History of RBI’s Ways and Means Advances to Central Government: Old Wine in New Bottle?

Good friend Niranjan pointed to me how WMA was started as a way to bridge the “short-term gap” between Government’s receipts and expenses. This piece tracks the short history of WMA

WMA was started from Apr-1997. Why 1997? Well, in 1997 the Government and RBI signed an agreement to get rid of automatic monetisation of government deficits. Before 1994, if the Government had a deficit, it just issued ad-hoc T-Bills which were held by RBI.

In the 1996-97 Budget Speech, then FM P Chidambaram announced:

Hon’ble Members are aware that in September 1994 an agreement was signed between the Central Government and the RBI to phase out the system of
ad-hoc treasury bills by 1997-98. The experience last year and in the current year so far has shown the difficulty of staying below the within-year limit. Nevertheless, I remain convinced that the system of ad-hoc treasury bills must be phased out. However, before this can happen we need to put in place a better expenditure control mechanism. We also need a more transparent method of defining and reporting the true budget deficit, including all forms of monetisation. I shall present concrete proposals in this regard at the time of presentation of next year’s budget so that RBI can have greater autonomy in formulating and implementing monetary policy.

This was followed by Budget speech in 1997-98 (28-Feb-1997):

The system of ad hoc treasury bills to finance the budget deficit will be discontinued with effect from April 1, 1997. A scheme of ways and means advances
(WMA) by the RBI to the Central government is being introduced to accommodate temporary mismatches in the government’s receipts and payments. This will not be a permanent source of financing the government’s deficit. Besides ways and means advances, RBI’s support will be available for the government’s borrowings programme. Details of the scheme are being separately announced by the RBI.

55. What I am effecting today is a bold and radical change which will strengthen fiscal discipline and provide greater autonomy to RBI in the conduct of
the monetary policy. With the discontinuance of ad hoc treasury bills and tap treasury bills, and the introduction of ways and means advances, the concept of
Budget deficit, as currently defined, will lose its relevance either as an indicator of short term requirement of funds by the government or the extent of monetisation. 

Therefore, it is proposed to discontinue the practice of showing the ‘Budget deficit’; instead Gross Fiscal Deficit (GFD) would become the key indicator of deficit. The extent of RBI support to the Central government’s borrowing programme will be shown as “Monetised deficit” in the Budget documents.

Fascinating.  How macro history is all inter-connected. The history of deficits itself requires a seperate post/article.

On 26 Mar 1997, the agreement was signed:

The salient features of the agreement signed by Dr. C. Rangarajan, Governor, on behalf of the Reserve Bank of India and Shri M.S. Ahluwalia, Finance Secretary, on behalf of the President of India are as follows :-

1. 1. The system of ad hoc Treasury Bills to finance budget deficit will be discontinued with effect from April 1, 1997.
   2. The outstanding ad hoc Treasury Bills as on March 31, 1997 would be funded into special securities, without any specified maturity, at an interest rate of 4.6 per cent per annum, on April 1, 1997. The outstanding Tap Treasury Bills as on March 31, 1997 will be paid off on maturity with an equivalent creation of special securities without any specified maturity, at an interest rate of 4.6 per cent per annum.
   3. From April 1, 1997 a scheme of Ways and Means Advances (WMA) by the Reserve Bank of India (RBI) to the Government of India (GOI) will be introduced to accommodate temporary mismatch es in Government receipts and payments. The limit and the rate of interest on WMA and the rate of interest on Overdraft will be mutually agreed between RBI and Government from time to time.
   4. The arrangements for the fiscal year 1997-98 in respect of WMA limits and rate of interest are :
      1. The limit for Ways and Means Advances will be Rs.12,000 crore for the first half of the year (April to September) and Rs.8,000 crore for the second half of the year (October to March).
      2. The interest rate on Ways and Means Advances and Overdraft for the Government will be the following:

      (i) Up to the Ways and Means Advances limits.	:	‘Calculated Rate’ minus 3 per cent. The ‘Calculated o73 Rate’ for any quarter beginning April 1, 1997, will mean the average of the implicit yield at the cut-off prices of 91 day Treasury Bill auctions held during the previous quarter.
      (ii)For Overdraft beyond the Ways and Means Advances limits.	:	The rate at (b)(i) plus 2 per cent on the Overdraft amount.

