RBI announced a 60% increase in the Ways and Means Advances (WMA) limit of state governments

  • What exactly is Ways and Means Advances (WMA)?
  • How much does the RBI charge on these advances?
  • What are the existing WMA limits and overdraft conditions?
  • What is the need for Ways and Means Advances for states?

UPSC can list these Questions under

GS paper 3 (Indian Economy)

What is the context about?

  • 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 level as on March 31.
  • It has been given “to undertake COVID-19 containment and mitigation efforts” and “to better plan their market borrowings”.

What exactly is 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.
  • Centre or State govts.  must repay “not later than three months from the date of the making of the advance”.

How much does the RBI charge on these advances?

  • 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%.
  • The governments are, however, allowed to 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 during the first half of 2020-21 (April-September) has been fixed at Rs 120,000 crore. This is 60% higher than the Rs 75,000 crore limit for the same period of 2019-20.
  • For the states, the aggregate WMA limit was Rs 32,225 crore till March 31, 2020.
  • On April 1, the RBI announced a 30% hike in this limit, which has now been enhanced to 60%, taking it to Rs 51,560 crore.

What is the need for Ways and Means Advances for states?

  • The reason is simple. 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.

q

qAt the same time, the states are also incurring the bulk of the on-the-ground expenditures for combating the novel coronavirus.

So, will the increase in the WMA limits help?

qThe WMA window, as already pointed out, is intended only to tide over temporary mismatches in cash flow of receipts and payments.

q

qGiven 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.