What is Ways and Means Advances (WMA)? Explain Its Need and Importance in the Indian Context🔗

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Ways and Means Advances (WMA) is a short-term loan facility provided by the Reserve Bank of India (RBI) to both the Central and State governments. It’s used to bridge temporary gaps between government receipts (like taxes) and payments (salaries, welfare schemes, etc.). Governed by Section 17(5) of the RBI Act, 1934, it acts as a financial lifeline to keep government spending running smoothly.

Why It’s Needed: Government expenditure and revenue don’t always sync up perfectly. For instance, tax collections might spike at certain times (like year-end), while expenses—like salaries or infrastructure projects—roll out steadily throughout the year. WMA steps in to cover these shortfalls, ensuring the government can meet its commitments without delay.

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Why It Matters:

• Cash Flow Support: It gives governments quick access to funds to cover short-term needs.
• Market Calm: By borrowing directly from the RBI instead of the bond market, WMA prevents sudden spikes in interest rates that could raise the cost of borrowing.
• Fiscal Responsibility: Since it’s a short-term loan (typically repayable within 90 days), it encourages governments to stay disciplined with their finances.

Example: Imagine a state government needs money to pay its employees but hasn’t collected enough taxes yet. It can tap WMA from the RBI, get the funds instantly, and settle salaries on time—repaying later when the tax revenue comes in.

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What Are the Types of WMA? What’s the Key Difference Between Them?🔗

WMA comes in two flavors:

1. Normal WMA: This is an unsecured loan—no collateral required, often called a “clean advance.” The RBI sets a limit for each state based on the average revenue and capital spending over the past three years.
2. Special WMA (or Special Drawing Facility - SDF): This one’s backed by government securities, like dated bonds held by the central government. States can pledge investments from funds like the Consolidated Sinking Fund (CSF) or Guarantee Redemption Fund (GRF) to access SDF. It comes with a lower interest rate—typically 1% below the repo rate—making it cheaper than Normal WMA.

Key Differences:

• Collateral: Normal WMA needs none; Special WMA requires securities.
• Interest Rate: Special WMA is cheaper than Normal WMA.
• Priority: States get Special WMA first (if they have securities to pledge), then Normal WMA kicks in once that’s exhausted.

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How Does Overdraft (OD) Differ from WMA? What Are the Terms of Overdraft?🔗

When a state government exceeds both its Normal WMA and SDF limits, it enters overdraft (OD) territory—essentially dipping into more funds than it has in its RBI account.

• Difference from WMA: WMA is a pre-approved loan with set limits, while overdraft is an unplanned overrun that happens when WMA limits are maxed out. It’s like overdrawing your bank account after your credit line runs dry.
• Overdraft Terms:
  • Interest Rate: Higher than WMA—usually 2% above the repo rate, making it pricier.
  • Duration: States can stay in overdraft for up to 14 consecutive working days (though RBI might grant exceptions).
  • Long-Term Overdraft: If it stretches beyond 90 days, it’s still classified as an overdraft but signals deeper financial strain.

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How Is the WMA Limit Decided? What Changes Have Happened Recently?🔗

• For the WMA Limit: The limit is mutually agreed upon by the government and RBI, tweaked as needed over time.
• For State Governments: The RBI sets Normal and Special WMA limits based on a state’s average revenue and expenditure. This ensures some parity. Special WMA depends on the amount of central government securities the state can pledge.
• Recent Updates: The COVID-19 pandemic shook up finances, prompting the RBI to bump up WMA limits for states and union territories. As of June 2024, the limit jumped from ₹47,010 crore to ₹60,118 crore to help them weather ongoing economic pressures.

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What’s the Link Between WMA and Fiscal Deficit? Is WMA a Source of Fiscal Deficit?🔗

WMA isn’t a direct contributor to fiscal deficit. Fiscal deficit is the gap between a government’s total spending and its revenue (excluding borrowings). WMA, on the other hand, is a short-term tool to smooth out cash flow hiccups—not a funding mechanism for long-term deficits. Before 1997, ad-hoc Treasury Bills sometimes masked the true fiscal deficit, but modern WMA rules reduce that risk.

Think of it this way: WMA is a temporary bridge, not a permanent crutch for overspending.

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What Are Consolidated Sinking Fund (CSF) and Guarantee Redemption Fund (GRF)? What’s Their Role in SDF?🔗

Consolidated Sinking Fund (CSF): This is a reserve pot some state governments keep with the RBI. It’s meant to stash away money to repay market loans when they mature, ensuring states don’t default.

Guarantee Redemption Fund (GRF): Another reserve fund, this one’s for covering guarantees states issue—like if a state-backed entity can’t pay its debts, this fund steps in to settle the bill.

Role in SDF: States can use their investments in CSF and GRF as collateral to unlock Special WMA (SDF) from the RBI. It’s like putting up a security deposit to borrow at a discount rate, making SDF a cost-effective option for cash-strapped states.