Panel proposes raising RBI's ways and means advances corpus by 11.2% to Rs 67,839 crore
The panel has also recommended an annual review of the WMA corpus capping annual upward revision at 4%. The extent of upward revision could be based on the last three years of accounts while there would be no reduction in the existing limit.
360° Perspective Analysis
Deep-dive into Geography, Polity, Economy, History, Environment & Social dimensions — AI-powered, on-demand
Context
A committee headed by ISN Prasad has recommended increasing the (WMA) corpus for state governments and union territories by 11.2% to Rs 67,839 crore. The released the report which also suggests changes to overdraft limits and the to address the growing budget sizes and liquidity needs of states.
UPSC Perspectives
Economic
The Ways and Means Advances (WMA) is a crucial mechanism for managing the temporary mismatches in the cash flow of the government's receipts and payments. Introduced under Section 17(5) of the , it acts as a short-term loan facility provided by the to the Central and State governments. The proposed 11.2% increase reflects the expanding budget sizes of states, necessitating larger liquidity buffers. This is vital for macroeconomic stability, as it prevents states from disrupting the market with sudden, unplanned borrowings when tax collections are temporarily delayed but expenditures (like salaries) must be met. However, the WMA is not a resource to finance the fiscal deficit; it must be repaid, typically within 90 days. The interest rate on WMA is linked to the Repo Rate. If a state continues to borrow beyond the WMA limit, it enters an overdraft facility, which carries a higher interest rate (Repo Rate + 2%). The committee's recommendation to reduce overdraft days from 14 to 10 is designed to disincentivize prolonged reliance on emergency funds and encourage better cash management by state treasuries.
Governance
This development highlights the evolving nature of financial administration at the state level. The committee noted a disparity: some states are over-dependent on the for liquidity, while others maintain excessively high cash balances (which carry an opportunity cost). To address this, the recommendation to fix state-wise WMA limits based on their specific revenue receipts versus total expenditure is a move towards more tailored and efficient financial governance, moving away from a one-size-fits-all approach. Furthermore, the interplay between different liquidity windows is important. States first utilize the Special Drawing Facility (SDF), which is collateralized borrowing against their investments in the (CSF) or Guarantee Redemption Fund (GRF). Only after exhausting the SDF do they tap into the WMA. The proposal to increase the SDF limit from 50% to 75% against eligible investments held in the CSF encourages states to build these sinking funds (which act as a buffer for future debt repayment), thereby promoting long-term fiscal prudence while providing enhanced short-term liquidity options.
Federalism
The WMA framework is a key component of fiscal federalism in India. It ensures that the sub-national governments (States and UTs) have smooth operational capacity without being entirely dependent on immediate transfers from the Centre or unpredictable market borrowings. The acts as the debt manager and banker to the state governments (under Section 21A of the , through mutual agreements). By increasing the WMA limits, the central bank acknowledges the growing financial responsibilities and larger budget outlays of state governments, ensuring they have the necessary liquidity to execute their mandates. This mechanism helps maintain stability in the federal structure by preventing sudden financial crises at the state level that could have systemic implications. From a UPSC perspective, questions can focus on how mechanisms like WMA, SDF, and overdraft facilities govern the financial relationship and autonomy of states vis-a-vis the central bank, and how these tools prevent sub-national fiscal crises.