WMA: Fixing a tool that is running haywire
As F.Y. 2022-23 ended, the RBI issued a press release which said that “in consultation with the (Central) Government, the limit for WMA for the first half of the financial year 2023-24 (April 2023 to September 2023) will be Rs.1,50,000 crore.” This was a routine, innocuous announcement of the kind 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 that are often left undiscussed. Further, WMA has morphed into a peculiar tool that allows the Central government to fix arbitrary limits while State governments are made to follow a rule-based approach.
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 the expenditure of the government.
Spending cap. Ways and means advances needs a dose of transparency. An expert panel for fixing WMA limits could be a start
WMA to the Central government was re-introduced on April 1, 1997 after a period of four decades when the system of ad hoc treasury bills. was abolished.
Currently, as announced in the RBI release, WMA limits are fixed at Rs. 1,50,000 crore for the first half of fiscal 2023-24. 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) and the overdraft has to be cleared within ten 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 Central government and the RBI. This raises questions on the integrity of the interface between the monetary authority and the fiscal authority.
WMA has morphed into a peculiar tool that allows the Central government to fix arbitrary limits while State governments are made to follow a rule-based approach
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: Rs. 60,000 crore and H2: Rs. 25,000 crore) a press release from RBI said. However, the RBI Annual Report stated that the WMA limits were fixed quarterly and half yearly in 2017-18 (Q1: Rs. 60,000 crore, Q2: Rs. 70,000 crore and H2: Rs. 25,000 crore). Similarly, there were quarterly and half yearly fixation of limits for 2018-19 (Q1: Rs. 60,000 crore, Q2: Rs. 70,000 crore and H2: Rs. 35,000 crore). However, this was reversed in 2019-20 subsequently with half-yearly estimates
This essentially reflects the poor cash management of the government. This is again corroborated by the data given in the Annual Financial Statement (AFS) of the Central government. For example, 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 Rs. 4,80,042 crore as against budget estimates of Rs. 3,00,000 crore. Similarly, in 2018-19, receipts for WMA actuals was Rs. 9,55,243 crore as against a budget estimate of Rs. 5,00,000 crore. Furthermore, in 2019-20, receipts for WMA (actuals) were Rs. 11,79,582 crore as against budget estimates of Rs. 5,00,000 crore.
The first option takes total expenditure (revenue and capital) and the second option takes total expenditure minus revenue deficit as WMA should not be used as a resource to meet the revenue deficit
In addition to this, the arbitrariness of fixation of WMA limits is reflected in the limits fixed currently at Rs. 1,50,000 crore during H1 of fiscal 2023-24 as against Rs. 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 poor cash management by the government but also questions the budget integrity. This is a concern and needs to be addressed. In view of this, we propose a model scheme for fixation of WMA limits which is formula based like the case of State governments
A model scheme is suggested here by considering 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). Thus, the years considered are 2017-18, 2018-19 and 2019-20. The first option takes total expenditure (revenue and capital) and the second option 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 Rs. 2,00,000 crore (H1: Rs. 1, 50,000 crore plus H2: Rs. 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 Rs. 2,00,000 crore works out to 10.8 per cent. These proportions are much higher than the proportion 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 fixation of WMA limits.
WMA is not a resource to finance the expenditure of the government
Accordingly, the calculated WMA limits worked out in the range of Rs. 74,384 crore (with the base total expenditure minus revenue deficit) and Rs. 95,246 crore (with the base total expenditure) in the first half of the fiscal year. The limit for the second half of the fiscal year has been one-third of the first half, as per the current practice. Based on this practice, the second half WMA is calculated at Rs. 24,794 crore in the first option and Rs. 31,748 crore in the second option. The preference, however, of this author is to fix WMA limits as a round off figure of Rs. 75,000 crore for H1 and Rs. 25,000 crore for H2.
The RBI and government should consider the following viz. a) an expert committee on the similar line of the State governments to look into the fixation of WMA limits and overdrafts b) a monetary limit on the overdraft, c) the press release published by RBI 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 ten consecutive working days), and d) RBI and government should consider publishing the availment of WMA data along with the overdraft position in the RBI bulletin to ensure data transparency.
(The writer is a former central banker. Views are personal)