WMA is a mechanism designed to increase cashless liquidity in states. The Reserve Bank of India (RBI) provides short-term loan facilities to both the central and state governments. Ways and Means Advances are a type of financing option. These are distributed by the RBI on behalf of the government. The WMA scheme came into effect in 1997 and was created to address the disparities between the government's earnings and expenditures. WMA borrowing is typically repaid within three months.
The WMA is typically used when the government's cash balances are low and it needs to borrow money to meet its expenses. The government can request a WMA from the RBI, which will then provide the necessary funds. The WMA is typically repaid within a few weeks or months, depending on the government's cash flow situation.
Did You Know? The Reserve Bank of India (RBI) reduced the Ways and Means Advances (WMA) for States and Union Territories (UTs) to ₹47,010 crores from ₹51,560 crores. The higher WMA was in effect until March 31, 2022.
What are Ways and Means Advances?
The Indian economy is distinguished by breakthroughs in methods and means. WMAs are short-term advances made by the RBI to the state governments as well as the union government to cover any shortfalls in payments and receipts.
- It was implemented in 1997 and is governed by section 17(5) of the RBI Act of 1934.
- It was enacted to replace the four-decade-old system of ad hoc Treasury bills used to finance the central government deficit.
Types of Ways and Means Advances
On WMA withdrawals, states and the centre pay interest linked to the repo rate. If immediate cash is required, the government can obtain it from the RBI. But the amount must be repaid within 90 days.
The current repo rate is used to calculate interest. If the WMA exceeds this period of 90 days, it is considered an overdraft. The interest rate on overdrafts is calculated as 2 per cent more than the repo rate.
WMA is not covered by the FRBM (Fiscal Responsibility and Budget Management Act) because they are paid within the fiscal year.
Ways and Means Advances are classified into two types: normal and special WMA.
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Normal WMAs
Normal WMAs are unsecured advances, whereas secured WMAs are advances granted against the promise of the Government of India dated securities. The number of loans made under the normal WMA type is based on an average of the state's three-year actual revenue and capital expenditure.
Special WMA
Also known as Special Drawing Rights (SDF), special WMAs are issued in exchange for government securities held by the states.
- For special WMA, the state's operating limit is subject to its securities holdings of the Central Government dated to the sanctioned limit.
- The SDF interest rate is one percentage point lower than the repo rate.
- When the state reaches the limit, it returns to normal WMA.
What is the WMA Limit for each State?
The Reserve Bank of India (RBI) and the Central Government jointly agree on WMA limitations, which are modified semi-annually. The amount of money available through WMA is restricted to one per state. These constraints are determined by a number of factors, including overall spending, revenue shortfalls, and the fiscal situation. WMA parameters are evaluated on a regular basis, and historical implementation rates are taken into account when computing revised restrictions.
What is the WMA Limit for the Central Government?
The WMA limit for the Central Government for the first half of the fiscal year 2020-21 (April to September) has been fixed at ₹120,000 crores. This is a 60% increase above the previous maximum of ₹75,000 crore rupees for the same period in 2019-20. For the second half of the previous fiscal year, which ran from October to March, the maximum was fixed at ₹35,000 crores.
The Reserve Bank of India has fixed the Ways and Mean Advances (WMA) limit for H2 of FY 2022-23 at ₹1, 50,000 crores. The WMA is a short-term loan provided by the RBI to the Government of India to meet its temporary cash flow mismatches. The increase in the WMA limit is intended to provide additional financial support to the government as it navigates the challenges posed by the pandemic.
The Central Government WMA Scheme
The Reserve Bank of India introduced the Central Government's WMA scheme on 1 April 1997, replacing ad hoc Treasury Bills to cover the central government's temporary finance requirements. The WMA scheme allows the government to request money from the RBI when it is desperately in need of it. WMA, like other schemes and channels of borrowing, is a borrowing instrument that reduces the interest burden on cash balances with the RBI. WMAs are retired after 90 days of being outstanding.
The WMA Scheme for State Government
State governments have two options for obtaining additional resources through the Ways and Means Advances Scheme. The first is via standard Ways and Means Advances (WMA), while the second is via a special drawing facility (SDF). A Special WMA exchanges financing for the state's holdings of government assets. When a special fund runs out of money, the state is entitled to regular Ways and Means Advances.
The biggest distinction between these two loan repayment options is their interest rates. The interest rate is one percentage point lower than the repo rate on an SDF. The proportion of loans under normal WMA is based on a three-year average of the state's real revenue and capital outlay.
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Significance of the WMA Scheme
Governments face economic strain at times, particularly in cases such as the Covid-19 outbreak. Ways and means advances is a scheme that relieves the government's financial stress during difficult times.
- Several states needed immediate and large financial resources to respond to these challenges.
- When tax collections are uncertain due to unfavourable economic conditions, the enhanced WMA limit allows states to borrow short-term funds from the RBI, providing a financial buffer.
- The increased WMA override limit allows states to borrow money from the RBI on a short-term basis if they have a budget deficit.
- WMA funding is less expensive than borrowing from the markets or other schemes because it has a longer maturity date and a lower interest rate.
- WMA can be used in place of issuing state development loans, raising long-term funds from the markets, or borrowing from financial institutions for short-term funding.
Concerns about the Ways and Means Advances Plan
Some governments expressed worry that doubling WMA limits would be insufficient and wanted a nine-month embargo on loans and interest. A few states have expressed concern about the short time frame for repayment (90 days).
How Does the Central Government Meet its Short-Term Cash Requirements?
The government's fund deficit or cash-flow mismatches are largely managed through the:
- Treasury Bills
- Short-term loans from the RBI known as Ways and Means Advances (WMAs)
- Cash Management Bills
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Importance of Ways and Means Advances
Ways and Means advances are really beneficial to the government sector in the following ways:
- They provide the necessary funds for cash-strapped governments.
- The pandemic exacerbated the state's financial challenges due to the need for various facilities such as medical testing, screening, and providing income and food security to the needy.
- These can be used as an alternative method of raising long-term funds from the market.
- WMA can also help with the issue of state government securities and short-term borrowing from various financial institutions.
- It is a less expensive source of funding than market borrowing.
Conclusion
The Reserve Bank of India's (RBI) decision to increase the Ways and Means Advances (WMA) limit for borrowing short-term funds is expected to provide a financial cushion for states in India during these uncertain times. The expanded WMA limit is intended to help states manage their cash flow and meet their financial obligations in the face of the economic crisis caused by the COVID-19 pandemic. Ways and Means advances are not intended to provide long-term financial relief. It gives leverage for both the centre and the states to borrow from the RBI, thereby assisting the government in meeting its receipts and payments.
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