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Against this background, the paper outlines the cash management framework of the Government of India and makes an assessment of effectiveness of the government debt management strategy in managing volatility in its cash balances. The rest of the paper is structured as follows: Section II presents basic elements of the cash management framework while Section III provides an interaction between cash management and other policy areas. Section IV discusses the cash management framework in India and Section V provides an assessment of cash management in terms of trends, sources of volatility and the role of debt management.

Section VI gives concluding observations and policy implications. For effective cash management, it is essential that these inflows and outflows are aggregated on a daily basis and a system is developed to align inflows and outflows to the extent possible. By doing so, borrowings requirements for meeting temporary mismatches in inflows and outflows can be minimised. To meet these requirements, a cash management framework needs to have following essential features. The need for a single account where all government transactions are aggregated is probably the foremost requirement of effective cash management Williams A government normally has multiple sub-accounts which belong to various agencies.

These may be held with different banks. A single treasury account requires that transactions under all the sub-accounts are aggregated in a centralised single account, which is normally held with the central bank of the country. The centralised account is normally held in domestic currency and foreign currency is obtained from the central bank, whenever needed.

However, a government may maintain a separate foreign currency sub-account within the centralised account.

Another basic requirement for effective cash management is reliable cash flow projections on a daily, weekly and monthly basis. The required periodicity and horizon of cash flow projections depend on the availability of cash management instruments and the development of the money market in the economy. Accuracy in cash flow projections enables effective investment of surplus cash and precision in borrowing schedule in case of a deficit. Availability of information about each spending agency and revenue collection department is crucial for precise cash flow projections.

Cash flow projections can be done at each sub-account level and then the aggregated information can be used to arrive at the cash position of the central account. The central account section takes decisions on short-term borrowings and investment of surplus cash. In some countries like Australia each spending agency is also responsible for internal cash management.

The end-of-day balances are swept into the treasury single account at the Reserve Bank of Australia. Thus, this system has a two-tier cash management: first at the level of spending agencies and second as a consolidated cash management system at the federal level.

Thus, cash flow projections differ in the two systems Lienert Centralised cash flow projection depends more on statistical methods while decentralised cash flow projections mainly depend on non-statistical methods such as information available with spending agencies and revenue collection departments. Effective cash flow projections require a comprehensive framework whereby all the inflows and outflows are discretely identified. It may be useful to identify debt and non-debt cash flows separately as debt flows can also be used as an instrument of cash management. The cash management system requires a comprehensive enumeration and identification of each cash flow.

The budget provides revenue and expenditure estimates for the full year. Daily, weekly or quarterly cash flow projections need to be consistent with the overall revenue and expenditure estimates provided in the budget.

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Sometimes the revenue and expenditure estimates provided in the budget may not be a simple aggregation of daily cash flows as daily cash flows may include some extra-budgetary transactions. Apart from facilitating cash management, such consistency also enables a government to take corrective measures during the course of the year if it is realised that there could be deviations from budgetary revenue and expenditure targets.

Cash management is an integral part of debt management which allows a government to raise its long-term borrowings in a planned manner; this also facilitates efficient management of investors. Cash flows of financial institutions are normally distributed across the year. Hence, an evenly distributed market borrowings programme across the year, which is broadly in sync with the cash inflows of investors, is likely to be cost effective for a government.

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Though such a programme may promote the objective of cost minimisation in the medium and long-term, it may not be consistent with intra-year cash flow. The central bank, therefore, needs to monitor the cash flows of the government while fine-tuning its liquidity management operations. Globally, capital accounts have been increasingly liberalised to allow for capital flows in equity as well as debt markets. Near zero rate policies followed in advanced economies in the post-crisis period encouraged even more capital inflows in debt markets in emerging market economies.

While this trend enabled lowering borrowing costs in these economies, their capital accounts have become more vulnerable and sensitive to interest rate movements. Ahmed and Zlate conclude that while the growth differential was the major factor in determining capital inflows to emerging market economies before the crisis, policy rate differential emerged as an equally important factor influencing such flows post crisis. Short-term interest rates in most countries depend on policy rates which are decided by the respective central banks.

The usual practice is to set a band for policy rates and the provision of liquidity by the central banks at these rates ensures that overnight rates remain within the policy rate band. Overnight rates also play a crucial role in shaping short-term interest rates on the extent to which market players can roll over their borrowings from the central bank. This may have significant implications for capital flows and the exchange rate, particularly when the short-term debt market is open to foreign capital. The budget also provides estimates of the net amount to be borrowed under different sources of financing to fill the gap between revenue and expenditure represented by gross fiscal deficit GFD.

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Receipts and expenditures of some public enterprises are taken into account on a net basis in calculating GFD, while for cash management purposes gross receipts and expenditures are the relevant variables. The receipts of the government consist of tax revenue, non-tax revenue, disinvestment proceeds and borrowings.

Tax revenue mainly comprises of direct and indirect taxes. Cash flows of direct taxes depend on the stipulated rules for making tax payments. Barring the tax deducted at source which is credited to the government account on a monthly basis, direct tax payments are made on a quarterly basis in June, September, December and March.

The final payments are made at the end of the financial year, usually during the last week of the year. Regarding indirect taxes, payments by taxpayers are made on a monthly basis. In the case of goods removed during March, the duty is to be paid by the 31st day of March. Regarding service tax, the Point of Taxation Rules stipulate that the date of payment shall be the earlier of the dates on which the payment is entered in the books of accounts or is credited to the bank account of the person liable to pay tax.

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Customs duties are normally paid at the time that goods are imported in the country, which may not follow a predictable pattern. Disinvestment by the government is planned in view of market conditions, hence cash flows related to these proceeds may be predictable only to the extent that the disinvestment plan is known. Non-market borrowings include receipts under the public account such as small savings and provident fund, external assistance, investment in day intermediate treasury bills by state governments and other items.

Market borrowings for cash management purposes can be defined to include dated securities, treasury bills and cash management bills.


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Market borrowings, particularly treasury bills and cash management bills, are planned in view of the cash flow pattern of the government. Non-market borrowings may not follow a predictable pattern and may influence cash flows significantly. Apart from this, the government also receives ways and means advances from the Reserve Bank, which are basically provided to manage temporary mismatches in cash flows. Disbursements of the government consist of expenditures under various heads. For cash management purposes, it is useful to classify these expenditures on the basis of predictability of cash flows.

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