   5. Overdraft will not be permissible for periods exceeding ten consecutive working days after March 31, 1999.

It may be recalled that a Supplemental Agreement was signed between the Central Government and the Reserve Bank on September 9, 1994 to phase out the system of ad hoc Treasury Bills, over a period of three years. It was agreed that the net issue of ad hoc Treasury Bills at the end of the year 1994-95 was not to exceed Rs.6,000 crore and that, if the net issue of ad hoc Treasury Bills exceeded Rs.9,000 crore for more than ten consecutive working days at any time during the year, the Reserve Bank would automatically reduce the level of ad hoc Treasury Bills, by auctioning Treasury Bills or selling fresh Government of India dated securities in the market. Similar ceilings at Rs.5,000 crore for year end and Rs.9,000 crore for intra year were stipulated for 1995-96 and 1996-97. The scheme of phasing out ad hocs worked reasonably well. While in 1994-95 the agreement was strictly adhered to both in terms of year end level of ad hoc Treasury Bills as well as the intra year limit, in 1995-96 there were prolonged periods in which intra year limit was exceeded. During 1996-97 since August 14, 1996 the net issue of ad hocs has remained below within the year limit.

Then RBI Governor Dr C Rangarajan said WMA was not old wine in new bottle:

A question often raised is whether the new scheme of Ways and Means Advances (WMA) is not old wine in new bottle. Far from it. While ad hocs were used to monetise budget deficits year after year in a cumulative way, WMA is not a source of financing deficit at all. That is the reason why the practice of showing budget deficit has been given up. WMA will purely be a mechanism for bridging the gap between Government’s expenditure and receipts temporarily and WMA will be vacated from time to time. Like net issue of ad hocs, no net increase in WMA is contemplated in the budget. It may be noted that the budget for 1997-98 has provided for both receipts and discharges of WMA at Rs.1,00,000 crore in gross terms, implying a net amount of zero. Therefore, WMA is not a source of monetisation.

Interesting again. WMA was supposed to be temporary and as a result not part of fiscal deficit.

Further, RBI’s History Volume IV shows how WMA has existed for States since 1937:

….in July 1996 the Government requested the Reserve Bank to prepare concrete proposals setting out the modalities to phase out adhoc Treasury Bills from 1997–98. In response, the Reserve Bank forwarded a self-contained note setting out proposals for phasing out ad hoc Treasury Bills from April 1, 1997 and also recommended a transparent method of defining and reporting the budget deficit and the monetised deficit.

The scheme provided for granting WMA to the Government to meet its temporary mismatches between receipts and payments. The Reserve Bank
also took the opportunity to convey its views on a number of related policy issues, namely:

(i) From the point of view of credible fiscal operations on a day-today basis and of having a mechanism to take care of the problem of lags in receipts, especially in the face of leads in expenditure, the Government would need to borrow from the central bank for temporary periods under transparent terms and conditions.

(ii) A system of providing WMA to the Government of India under section 17(5) of the RBI Act, 1934, could be considered as a possible means of accommodating temporary mismatches in  government receipts and payments from April 1, 1997 onwards after the practice of issuing ad hoc Treasury Bills was discontinued. In this regard, it would be useful to draw appropriately from the experience of the system of WMA to the state governments which had been in vogue since 1937. 

(iii) The underlying principle of the WMA arrangement was that it should not become a supplementary source for the Government to finance its budgetary deficits, but would cover only day-to-day mismatches in receipts and disbursements of the Government. There would, therefore, be no WMA in an ex ante sense and it could not be a part of the capital receipts or of financing GFD. The temporary accommodation to be viewed as credible by the public
should be subject to certain limits. 

(iv) It was possible that temporary cash surpluses might accrue in government accounts on some occasions after vacating WMA. When the cash surpluses went consistently beyond, say, Rs 100 crore, they could be utilised for premature repayment of maturing 91-day auction Treasury Bills held by the Reserve Bank.

RBI had hoped that WMA would not be used as a supplementary source of Govt. finances.

However, my piece shows that things have not really turned out in the desired direction. The real test of WMA will not be in good fiscal years but in bad ones. In years of fiscal pressure such as 2011-12, 2018-19 and now 2019-20, Central Govt has resorted to WMA in several weeks. We just have weekly data and do not know of WMA on a daily basis.

Infact, WMA has become more like old wine in new bottle!

Update:

1. Added a post which shows some daily data of WMA.