was 9.4% in 1990-91. The ratio improved in subsequent years till 1997-98 (average 7.1%). However, thereafter the ratio rose to an average of 9.5% (9.9% for 2001-02).

Another way is to look at the total liabilities. For 2001-02, total liabilities of Centre worked out to 58% of GDP against 55% in 1990-91. For the States, the ratio was 26% in 2001-02 against 19% in 1990-91. For Centre and States together the ratio was 70% in 2001-02 against 62% in 1990-91.

The Fiscal Responsibility Bill 2000 envisages the ratio below 50% by March 2011. Eleventh Finance Commission (2000) has recommended the ratio at 48% for Centre, and 55% for Centre and States together.

In India, fiscal policy compulsions rendered internal debt management before 1991-92 passive. To keep government borrowing costs down, Treasury Bill rates were kept low, while the low coupon rates offered on government securities made real rates of return negative for several years till the mid-1980s. During the 1980s, the volume of debt expanded considerably, particularly short-term debt, due to automatic accommodation through the mechanism of ad hoc Treasury Bills. With captive investor base and interest rates below the market rate, secondary market for government bonds remained dormant. Artificial yields on government securities distorted the yield structure of financial assets in the system and led to higher lending rates and cross subsidisation. In view of the rising requirements of Government, Reserve Bank's monetary management was dominated by a regime of administered interest rates and rising CRR and SLR prescriptions. High CRR and SLR left little room for monetary maneuvering. It is against this backdrop, and in the context of the overall economic and financial sector reforms, that development of the government securities markets was initiated in the 1990s.

The reforms undertaken since 1990s can be briefly viewed as a systematic exercise for the development of the debt market, as well as integration of the entire financial markets by making it deep, wide and transparent. The reforms aimed at increasing the operational autonomy of the RBI, by measures such as abolition of automatic monetization of deficit through creation of ad-hoc Treasury Bills and introduction of Ways and Means Advances for the Central Government. Secondly, government borrowing was made market-rate based through the introduction of auctions in primary issues. Thirdly, improvements in institutional infrastructure were sought to be achieved through the setting up of Primary and Satellite Dealers. Fourthly, the breadth and depth of markets were sought to be improved by introduction of a variety of new instruments, viz., Zero Coupon Bonds, Capital Indexed Bonds, Floating Rate Bonds etc. Fifthly, since April 1999, the Reserve Bank has been actively pursuing the consolidation of debt through reissuance through price based auctions.

This has greatly improved the market liquidity and helped the emergence of benchmark securities. It will also facilitate the introduction of STRIPS (Separate Trading for Registered Interest and Principal Securities). Sixthly, through re-issue of existing securities, the liquidity of the market improved and the process of development of benchmarks received a fillip. Seventhly, trading and settlement systems have been improved through introduction of Delivery-versus-Payment (DvP) system and operationalisation of Negotiated Dealing System (NDS) and Clearing Corporation of India Ltd. (CCIL). Eighthly, a retail market in government securities is sought to be promoted through a system of non-competitive bidding at primary auctions. This is also sought to be done by encouraging banks/ PDs to provide an active secondary market for small investors. Finally, increased transparency is sought to be achieved through announcement of calendar for dated securities, implementation of standardized codes and accounting norms and dissemination of information.

The Reserve Bank in its role as adviser to Government is also concerned with the maturity profile of debt, timing of issuances and types of instruments, depending on the market conditions. In view of the large and growing fresh borrowings by the Government, the need to elongate the maturity profile of government debt has been felt, so as to minimize the refinancing risk.

The maximum maturity of new loan issues was reduced from 30 years in 1985-86 to 20 years in 1986-87. Thereafter, since 1992-93 the maximum maturity had been telescoped from 20 years to 10 years which continued till 1997-98. In 1998-99, the maximum maturity of loans issued was again raised to 20 years. In 2001-02, the Central Government issued a 25 year bond and in the current year a 30 year bond, successfully. The weighted average maturity of loans issued during a year rose from 5.5 years in 1996-97 to 14.3 years in 2001-02 which at present in the current year is around 12.3 years. Of the outstanding debt of Central Government, the weighted average maturity was 8.2 years as at the end of March 2002 as compared to 6.5 years at end March 1998.

In contrast to the weighted average maturity, the weighted average yield on the borrowings during the year has been declining consistently, from 13.75 per cent in 1995-96 to 12.01 per cent in 1997-98 and 9.44 per cent in 2001-02. For the period April-August, 2002, the weighted average yield works out to 7.53 per cent. In the case of State Governments, the maximum maturity of new loan issues was reduced from 20 years in 1991-92 to 15 years in 1992-93 and further to 10 years in 1993-94. Since then, the maximum maturity for state loan has been maintained at 10 years. The weighted average yield on state loans issued during a year declined from 14.0 per cent in 1995-96 to 12.4 per cent in 1998-99 and 9.2 per cent in 2001-02. For the period April-August, 2002 the weighted average yield is 7.8 per cent.

The strategy followed by Reserve Bank revolved around timing of issues to coincide with favourable liquidity and yield environment. As a result, Reserve Bank resorts to primary acquisition of government bonds through private placement/devolvement in the case of the Central Government, when it feels that market sentiment is uncertain or when liquidity conditions are not appropriate and to meet unanticipated requirements of the Central Government, with a view to off-load in the market at appropriate times.

Since 1992, new instruments like capital indexed bonds and floating rate bonds have been introduced. Bonds with call/put options have also been introduced in July 2002. Reserve Bank is now actively pursuing the creation and development of the STRIPS (Separate Trading for Registered Interest and Principal of Securities) market. Under this method, separate tradable securities for principal and the coupon payments will be issued. All the securities will have the characteristic of a zero coupon bond. In addition to providing more flexibility in managing interest rate risk, these will also help in addressing the asset-liability mismatch problem of banks.

From the inception of the auction system, multiple price auction format (under which individual bidders have to pay according to respective prices quoted by them) has been used for auction of dated securities. With the experience of uniform price (same price for all) auctions in the issuance of 91-day Treasury Bills, the uniform price auction format has been extended to the auctions of Government of India dated securities, on a selective and experimental basis.

Recently, RBI had introduced the Non-Competitive Bidding scheme in January 2002, to encourage retail participation in primary auctions, in particular by the mid-segment investors like Urban Co-operative Banks, NBFCs, Trusts, etc., in the primary market of Government securities. The scheme provides for allocation of up to 5 per cent of the notified amount at the weighted average rate of accepted bids. Operationalisation of the Scheme for screen-based order-driven trading on the stock exchanges to facilitate retailing is under active consideration. It is expected that the scheme will help to widen the investor base.