Ways and Means Advances

Why in News?

The Reserve Bank of India (RBI) increased the Ways and Means Advances (WMA) limit of state governments.

Why the WMA limit was increased?

• On 17^th April 2020, the RBI announced a 60% increase in the WMA limit of the state governments.
• This increase is over the level as on March 31, 2020.
• It would enable the state governments to undertake effective COVID-19 containment and mitigation efforts.
• It would also enable them to better plan their market borrowings.

What is WMA?

• Section 17(5) of the RBI Act, 1934 authorises the RBI to lend to the Centre and state governments as WMA.
• It can lend them only if they can repay it within 3 months from the date of making the advance.
• These borrowings may help the governments to tide over temporary mismatches in cash flows of their receipts and expenditures.

How much does the RBI charge on these advances?

• The interest rate on WMA is the RBI’s repo rate, which is currently 4.4%
• [Repo rate is a rate at which the RBI lends short-term money to banks.]
• But the governments can draw amounts in excess of their WMA limits.
• The interest on such overdraft is 2 percentage points above the repo rate, which now works out to 6.4%.
• Further, no state can run an overdraft with the RBI for more than a certain period.

What are the existing WMA limits and overdraft conditions?

• For the Centre - The WMA limit for the period of April-September, 2020-21 has been fixed at Rs 120,000 crore.
• This is 60% higher than the limit for the same period of 2019-20.
• For the states - After a 60% increase, the aggregate WMA limit is at Rs 51,560 crore.
• The higher limit will be valid until September 30.

Why all these relaxations been made?

• Due to lockdown, the revenues are collapsing and uncertain.
• The expenditures for combating the novel coronavirus are mounting.
• Therefore, the states are facing an unprecedented cash crunch.
• Most of the states are slashing expenditures of other departments in order to meet COVID-19 exigencies.
• However, these measures have not addressed the underlying problem of liquidity and cash flow mismatches.

So, will the increase in the WMA limits help?

• There is a likelihood of the total government borrowings crossing Rs 20 lakh crore.
• So a WMA limit of Rs 120,000 crore for the Centre and Rs 51,560 crore for states may prove grossly insufficient.

What could be done further?

• Centre - The Centre may invoke Section 5(3) of its Fiscal Responsibility & Budget Management Act, 2003.
• This would allow the RBI to subscribe to the primary issues of Central Government securities under very specified grounds.
• Those cover, among other things, “act of war” and “national calamity”.
• RBI - It may undertake increased secondary market purchases and sales of central and state government securities.

Source: The Indian Express