LIQUIDITY MANAGEMENT ASSISTANCE TO THE STATES:

Though the receipts and the expenditure of the states are matched in the annual State Budget, there could be temporary mismatches in the cash receipts and expenditure during the course of the year. Central Government and RBI have instituted mechanisms that enable States to tide over such short term liquidly problems. These are as follows:

(I) WMA FACILITY TO STATE GOVERNMENTS

The Ways and Means Advances (W &MA) provided by RBI to the States are governed by Section 17(5) of the RBI Act, 1934. This Section authorizes the RBI to extend WMA to the State Governments which are repayable not later than three months from the date of making the advances. These advances are meant to be temporary to provide a cushion to the States to carry on their essential activities despite mismatches on fiscal transactions and to avoid disruptions to the normal and necessary financial operations of the State. At present all the State Governments except Jammu and Kashmir and Sikkim have signed such agreements with RBI. The scheme is revised from time to time. Currently it is based on the recommendations of the Bezbaruah Committee.

The RBI provides accommodation to the State Governments through two facilities. These are: (i) Normal WMA facility and (ii) Special WMA facility which is secured against Government of India securities held by the State Governments with RBI. These facilities have been in existence since 1937 and 1953 respectively.

Normal Ways and Means Advances

Normal WMA limits were earlier related to the minimum balance held by each State. The present system of WMA is based upon the recommendations of the Bezbaruah Committee under the Chairmanship of Shri M.P. Bezbaruah. Bezbaruah Committee had recommended substantial enhancement of limits of WMA. Based on the recommendations of the Committee normal WMA was enhanced to Rs. 9875 crore from the earlier limit of Rs. 8935 crore from 1 March, 2006 for 26 States. The total normal WMA limit was further enhanced to Rs.9925 crore with effect from April 1, 2007 for 26 States and one UT (Puducherry) and continues to be the same from April 1, 2008 and April 1, 2009.

Special Ways and Means Advances

The State Governments are sanctioned Special Ways and Means Advances based on their holdings in Government of India (GOI) dated securities/ Treasury Bills since 1953 when a uniform limit of Rupees two crore was allocated to each State. The limits were raised from time to time. Special WMA Scheme continues to be linked to the investments made by State Governments in the Government of India securities, i.e., dated securities and Treasury Bills as per recommendations of Bezbaruah Committee. A lower and uniform margin of five per cent has been applied on the market value of the securities for determining the operating limit of Special WMA. The States are required to avail of Special WMA limits first before seeking accommodation under the normal WMA limits.

Overdrafts of State Governments

States' overdrafts (OD) with Reserve Bank of India represent their drawls exceeding the authorized limits of WMA, both normal and special. The OD regulation scheme was first introduced in 1972. Since then, the scheme has regularly been revisited. The salient features of revised OD scheme are as follows:

  1. The number of days that a State can be in overdraft at present is 14 consecutive working days.
  2. The norms of restricting overdraft to 100 per cent of the normal WMA limit will continue. If the overdraft exceeds this limit for five consecutive working days for the first time in a financial year, the Reserve Bank will advise the State to bring down the overdraft level within the 100 per cent of WMA limit. If, however, such irregularity occurs on a second or subsequent occasion in the financial year, the Reserve Bank will stop payments notwithstanding the above provision, which permits the State an overdraft up to 14 days.
  3. No State Government will be allowed to be in overdraft for more than 36 working days in a quarter. If this is not adhered to, payments will be stopped. This regulation was made applicable from April 1, 2003.
  4. The rate of interest on overdraft will be:
    1. Overdraft up to 100 per cent of normal WMA limit- two per cent above the Repo rate, and
    2. Overdraft exceeding 100 per cent of the normal WMA limit-five per cent above the Repo Rate.