As FY23 ended, an RBI release said that “in consultation with the (Central) Government, the limit for Ways and Means Advances (WMA) for the first half of the financial year 2023-24 (April 2023 to September 2023) will be ₹1,50,000 crore.”

This was a routine, innocuous announcement issued twice a year on a matter that at first glance appears to be a closed deal between two parties — the RBI and the government. But the arbitrariness and non-transparency on how the WMA is fixed raises important questions.

Further, WMA has morphed into a peculiar tool that allows the Centre to fix arbitrary limits while State governments are made to follow a rule-based approach.

Short-term credit

WMA is short-term credit (up to three months) provided by the RBI to both Central and State governments to bridge a temporary mismatch in their cash flows, as laid down in terms of Section 17(5) of the RBI Act, 1934. As such, WMA is not a resource to finance government expenditure.

WMA to the Centre was re-introduced on April 1, 1997 after a period of four decades when the system of ad hoc treasury bills. was abolished.

Currently, WMA limits are fixed at ₹1,50,000 crore for the first half of FY24. The interest rate on WMA is repo rate i.e., 6.5 per cent. When the WMA limit is crossed, the Central government enters into an overdraft (OD) which has to be cleared within 10 consecutive working days. The interest rate on OD is currently the repo rate plus two per cent.

For State governments, WMA (since 1999) has been formula-based with a committee approach. In other words, periodically an expert committee fixes the WMA limits and overdraft regulations. Contrary to this, the WMA to the Central government is arbitrarily fixed in a non-transparent manner by the Centre and the RBI. This raises questions on the integrity of the interface between the monetary authority and the fiscal authority.

As the evidence reveals, there is no defined process in the fixation of WMA limits. Sometimes it is quarterly, and at other times it is half-yearly.

For example, in 2017-18, WMA limits were fixed half yearly (H1: ₹60,000 crore and H2: ₹25,000 crore), a RBI press release said.

However, the RBI Annual Report stated that the WMA limits were fixed quarterly and half yearly in 2017-18 (Q1: ₹60,000 crore, Q2: ₹70,000 crore and H2: ₹25,000 crore). Similarly, there were quarterly and half yearly limits for 2018-19 (Q1: ₹60,000 crore, Q2: ₹70,000 crore and H2: ₹35,000 crore). However, this was reversed in 2019-20 with half-yearly estimates.

This essentially reflects the government’s poor cash management. The Centre’s Annual Financial Statement corroborates this. In 2017-18, 2018-19 and 2019-20, the WMA receipt and expenditure limits in the actual figure exceeded sharply from the Budget Estimate.

To elaborate, for 2017-18, receipts for WMA (actuals) were ₹4,80,042 crore as against Budget Estimates of ₹3,00,000 crore. Similarly, in 2018-19, receipts for WMA actuals was ₹9,55,243 crore as against a Budget Estimate of ₹5,00,000 crore. Furthermore, in 2019-20, receipts for WMA (actuals) were ₹11,79,582 crore as against Budget Estimates of ₹5,00,000 crore.

Arbitrary process

In addition to this, the arbitrariness of this process is reflected in the limits fixed currently at ₹1,50,000 crore during H1 of FY24 as against ₹1,20,000 crore during the pandemic year of 2020-21. Furthermore, there is no rationale in justifying the increase of WMA limits. This development not only reflects the government’s poor cash management but also questions the Budget integrity.

This is a concern and needs to be addressed. We propose a model for fixing WMA limits which is formula based as it is for State governments.

For this model, the actual data for the past three years of actual budgetary transactions in receipts and expenditure (excluding 2020-21 and 2021-22 as these two years are pandemic years) is considered. Thus, the years considered are 2017-18, 2018-19 and 2019-20. The first option takes total expenditure (revenue and capital) and the second takes total expenditure minus revenue deficit as WMA should not be used as a resource to meet the revenue deficit.

In our model scheme, the total WMA limits worked out in 2022-23 to ₹2,00,000 crore (H1: ₹1,50,000 crore plus H2: ₹50,000 crore), which was 8.9 per cent as a proportion of total expenditure. In the second option, when revenue deficit is netted out, the WMA limits of ₹2,00,000 crore works out to 10.8 per cent.

These proportions are much higher than that suggested by the expert committees for State governments which were in the range of 2.9 per cent and 4.1 per cent. We, thus, considered 4 per cent as the proportion of total expenditure for fixing WMA limits.

Accordingly, the calculated WMA limits worked out in the range of ₹74,384 crore (with the base total expenditure minus revenue deficit) and ₹95,246 crore (with the base total expenditure) in the first half of the fiscal year. The limit for the second half has been one-third of the first half, as per the current practice.

Based on this practice, the second half WMA is calculated at ₹24,794 crore in the first option and ₹31,748 crore in the second option. However, it is better to fix WMA limits as a round off figure of ₹75,000 crore for H1 and ₹25,000 crore for H2.

Some suggestions

The RBI and government should consider the following:

(a) an expert committee on the similar line of the State governments for fixing WMA limits and overdrafts;

(b) a monetary limit on the overdraft;

(c) the RBI press release should explicitly provide the current position of availment of the overdraft. (The last such clarificatory press release was in 2014-15, where it was indicated that overdraft should not exceed 10 consecutive working days), and;

(d) the RBI and the government should consider publishing the WMA data along with the overdraft position in the RBI bulletin to ensure data transparency.

The writer is a former central banker. Views expressed are personal (Through The Billion Press)

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