Context: Recently, the Reserve Bank of India (RBI) has announced a 60% increase in the Ways and Means Advances (WMA) limit of state governments over and above the level as on March 31, with a view to enabling them “to undertake COVID-19 containment and mitigation efforts” and “to better plan their market borrowings”.
Key Points

• The states welcomed the RBI move to allow 60% higher borrowing under Ways and Means Advances (WMA), but said it is a temporary relief and will have only a marginal impact upon the fiscal crisis the states are facing.
• They are saying that they can not go long for ways and means and have to slash their expenditure to a large extent because they do not have many avenues left for revenue augmentation.
• They said banks are not willing to lend for the long term large amounts of money because of their liquidity preference.
• They demanded from the Central government to raise the fiscal borrowing limits of states currently capped at 3% of the GSDP (Gross State Domestic Product) under the Fiscal Responsibility and Budget Management (FRBM) Act.
• The Centre can invoke Section 5(3) of Fiscal Responsibility and Budget Management Act, 2003 which allows the RBI to “subscribe to the primary issues of Central Government securities” under very specific grounds.
• Those cover, among other things, “act of war” and “national calamity”.
• The RBI can also undertake increased secondary market purchases and sales of Central as well as state government securities.

About Ways and Means Advances

• They are temporary loan facilities provided by RBI to the government to enable it to meet temporary mismatches between revenue and expenditure.
• The government makes an interest payment to the central bank when it borrows money.
• The rate of interest is the same as the repo rate, while the tenure is three months.
• The limits for WMA are mutually decided by the RBI and the Government of India.
• They aren’t a source of finance per se. 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”.

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. 
• The limit for the second half of the last fiscal (October-March) was Rs 35,000 crore. 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. 
• The higher limit will be valid till September 30. The central bank, on April 7, also extended the period for which a state can be in overdraft from 14 to 21 consecutive working days, and from 36 to 50 working days during a quarter.

WMA scheme for the State Governments  

Under the WMA scheme for the State Governments, there are two types of WMA:  

• Special Drawing Facility or SDF (Special WMA in the past) and Normal WMA.  
• SDF is extended against the collateral (mortgaging) of the government securities held by the State Government.  
• Interest rate for SDF is 1% less than the repo rate.  
• If the state is not finding enough money, it can opt for the normal WMA which has a higher interest rate.  
• The amount of loans under normal WMA are based on three-year average of actual revenue and capital expenditure of the state.  

Treasury Bills (T-bills) :  

• Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 days, 182 days and 364 days.  
• Treasury bills are zero coupon securities and pay no interest.  
• Instead, they are issued at a discount and redeemed at the face value at maturity.  
• For example, a 91 days Treasury bill of ?100/- (face value) may be issued at say ? 98.20, that is, at a discount of say, ?1.80 and would be redeemed at the face value of ?100/-.  

Cash Management Bills (CMBs)  

• Cash Management Bills (CMBs) are short-term instruments introduced to meet the temporary mismatches in the cash flow of the Government of India.  
• The CMBs have the generic character of T-bills but are issued for maturities less than 91 days.  

Other Provisions  

• At some point, the Centre, at least, might have to invoke Section 5(3) of its Fiscal Responsibility and Budget Management Act, 2003.  
• That overriding provision in the Act – which otherwise bars the RBI from lending to the government, except for meeting temporary cash flow mismatches – allows the central bank to “subscribe to the primary issues of Central Government securities” under very specified grounds.  
• Those cover, among other things, “act of war” and “national calamity”.  
• 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. 

About Fiscal Responsibility and Budget Management (FRBM) Act, 2003

• The FRBM Act was enacted by the Parliament in 2003 to institutionalize fiscal discipline, reduce fiscal deficit, and improve macroeconomic management.
• Fiscal deficit is the total expenditure excluding revenue receipts, loan recoveries and receipts from disinvestment etc. It is a measure of the government borrowing in a year.
• The Act applies only to the central government and the States have to enact suitable legislation to adopt the rules under the FRBM Act.
• Effective revenue deficit excludes capital expenditure from revenue deficit and thus provides space to the government to spend on formation of capital assets.
• A debt to GDP ratio of 60% should be targeted with a 40% limit for the centre and 20% limit for the states;
• Creation of an autonomous Fiscal Council;
• An “escape clause”, i.e. the government can deviate from the targets in case of a national calamity, national security, etc.
• The government used an escape route in its Budget for FY20, by taking a deviation of 0.5 percentage points from the fiscal deficit targets set out earlier.
• During the presentation of the Budget 2020-21, the government fixed the fiscal deficit target for the year 2020-21 at 3.5% of the GDP.