RBI Committee Proposes 11.2% Hike in Average WMA Limit for States to Boost Financial Accommodation

The Reserve Bank of India’s Advisory Committee has recommended an increase in the Ways and Means Advances (WMA) limits for State governments from ₹61,008 crore to ₹67,839 crore, marking an 11.2% rise. This adjustment comes in response to the growing budget sizes of States, which may require greater liquidity support. The recommendation underscores a shift in how States access financial accommodations, with recent trends indicating that the Special Drawing Facility (SDF) has supplanted WMA as the primary channel for liquidity support.

For the common citizen, this increase in WMA limits could imply a greater fiscal leeway for State governments to manage their cash flows and meet expenditures, potentially minimizing disruptions in public services. From a market perspective, enhanced liquidity support may encourage more stable fiscal management at the State level, fostering an environment conducive to economic growth. However, the Committee also highlighted the need for States to develop better fiscal discipline, as some have relied excessively on such financial instruments.

Looking ahead, the government and the Reserve Bank are likely to take a measured approach in managing this increased liquidity, balancing the need for financial support with the imperatives of fiscal discipline. Limiting the duration and frequency of overdraft usage is expected to discourage over-dependence on liquidity facilities. Additionally, the recommendation to base WMA limits on “Revenue Receipts” rather than “Total Expenditure” suggests a more actuarial approach to fiscal responsibility, encouraging States to improve their revenue generation capabilities.

Source: The Hindu

(Expert Note: This report was independently prepared by the Wealthova Economy team.)