Recently, states like Kerala, Punjab and Bihar have said that the Reserve Bank of India’s (RBI) decision to allow 60% higher borrowing under Ways and Means Advances (WMA) compared March 30, 2020 limit, is inadequate given the mounting expenses of states to counter the Covid-19 pandemic.

• The states welcomed the RBI move to allow 60% higher borrowing under Ways and Means Advances (WMA), but said it is a temporary relief and will have only a marginal impact upon the fiscal crisis the states are facing.
• They are saying that they cannot go long for ways and means and have to slash their expenditure to a large extent because they do not have many avenues left for revenue augmentation.
  • They said banks are not willing to lend for the long term large amounts of money because of their liquidity preference.
• They demanded from the Central government to raise the fiscal borrowing limits of states currently capped at 3% of the GSDP (Gross State Domestic Product) under the Fiscal Responsibility and Budget Management (FRBM) Act.
• The Centre can invoke Section 5(3) of Fiscal Responsibility and Budget Management Act, 2003 which allows the RBI to “subscribe to the primary issues of Central Government securities” under very specific grounds.
• Those cover, among other things, “act of war” and “national calamity”.
• The RBI can also undertake increased secondary market purchases and sales of Central as well as state government securities.

Ways and Means Advances (WMA)

• The WMA are short-term loan facilities which allow the Centre and states to borrow funds from the RBI to bridge their temporary mismatch between expenditure and receipts.
• The interest rate on WMA is the RBI’s repo rate.
  • Repo rate is basically the rate at which RBI lends short-term money to banks.
• The WMA loans have a three-month tenure.
• States are allowed an overdraft facility (to borrow in excess of WMA limit) of 21 days.

Fiscal Responsibility and Budget Management (FRBM) Act, 2003

• The FRBM Act was enacted by the Parliament in 2003 to institutionalize fiscal discipline, reduce fiscal deficit, and improve macroeconomic management.
• The government was supposed to wipe out revenue deficit and cut fiscal deficit to 3% of GDP by 2008-09, thus bringing much needed fiscal discipline.
  • Fiscal deficit is the total expenditure excluding revenue receipts, loan recoveries and receipts from disinvestment etc. It is a measure of the government borrowing in a year.
• The Act applies only to the central government and the States have to enact suitable legislation to adopt the rules under the FRBM Act.
• The implementation of the Act was put on hold in 2007-08 due to the global financial crisis and the need for fiscal stimulus.
• In 2012, the FRBM Act was amended and it was decided that the FRBM Act would target an effective revenue deficit in place of revenue deficit.
  • Effective revenue deficit excludes capital expenditure from revenue deficit and thus provides space to the government to spend on formation of capital assets.
• In 2017, the FRBM Review Committee headed by former Revenue Secretary, NK Singh submitted its report to the Central Government. Few important recommendations being-
  • A debt to GDP ratio of 60% should be targeted with a 40% limit for the centre and 20% limit for the states;
  • Creation of an autonomous Fiscal Council;
  • An “escape clause”, i.e. the government can deviate from the targets in case of a national calamity, national security, etc.
    • The government used an escape route in its Budget for FY20, by taking a deviation of 0.5 percentage points from the fiscal deficit targets set out earlier.
• During the presentation of the Budget 2020-21, the government fixed the fiscal deficit target for the year 2020-21 at 3.5% of the GDP.

Source: Livemint - https://www.livemint.com/opinion/columns/the-helping-hand-rbi-can-lend-to-tide-over-exceptional-times-11586883536893.html