18/04/2020 - Indian Economy

KEY POINTS

The Reserve Bank of India (RBI), announced a 60% increase in the Ways and Means Advances (WMA) limit of state governments over and above the, with a view to enabling them “to undertake COVID-19 containment and mitigation efforts” and “to better plan their market borrowings”.

Ways and Means Advances (WMA)

·         It is a facility for both the Centre and states to borrow from the RBI. These borrowings are meant purely to help them to tide over temporary mismatches in cash flows of their receipts and expenditures.

·         Section 17(5) of the RBI Act, 1934 authorises the central bank to lend to the Centre and state governments subject to their being repayable “not later than three months from the date of the making of the advance”.

·         The interest rate on WMA is the RBI’s repo rate, which is basically the rate at which it lends short-term money to banks. That rate is currently 4.4%.

Why have all these relaxations been made?

·         Government finances are in a mess today. The lockdown has resulted in revenues drying up, and it is the states that are actually feeling the heat. With economic activity at a near standstill, there is hardly any money coming in from GST, petroleum products, liquor, motor vehicles, stamp duty or registration fee.

So, will the increase in the WMA limits help?

·         The WMA window, as already pointed out, is intended only to tide over temporary mismatches in cash flow of receipts and payments. Given the likelihood of total government borrowings crossing Rs 20 lakh crore – a conservative underestimate – a WMA limit of Rs 120,000 crore for the Centre and Rs 51,560 crore for states may prove grossly insufficient.

·         Apart from monetisation of deficits – which is what this provision effectively entails – the RBI may, in the coming day, also have to undertake increased secondary market purchases and sales of Central as well as state government securities.

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Government of India imposed nation wide lockdown to tackle Covid-19 pandemic.This situation resulted in decreased Governmental Revenue and increased Governmental expenditure.Reserve Bank of India came to rescue both state and central governments from debt traps in the form of Ways and means advances mechanism.

WAYS AND MEANS ADVANCES :

1.As per section 17(5) of the RBI Act,1934,Reserve bank of India can lend to the government temporarily to meet the mismatches in revenue and payments and this form of lending is known as Ways and advances mechanism.

2.The amount of loan for central government under WMA is mutually decided by the RBI and the Government of India.In the case of state government/union territories,RBI follows the recommendations of an advisory committee set up for this purpose.

3.As per WMA,RBI issues loans on existing repo rate as interest rate.Governments who took loans from RBI using this mechanism has to repay the loans within 90 days.Otherwise it results in overdraft where the rate of interest increases more than repo rate by 200 basis points.

4.WMA facility cannot be used by the governments for meeting their regular finances.

HOW WMA MECHANISM  HELPS GOVERNMENT DURING COVID-19 PANDEMIC :  

Health and Welfare point of view :

WMA helps government to finance expenditure which occurs due to the implementation of various welfare schemes like PMGKY,PM-KISAN etc.Also it helps for financing health equipment like PPEs,masks etc for fighting against the pandemic.

Economic point of view :

Since the government has fallen short of revenue and increase in public expenditure,Government borrowings have risen enormously.Investors are not coming forward to invest in government securities led to the fall in demand for G-Secs.Due to fall in demand,the yields have risen which made difficult for the government to borrow under bond market.This made the RBI to step in for the rescue of government in the form of Ways and means advances.Government can get loans at lower rate of interest i.e. repo rate which is lower when compared to the interest rates in the bond market.Government is using these funds for welfare of the people which do not result in building capital.So,less interest rates are preferred.Even RBI has increased WMA limit 60% more than of its its previous WMA limit and also increased the overdraft limit from 14 to 21 consecutive days which is a huge relief to both the central and state governments.

However,it is estimated that government borrowings are more than WMA limits which pushes centre to invoke section 5(3) of FRBM Act,2003.

Thus WMA mechanism is only a kind of temporary relief for the government fighting against a big enemy called Covid-19.

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