The Reserve Bank of India’s (RBI) recent decision to permit 60% additional borrowing under Ways and Means Advances (WMA) has sparked discussion in states such as Kerala, Punjab, and Bihar. These states have argued that the increase falls short of adequately addressing their growing financial burden due to the Covid-19 pandemic.
RBI’s Increased Borrowing Limit: A Temporary Relief?
While these states have openly appreciated RBI’s move to allow a boost in borrowing under WMA, they insist it is merely a short-term solution. The increased limit will only slightly alleviate the fiscal crisis they are currently facing. These states suggest that their financial road ahead appears bleak as they are lacking in substantial sources of revenue enhancement. They have also expressed concerns that banks are resistant to lending large sums of money due to a preference for liquidity.
Demands for Raised Fiscal Borrowing Limits
The states are urging the Central government to increase the fiscal borrowing limits. As of now, these limits are restricted at 3% of the Gross State Domestic Product (GSDP) as per the Fiscal Responsibility and Budget Management (FRBM) Act. The Central government does have the authority to use Section 5(3) of the FRBM Act of 2003. This allows the RBI to support the primary issues of Central Government securities under certain specific conditions such as an act of war or national calamity.
An Overview of Ways and Means Advances (WMA)
WMA refers to loan facilities that give the Centre and states permission to borrow from the RBI. This mechanism is utilized when there is a temporary discrepancy between expenditure and receipts. The interest rate applied to WMA is determined by the RBI’s repo rate. Which is the rate at which RBI lends short term funds to banks. This loan generally carries a three-month tenure period.
Fiscal Responsibility and Budget Management (FRBM) Act, 2003: A Close Look
The FRBM Act was passed by Parliament in 2003 in order to standardize fiscal discipline, scale down fiscal deficits, and enhance macroeconomic management. The government was required to eliminate the revenue deficit and reduce the fiscal deficit to 3% of GDP by the 2008-09 financial year. Implementation of the act was suspended in 2007-08 due to the global financial crisis and the need for fiscal stimulus.
Amendments and Recommendations to the FRBM Act
In 2012, the FRBM Act was amended to replace the revenue deficit with an effective revenue deficit. This essentially excluded capital expenditure from the revenue deficit, providing the government with more room to invest in capital assets. In 2017, the FRBM Review Committee put forth a few significant recommendations. These included targeting a debt-to-GDP ratio of 60% and establishing an autonomous Fiscal Council. Moreover, it suggested an ‘escape clause’ through which the government could divert from set targets in instances of national calamity or security considerations.
The call for greater borrowing capacity has exposed the financial stress that states are under due to the pandemic. It remains essential for governments to work collaboratively in these challenging times to ensure both fiscal health and welfare of their citizens.