The system of ways and Means Advances (WMA) for the center

The ad hoc treasury bills emerged as a popular mode of financing the central government’s deficit in the mid 1950s. For the smooth conduct of the government’s business, it was mutually agreed between the central government and the Reserve bank that a minimum cash balance of Rs 50 crore on Fridays and Rs 4 crore on other days would be held by the central government. To adhere to this administrative arrangement, it was agreed that whenever the cash balances fell below Rs 50 crore, the Reserve bank would automatically issue fresh ad hoc T-bills of an amount that would restore the balance to Rs 50 crore. This mechanism ensured an unlimited access to the Reserve Bank’s resources. The ad hoc T- bills which were meant to be temporary, gained a permanent as well as a cumulative character. Indeed, it became an attractive source of financing government expenditure since it was available at an interest arte of 4.6 per cent per annum since 1974.

The Reserve Bank’s credit to government is a source of reserve money generation and any investments in central government’s securities by the Reserve bank results in monetization of government deficit. Monetized deficit is the increase in the net Reserve bank credit to the central government which is the sum of increase in the Reserve bank’s holdings of the government of India’s dated securities, treasury bills, rupee coins and loans and advances from the Reserve Bank to the center since April 1, 1997, adjusted for changes in the center’s cash balances with the Reserve bank. The Reserve bank was expected to compulsorily finance adhocs. The increase in the central bank’s credit to the government led to an increase in money supply and inflation. The Reserve bank had no way of containing monetization of the budget deficit and effectively implementing its monetary policy. In order to restore the role of the monetary policy in the economy, the government entered into an agreement with the Reserve bank to put an annual ceiling on the issue of treasury bills, to reduce that ceiling over time, and finally to eliminate adhocs.

The process of elimination of adhocs was designed in three stages:
1) through limits on creation of ad hoc T- bills which operated between 1994 – 95 and 1996 – 97
2) through a transition period of two years which began on April 1, 1997, when ad- hocs were eliminated, and the new system of ways and Means was introduced. However, overdraft above Ways and Means was made permissible only beyond ten continuous working days; though at a cost.
3) The full fledged system of WMA has been operating effectively since April 1999.

What is Ways and Means Advances:

1) This scheme has been evolved to accommodate temporary in government receipts and payments
2) The limit for WMA and the rate of interest on WMA will be mutually agreed to between the Reserve bank and the government from time to time.
3) Any withdrawals by the government from the Reserve bank is excess of the limit of WMA would be permissible only for ten consecutive workings days
4) When 75 per cent of WMA is utilized, the Reserve bank would trigger fresh floatation of government securities.
5) Consistent with the discontinuance of ad hoc T- bills, the system of 91 day tap – bills was also discontinued with effect from April 1, 1997. The outstanding ad hoc and tap T – bills as on March 31, 1997, were funded into special securities without any specified maturity, at an interest rate of 4.6 per cent per annum on April 1, 1997.
6) With the discontinuance of ad hoc T- bills and tap T-bills and with the introduction of WMA, the concept of conventional budget deficit was no more relevant. Therefore, the practice of showing budgetary deficit was discontinued; the gross fiscal deposit (GFD) is now the key indicator of deficit. Gross fiscal deficit is the excess of total expenditure including loans, net of recoveries over revenue receipts ( including external grants) and non-debt capital receipts

WMA is not a source of financing budget deficit and is not included in the budget estimates. It is only a mechanism to cover day-to-day mismatches in receipts and payments of the government. It is charged at market related interest rate. Hence, the use of WMA may have to be periodically abandoned.