Everything of Ways and Means Advance UPSC – An Insight

What is Ways and Means Advances?

Ways and Means Advances (WMAs) is a facility that allows different arms of the government and centres to borrow from the Reserve Bank of India. These are only administered to finance temporary budget deficits. Section 17(5) of the RBI Act, 1934 explicitly states that WMAs can be availed by state or central governments on the condition that it has to be repaid within three months and are often issued at the repo rate.

Why Is It in News?

The Reserve Bank of India (RBI) stated a 60% sharp rise in state governments’ Ways and Means Advances (WMA) ceiling, allowing them to “initiate COVID-19 management and abatement actions” and “better manage their external borrowings”.

• The impact of Covid-19 has exacerbated the cash flow woes of the States, and it is causing great financial stress for them. State governments are grappling with multiple challenges such as administering tests, carrying out screenings, and providing food security to needy populations.
• The expanded ways and means advances limit on borrowing short-term funds from the RBI will provide a much-needed financial cushion. This will be helpful when states are unsure how much revenue they may collect in months ahead due to an economic crisis affecting their overall financial situation.

When was the Ways and Means Advances introduced?

WMA is a mechanism that aims to boost cashless liquidity to the states. The Reserve Bank of India gives it on behalf of the government. The borrowing done via WMA is usually repaid within three months. The WMA scheme was implemented in 1997.

Why was the WMA Scheme introduced?

The WMA scheme was formulated to overcome discrepancies in the government’s revenues and expenditures.

What is the State-Wise WMA limit?

The Reserve Bank of India (RBI) and the Central Government, the WMA limits are mutually agreed upon, updated on a semi-annual basis.

The sum of funds obtained through WMA is limited per state. These restrictions are determined by various criteria, including overall spending, revenue shortfall, and fiscal situation. WMA parameters are reviewed regularly, and prior implementation rates are considered when calculating new limits.

The WMA Scheme For Central Government

The Central Government’s WMA scheme was introduced by the Reserve Bank of India on 1 April 1997 and replaced ad-hoc Treasury Bills to cover the temporary finance requirements of the central gov. Under the WMA scheme, the government can request RBI for money when they need it urgently. Like other schemes and channels of borrowing, WMA is also an instrument of borrowing that reduces the interest burden on cash balances with the RBI. The WMA is to be retired after it has been outstanding for 90 days.

The WMA Scheme for State Government

States have two ways to obtain additional resources under the Ways and Means Advances Scheme. The first is through normal Ways and Means Advances (WMA), the other is through a special drawing facility (SDF). A Special WMA provides financing in exchange for the state’s holdings of government assets. When a special fund is depleted, the state is entitled to normal Ways and Means Advances.

The main difference between these two repayments of loans lies in their respective interest rates. The interest rate is one percentage point less than what’s known as the repo rate on an SDF. Under normal WMA, the proportion of loans is based on a three-year average of the state’s real revenue and capital outlay.

Significance of WMA scheme

State governments that were already facing financial problems with the introduction of Covid-19 are now even more adversely affected. Understandably, there is an impact on their revenue streams with the worsening economic climate, which makes it near impossible to make ends meet at the moment.

• When tax receipts are unpredictable owing to adverse economic conditions, the increased WMA limit allows states to borrow short-term cash from the RBI, providing a financial cushion.
• The increased override limit of WMA enables states to borrow money from RBI on a short-term basis if the states are facing a budget deficit. WMA funding is cheaper than borrowings from markets or other schemes because it has a longer maturity date, and its interest rate is also lower.