Ways and Means Advances

Ways and Means Advances (WMA) refer to the temporary credit facility provided by the Reserve Bank of India (RBI) to both the Central and State Governments to meet short-term mismatches in their receipts and payments. This mechanism ensures smooth functioning of government operations without disruption due to temporary liquidity shortages. WMAs form an essential component of India’s monetary and fiscal management framework, aligning government cash flow needs with overall financial stability.

Background and Introduction

The concept of Ways and Means Advances was introduced in April 1997, replacing the earlier system of ad hoc Treasury Bills, which had been in use since 1954. The shift aimed to bring more fiscal discipline and transparency to government borrowings from the central bank. Under the earlier system, the government’s borrowing was largely automatic and unlimited, leading to inflationary pressures.
The WMA system established a more structured and rule-based approach, wherein borrowing is permitted within pre-set limits, and repayment must occur within a specified period. This framework was developed jointly by the Reserve Bank of India and the Government of India, ensuring that the RBI’s role as a monetary authority remained distinct from its function as a banker to the government.

Objectives of WMA

The key objectives of the WMA facility are as follows:

• To bridge temporary cash flow mismatches in government finances.
• To avoid excessive short-term borrowings through market instruments.
• To maintain monetary control by limiting automatic monetisation of fiscal deficits.
• To ensure timely payment of government commitments such as salaries, pensions, and subsidies.

Types of Ways and Means Advances

The RBI provides two main types of WMAs to the government:

1. Normal WMA (or Regular WMA):
   • These are temporary advances granted within an agreed limit.
   • The limits are reviewed and fixed periodically based on the government’s expenditure pattern and revenue flows.
   • They are provided for a maximum period of 90 days, after which the outstanding amount must be cleared.
2. Special WMA (or Special Drawing Facility):
   • This is extended against the collateral of government securities held by the respective government.
   • Once the securities are exhausted, the government can resort to normal WMA.
   • Special WMA limits are determined by the availability and market value of eligible securities.

In addition to these, if the government’s requirements exceed the sanctioned WMA limit, it can resort to Overdrafts (ODs) from the RBI, which are subject to stricter regulations and shorter repayment timelines.

WMA for the Central Government

The WMA arrangement for the Central Government is governed by an agreement between the Government of India and the RBI, revised periodically in consultation with the Ministry of Finance.
Key features include:

• The WMA limit is reviewed semi-annually—typically for the first and second halves of the financial year.
• The interest rate on WMA is equal to the repo rate, while the rate on Overdrafts is 2 percentage points above the repo rate.
• The repayment period is restricted to 90 days, ensuring short-term liquidity management rather than long-term financing.
• If the WMA or OD persists beyond the permissible period, it is converted into market borrowings.

For instance, the Central Government’s WMA limit for the first half of FY 2024–25 was fixed at approximately ₹1.5 lakh crore, reflecting an increase to accommodate larger fiscal operations and ensure smooth liquidity management.

WMA for the State Governments

Each State Government in India also has a WMA arrangement with the RBI, customised according to the state’s financial size and revenue pattern.
There are three forms of WMA available to the states:

1. Normal WMA: Based on a multiple of the average revenue and capital expenditure of the state.
2. Special WMA: Granted against the collateral of government securities held by the state.
3. Overdrafts: Allowed when the state exceeds its WMA limit, subject to restrictions on duration and frequency.

Key provisions include:

• States can avail overdrafts for a maximum of 14 consecutive working days.
• If the overdraft exceeds this limit, the RBI suspends further payments until it is cleared.
• The interest on WMA is linked to the repo rate, while overdrafts attract higher penal interest.

Determination of WMA Limits

The limits for both Central and State Governments are reviewed periodically, taking into account factors such as:

• Historical cash flow patterns.
• Seasonality in tax and non-tax revenues.
• Expenditure trends.
• Size of the fiscal deficit.
• Inflation and liquidity conditions in the economy.

The RBI and Ministry of Finance jointly determine the limits to ensure that WMAs act strictly as temporary financial accommodation rather than a tool for deficit financing.

Role in Fiscal and Monetary Management

The Ways and Means Advances mechanism plays a dual role in India’s financial system:

1. Fiscal Management:
   • It provides the government with short-term funds to meet urgent expenditure needs without resorting to long-term borrowing.
   • It ensures continuity in government operations during periods of uneven cash inflows.
2. Monetary Management:
   • By setting borrowing limits, the RBI prevents the automatic creation of money for fiscal purposes, which could otherwise fuel inflation.
   • It aids in maintaining monetary discipline and supports the inflation targeting framework.
   • The WMA operations are closely linked with Liquidity Adjustment Facility (LAF) operations, allowing the RBI to maintain stable liquidity in the banking system.

Advantages of WMA

• Ensures Liquidity for Governments: Provides immediate funds to manage temporary shortages.
• Prevents Monetary Expansion: Limits the extent of automatic deficit financing.
• Promotes Fiscal Discipline: Encourages governments to manage cash flow efficiently.
• Facilitates Policy Coordination: Enhances coordination between fiscal and monetary authorities.
• Short-Term Nature: Repayment requirement within 90 days prevents prolonged dependence.

Limitations of WMA

• Temporary Solution: It cannot be used for long-term fiscal deficits.
• Risk of Overdependence: Repeated use may signal weak fiscal management.
• Monetary Policy Implications: Excessive recourse to WMA may distort liquidity management.
• Interest Burden: Extended overdrafts attract higher penal interest rates.

Recent Developments and Contemporary Relevance

In recent years, particularly during the COVID-19 pandemic (2020–21), the RBI temporarily increased WMA limits for both the Central and State Governments to manage liquidity stress due to revenue shortfalls and increased public expenditure.
With India’s move toward a flexible inflation targeting framework, the RBI has maintained a careful balance between providing fiscal support and preserving monetary stability. Periodic revisions in WMA limits reflect changing macroeconomic realities, such as revenue buoyancy, expenditure priorities, and inflationary conditions.