Ways and Means Advances to State Governments-An Indian experience

Dasarathi MishraManaging Partner

Abhyutthana Financial Learning Centre LLP

Reserve Bank of India (RBI) is the debtmanager for 29 State Governments and theUnion Territory of Puducherry as also thebanker to the State Governments exceptGovernment of Sikkim.

This is in terms of their agreement with RBI under Section 21 A of the Reserve Bank of India Act 1934.

Under Sec 21 A of the RBI Act, the Reserve Bank shall undertake all money, remittance, exchange and banking transactions in India, including in particular, the deposit, free of interest, of all its cash balances with the Bank;

Management of the public debt of, and the issue of any new loans by, that State.

RBI makes advances to State Governmentsto tide over mismatches in the cash flows oftheir receipts and payments. Such advancesare termed as Ways and Means Advances(WMA).

WMA : Repayable in each case not later than

three months from the date of the making of the advance.

Governed by Section 17 (5) of the RBI Act.

The Reserve Bank has been extending such advances to State Governments since 1937.

Under this provision, the maximum amountof WMA by the Reserve Bank and the interestcharged thereon are regulated by agreementswith the State Governments

Based on he recommendations of variouscommittees Groups constituted

Various committees appointed by RBI reviewed the WMA scheme.

BPR Vithal Committee (1998)

C. Ramachandran Committee (2003)

Bezbaruah committee ( 2005)

Sumit Bose Committee ( 2015)

There are two types of Ways and Means Advances, viz.,

(i) Normal WMA or clean advance, which was introduced in 1937;and

(ii) Special WMA instituted in 1953, which issecured advance provided against thecollateral of GoI securities

Special Drawing Facility

As requested by the State Governments in theSFS conference held in May 2013, thenomenclature of Special WMA was changed toSpecial Drawing Facilities (SDF) since June 23,2014 by amending the respective agreementwith State Governments.

An overdraft (OD) facility is also provided to the

State Governments whenever RBI credit to theState Government exceeds the SDF and WMAlimits.

The maximum amount of such advances by the Reserve Bank and the interest charged thereon are, however, not specified in the RBI Act.

Are regulated by voluntary agreements with the State Governments as also based on the recommendations of various Committees.

In 1953, the WMA limits were fixed at twice the revised minimum balance.

The WMA limits were increased to 12 times of the minimum balances in 1967 and further

to 168 times in 1996.

Since 1999, the limits are being fixed basedon the recommendations of the AdvisoryCommittees set up periodically by RBI.

The Committee recommended that the baseshould be taken as the average of the latestthree years’ total expenditure (actuals)excluding repayments and adjusted foronetime ad-hoc expenditures and lotteryexpenditures.

It was decided to increase the WMA limits for the State Governments by 50 per cent of then

existing limit of `10,240 crore to `15,360 crore with effect from November 11, 2013.

As per Bez Baruah Formula Limit since Nov

11, 2013

Odisha 300 crore 450 crore

Taking into account the significant increasein fiscal size of states, as also to providecushion to keep pace with fiscaldevelopments, the Committee felt that thereis a need for upward revision of WMA limits.

The Committee considered various scenarios for revision of WMA

viz. GFD, GSDP, Total expenditure, total revenue

Total expenditure net of lotteries for three years average ( 2011-12 to 2013-14).

WMA formula based on total expenditure

reflected somewhat equal distribution of limit to all States according to their fiscal size.

Committee recommends that WMA limit willbe set on the basis of total expenditureadjusted for lottery expenditure untilcommencement of fiscal year 2017-18.

RBI, a unique central bank, has agreementswith the sub-national Governments to act asbanker.

The revised WMA quantum works out to`32,225 crore for all the States.

Once WMA limits are prescribed, States have the full freedom to access it and it becomes an autonomous component of liquidity over which the central bank has least control.

Quantum increase in WMA limit of around 15per cent was considered appropriate keepingin view the similar growth in expenditurebetween 2005-06 and 2013-14.

The revised WMA quantum works out to`32,225 crore for all the States.

The increase in State wise WMA limits is in the range of 70.6 per cent to 132 per cent

Since March 1999, Special WMA limits of theState Governments have been linkedexclusively to their holdings of GoI datedsecurities and Treasury Bills, adjusted formargin.

A uniform hair cut margin of five per cent isbeing applied on the market value of thesecurities for determining the operating limitof the SDF.

If states avail of SDF against the collateral ofGovt dated securities and Auction treasuryBills, they will not be allowed to invest in anyof such securities for next 90 days.

OD Limit : 100 per cent of the WMA limit

Limit permitted up to 14 days.

If the OD exceeds this limit continuously for 5consecutive working days for the first time in afinancial year, the State will be advised by the RBIto bring down the OD level.

If such irregularity persists on a second orsubsequent occasion in the financial year, the RBIwill stop payments notwithstanding the provisionof permitting OD upto 14 days.

In a quarter, the OD availed should not exceed 36 days irrespective of 14 days & 5 days rules.

The Bezbaruah Committee decided not to modify the existing time limits for OD at that

stage.

Ramachandran Committee observed thatgreater resort to OD is a clear indication offiscal imbalance and unless regulated in time,it would lead to a situation where thecorrections would become costly and difficult.

However, the total number of days that aState can remain in OD has been extended to14 consecutive working days by theCommittee.

1. SDF – Repo rate minus 1%

2. WMA : Up to 90 days Repo rate

3. WMA : Above 90 days Repo rate plus 1%

4. OD : Availment equal to WMA Limit Repo rate plus 2%

5. OD : Availment is more than WMA Limit Repo rate plus 5

Since 2008-09,only few States have been regularly availing SDF/ WMA,

States availing OD increased from 3 in 2008-09 to 6 in 2011-12 and further to 10 in 2014-15.

Average peak utilisation of OD increased from ₹ 199 crore in 2013-14 to ₹ 449 crore in 2014-15

Since 2011, the annual average availment of SDF/

WMA/ OD by the State Governments hasincreased year after year due to structural issuesfaced by some of the fiscally stressed States.

Number of States availing WMA/OD as at end-March increased from 3 in 2011 to 6 in 2015,which reveal that some part of these States’ GFDhas been financed by borrowings from the RBIthrough WMA.

Transfers from the GoI in the form of grants-in-aid and share in central taxes constitutedabout 40 per cent of the revenue receipts ofall the States during 2009-10 to 2013-14and in the case of special category States, itconstituted about 75 per cent during 2013-14.

Transfers from the Centre are also animportant factor that determines the cash

flows of the State Governments

It is imperative that State Governmentscontinue to limit their recourse to WMA tominimise the spillover effects to the RBI’smonetary policy operations for the purpose ofensuring monetary stability.

The 14th Finance commissionrecommendations on devolution, the postdevolution Revenue Deficit grants to 11states are expected to eliminate RevenueDeficit.

The committee said that the limits would continue for two years

The Committee recommended that a reviewbe undertaken by RBI in 2017-18, when finalexpenditure numbers for FY 2015-16 will beavailable.