Rs 100,000 Cr Cushion For Ways & Means Advances

Finance minister P Chidambaram has provided the Union governments ways and means advance (WMA) limit with a large cushion of Rs 1,00,000 crore, which is nearly three times the size of its borrowing programme and also that of its outstanding ad hoc treasury bills.

The very large WMA provided for in the budget for 1997-98 at one stroke takes care of the vexed problem of the redemption of the ad hoc treasury bills. The total outstanding ad hocs stood at Rs 33,590 crore on February 7, 1997. Banking sources say the government will convert the outstanding ad hocs to WMA on April 1.

 

The fresh WMA takes the total internal debt of the Union government up to Rs 252,926 crore in 1997-98 from Rs 210,628 crore in the revised estimates of the 1996-97. This consists of a rise in market loans to Rs 44,722 crore from Rs 5,000 crore, a WMA of Rs 100,000 crore from nil, and a fall in 91-day treasury bills to Rs 99,000 crore from Rs 174,120 crore.

Chidambarams budget speech only talked about phasing out ad hocs and their replacement with the ways and means advance. However, a closer reading of the budget documents reveals that the ways and means advance limit is as large as Rs 100,000 crore.

The interest rate on the ways and means advances overdraft is expected to be fixed at minimum of 12 per cent, which is 7.4 percentage points above the rate of ad hoc treasury bills. Ad hocs will be abolished from April 1, 1997.

The tenure of the WMA will not be more than three months. In terms of section 17 (5) of the Reserve Bank of India Act, the bank is authorised to make to the Union and state governments, ways and means advances which are repayable not later than three months from the date of making the advance.

It is pointed out that the present WMA is highly unlikely to be ever breached and is seen as more profligate than the system of ad hoc treasury bills, which placed a cap of Rs 9,000 crore on the issue of incremental bills. If the figure exceed Rs 9,000 crore for 10 consecutive working days, the RBI could issue dated paper to wind down the position.

However, under the proposed WMA, the government can draw funds upto Rs 75,000 crore and not trigger the issue of gilts in the market. According to the details on the WMA issued by the Reserve Bank, any drawals by the government from RBI in excess of the limit of WMA would be permissible only for 10 consecutive working days. When 75 per cent of the WMA is utilised, the Reserve Bank would trigger a fresh flotation of government securities.

However, the WMA has to be wound down every three months before fresh funds can be given. Sources point out that this has not been possible in the case of state governments and the RBI has no legal mechanism to do so. Since the transition from ad hocs to WMA will take time, the RBI has allowed the overdraft to exceed 10 working days. The only penalty would be a higher rate of interest on the overdraft beyond 10 days.

There are no statutory provisions with respect to either the maximum amount of the advance or the rate of interest to be charged.

These are regulated by the respective agreements which the Reserve Bank has made with the Union and state governments.