The central government is increasingly tapping the short-term borrowing window offered by the Reserve Bank of India, even though state governments have stayed away.
The limit for 90-day borrowings under the RBI's Ways and Means Advances window was recently raised to Rs 2 lakh crore for the central government and to above Rs 50,000 crore for state governments. Ways and Means Advances are short-term borrowings used for the purpose of cash managements. The interest rate charged on these borrowings is the repo rate, currently at 4.4 percent.
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Data from RBI's Weekly Statistical Supplement shows that the central government's outstanding borrowings currently stand at Rs 1.35 lakh crore, about 67 percent of the limit available. Since these are short-term borrowings, the government can keep repaying them and availing fresh finance within the stipulated limit. A short period of overdraft is also permitted.
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While the Centre has stepped up recourse to this window, states have stayed away.
As on April 17, state borrowings from RBI's WMA window stood at Rs 828 crore. While this was higher than the Rs 362 crore in the preceding week, less than 2 percent of the limit available has been used up.
One reason why the states are not availing the limits is because there may be cheaper options available to them. To borrow from the WMA window, the centre and states pay the policy repo rate, currently at 4.4 percent.
States will use the cheapest avenues for borrowing, said Devendra Pant, chief economist and head of public finance at India Ratings and Research.
RBI provides a special drawing facility against investments in the consolidated sinking fund, guarantee redemption fund and state investments in government securities and treasury bills, explained Pant. The interest on that is one percentage point below the repo rate, he added.
According to data from the RBI's monthly bulletin, in February 2020, investments by state governments in these instruments totaled Rs 1.86 lakh crore.
After states exhaust other cheaper options, they may use funds available under the WMA. These funds may be useful for states to delay their longer-term borrowing requirements.
States are presently borrowing at around 110 basis points above the central government bond yields, while they have to pay 4.4 percent on WMA borrowings. So, they can avail borrowings under WMA until it is conducive to borrow from markets, Pant said.
Possibly, states do not see WMA as an attractive avenue, said Radhika Pandey, consultant at New Delhi-based National Institute of Public Finance and Policy.
States have been demanding an outright grant from the central government. The WMA is a loan that the states will have to repay in three months. At a time when they have seen a such a substantial drop in revenue, they will not be in a position to repay even after three months, she said.
According to an India Ratings analysis of the liquidity position of states, 14 states will be able to meet their commitments in April 2020. But four states—Himachal Pradesh, Jharkhand, Rajasthan and Uttar Pradesh—may face pressure in the near term if the lockdown continues beyond May 3, the report said.
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Increasing the WMA is inadequate, Kerala Finance Minister Thomas Isaac said at a webinar on the Impact of Covid-19 Monday. It is a small step and does not contribute to the kind of gap that exists between the revenue and expenditure of the state governments, he said.
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