The central bank on Wednesday announced steps to help states cope with the fallout of the covid-19 pandemic, including allowing a higher borrowing limit. This also acknowledges the states’ frontline role in mitigating the impact of the pandemic.
The Reserve Bank of India (RBI) has increased the borrowing limit of all states and Union territories under the ways and means advances (WMA) facility to help them overcome the mismatch between revenue and expenditure flows because of the unprecedented 21-day nationwide lockdown. The other measures announced by RBI include an extension of realisation period for export proceeds and deferring implementation of countercyclical buffers.
RBI said that pending submission of the final recommendations by an advisory committee, it has decided to increase WMA limit by 30% from the existing limit for all states and UTs to allow them to tide over the current crisis. The limits will come into force from April 1 and be valid till September 30.
RBI provides financial accommodation to tide over temporary mismatches in the cash flow of their receipts and payments as WMA. The WMA is intended to provide a cushion to the states to carry on their essential activities and normal financial operations. The increased limits are expected to help states spend on fighting the outbreak. Maharashtra, Telangana and Kerala have already announced pay cuts for employees as state revenues suffer.
According to RBI rules, the normal WMA limits are based on a three-year average of the state’s actual revenue and capital expenditure and withdrawing beyond the limit is considered an overdraft. Under the prudential rules, a state government account can be in overdraft for a maximum 14 consecutive working days with a limit of 36 days in a quarter. States pay interest linked to the repo rate on WMA withdrawals. The increase in WMA limits will obviate states’ need to resort to overdrafts. It will also allow states to not only meet targeted expenditure commitments in the absence of revenue flows but step in with emergency funding to meet the exigencies arising out of the pandemic.
On March 31, RBI raised short-term borrowing limit of central government. It said that the limits for WMA for the first half of the financial year 2020-21 will be Rs 1.2 lakh crore, from Rs 75,000 crore in the first half of last financial year