About Ways And Means Position

I was asked on 22 May 07, at 13:12:

kushagra: sir, plz update me on ways and means advances. what is the current position.

My Answer:

The Reserve Bank provides the facility of WMA/ OD to the State Governments and manages market borrowing programmes for States. Let us take a look at the WMA position of all the States as at the end of March every year from 1991:

Year	Rs. Crores
1991	1,050
1992	1,288
1993	1,073
1994	1,306
1995	608
1996	1,894
1997	2,557
1998	630
1999	4,858
2000	7,328
2001	6,559
2002	9,419
2003	2,512
2004	2,052
2005	270
2006	-350
2007	-300

Source: Finances of State Governments – 2006-07: Highlights, Published by RBI on February 15, 2007.

Based on the recommendations of the Bezbaruah Committee, the aggregate normal WMA limit was increased by 10.5 per cent to Rs.9,875 crore for the year 2006-07. The interest rate on WMA for 2006-07 has been linked to the LAF (Liquidity Adjustment Facility) repo rate as against the Bank Rate earlier.

Some excerpts from the same report that are worth noting to get an understanding of the WMA position:

During 2005-06, the average utilisation of normal WMA, special WMA and overdrafts by the States remained substantially lower reflecting an improvement in their overall cash position. There was a reduction in the number of States that availed normal WMA during 2005-06 (12 States as compared with 21 States in 2004-05). This reflected a change mainly on account of the provision under the revised Scheme that special WMA should be availed before taking recourse to normal WMA. The special WMA facility is linked to the investment in Government of India securities by the State Governments. The rate of interest charged on special WMA was one percentage point less than that on normal WMA. Higher mobilisation of Small Savings and enhanced market borrowings also facilitated the reduction in recourse to normal WMA. Similarly, there was a reduction in the number of the State Governments (8 States as compared with 13 States in 2004-05) availing overdraft during 2005-06. The liquidity position of the States has remained comfortable during 2006-07 (up to October 31, 2006). The weekly average utilisation of WMA and overdraft by the States at Rs.239 crore during 2006-07 (up to October 31, 2006) was substantially lower than that of Rs.772 crore in the corresponding period of the previous year.

An issue that has a bearing on the liquidity management by the State Governments relates to surge in surplus cash balances of the State Governments as reflected in their investments in 14-Day Intermediate Treasury Bills. In view of the build-up of the surplus cash balances, resort to utilisation of WMA/OD by the State Governments has declined significantly. The upsurge in surplus cash balances of the State Governments has emanated mainly from the large automatic inflow of relatively high cost NSSF resources, larger central tax devolution and grants following the recommendations of the TFC, as well as buoyancy of States’ own tax revenues, in relation to their budgetary projections. The surge in surplus cash balances of the State Governments, however, has posed challenges to the cash and financial management of the State Governments. The Working Group to Evolve the Framework for Investment of State Government Balances constituted by the Reserve Bank is seized of the matter.