Ways and Means Advances (WMA) - Indian Economy Notes
Ways and Means Advances (WMA) are temporary loan facilities provided by RBI to the government to enable it to meet temporary mismatches between revenue and expenditure. Ways and Means Advances (WMA), when the government borrows money it makes an interest payment to the central bank. In this, the rate of interest is similar to the repo rate and the tenure is three months. Limits for WMA are mutually decided by the government and the RBI.
In this article, we will see the meaning of ways and means advances and their importance which are important for the UPSC examination.
|
Table of Contents |
What is Ways and Means Advances?
- In order to meet the mismatches in the receipts and payments of the government, WMA was introduced in 1997.
- If the WMA repayment exceeds 90 days it is treated as an overdraft and the interest rate charged on overdrafts is 2 percentage points more than the repo rate.
- When there is a higher limit set on the WMA it provides the government flexibility to raise funds from RBI without resorting to borrowing from the market.
| Other Relevant Links | |
|---|---|
| Fiscal Consolidation | N K singh Committee on FRBM act |
| Recent Amendments to FRBM Act | Deficit Financing |
Types of Ways and Means Advances
- Ways and means advances are mostly of two types- normal and special.
- Special WMA:
- Special WMA is provided against the collateral of the government securities held by the state.
- The interest rate for special WMA is one percentage point less than the repo rate.
- Normal WMA:
- When the limits for special WMA are exhausted the state gets normal WMA.
- Under normal WMA loans provided are based on a three-year average of actual revenue and capital expenditure of the state.
Importance of Ways and Means Advances
- It provides requisite sources of financing to cash-starved states.
- The pandemic has further increased the financial challenges of the state due to the requirement of various facilities such as medical testing, screening and providing income and food security to the needy.
- It can act as an alternative mode to raise long-tenured funds from the market.
- WMA can also aid the issuance of state government securities and borrowing from various financial institutions for short-term funding.
- It is a relatively cheaper source of financing as compared to market borrowing.
Changes to WMA due to COVID-19
- The recommendations of the Advisory Committee on the WMA scheme for state governments(Chairman: Shri Sumit Bose) set the WMA limit at Rs 32,225 crore for all states/UTs together until the next review in 2020-21.
- In order to provide greater comfort to state governments in undertaking COVID-19 containment and mitigation measures, and to enable states to plan their market borrowings, as an interim measure, the Reserve Bank had announced an increase in the WMA limit of the states/UTs by 60 per cent over and above the level as on March 31, 2020, which remained valid till March 31, 2021.
- In March 2021, the Advisory Committee on WMA to State Governments (chaired by Shri Sudhir Shrivastava) submitted its findings.
- The Reserve Bank has decided to keep the interim WMA limit (at Rs 51,560 crore for all States/UTs) in place until September 30, 2021, based on the Committee's recommendations.
Conclusion
Ways and Means advances are meant to pass over temporary mismatches in the cash flow of receipts and payments and are not a source of permanent financial relief. It provides leverage for both the centre and the states so as to borrow from the RBI and it, therefore, helps to meet the receipts and payments of the government.
| Other Relevant Links | |
|---|---|
| Indian Economics Notes | Fiscal System |
| Fiscal Responsibility and Budget Management (FRBM) Act | Fiscal Policy |
| Fiscal Stimulus | Government Budgeting |
| Budgetary Reforms | NRI Bonds |
| Masala Bonds | Financial Stability and Development Council |
FAQs
Question: What are Ways and Means Advances (WMA) in the context of Indian economy?
Answer: Ways and Means Advances (WMA) are temporary advances provided by the Reserve Bank of India (RBI) to the central and state governments to meet their short-term liquidity requirements. These advances are intended to help the governments manage their cash flows and ensure smooth functioning of government expenditures, particularly when there is a mismatch between receipts and payments. The WMA facility is governed by the RBI and is typically repaid within a short period, usually within a few months.
Question: How do Ways and Means Advances help the government?
Answer: WMA helps the government in managing its short-term liquidity needs by providing temporary funds. It allows the government to bridge the gap between its expenditure commitments and revenue inflows. This facility ensures that the government does not face difficulties in making timely payments for various expenditures like salaries, pensions, and other operational expenses. By availing the WMA, the government can avoid resorting to more expensive borrowing options and manage its fiscal position effectively.
Question: What is the difference between Ways and Means Advances and the overdraft facility provided by the RBI?
Answer: The key differences between WMA and overdraft facilities are:
- WMA: WMA is a temporary advance granted by the RBI for a fixed period to the government to meet short-term liquidity needs. The government is required to repay the advance within a specified time.
- Overdraft: Overdraft is an extension of credit by the RBI that allows the government to withdraw more money than what is available in its account. It is typically provided when the government’s balance falls below a certain threshold, and it is a short-term borrowing arrangement.
Question: What is the significance of WMA in the monetary policy of India?
Answer: The WMA plays an important role in managing the government's cash flow without causing disruptions to its operations. It also supports the RBI in implementing its monetary policy by ensuring liquidity in the system and preventing sudden fluctuations in government borrowing. By utilizing WMA, the government can maintain fiscal discipline while avoiding reliance on market borrowing, which could affect interest rates and inflation.
Question: What are the limits on the WMA provided by the RBI to the government?
Answer: The RBI sets annual limits on the amount of WMA that can be extended to the government. These limits are revised periodically, taking into account the economic conditions, fiscal targets, and the government’s borrowing requirements. Typically, the limit for WMA is determined as a percentage of the government’s average revenue receipts in recent years. The government is expected to repay the WMA within a set period, usually before the end of the financial year, and the RBI monitors the outstanding WMA to ensure compliance with the limits.
MCQs
1. What is the purpose of the Ways and Means Advances (WMA) facility?
A) To provide long-term loans to the government
B) To help the government meet its short-term liquidity needs
C) To regulate the country's monetary policy
D) To finance the deficit in the government's budget
Answer: (B) See the Explanation
Explanation: The primary purpose of the WMA facility is to help the government meet its short-term liquidity requirements by providing temporary funds to bridge the gap between its receipts and expenditures.
2. Which institution is responsible for providing Ways and Means Advances (WMA) to the government?
A) Ministry of Finance
B) Reserve Bank of India (RBI)
C) Securities and Exchange Board of India (SEBI)
D) Planning Commission
Answer: (B) See the Explanation
Explanation: The Reserve Bank of India (RBI) is responsible for providing Ways and Means Advances (WMA) to both the central and state governments to meet their short-term liquidity requirements.
3. Which of the following is a major characteristic of WMA?
A) It is a long-term borrowing arrangement
B) It is available to the government only during budget periods
C) It is an interest-free loan
D) It is a temporary advance to meet short-term cash flow gaps
Answer: (D) See the Explanation
Explanation: WMA is a temporary advance provided by the RBI to the government to meet short-term cash flow gaps. It is meant to be repaid within a short period, usually during the same financial year.
4. What is the maximum period for which WMA can be availed?
A) 1 year
B) 6 months
C) 3 months
D) 90 days
Answer: (C) See the Explanation
Explanation: The maximum period for which WMA can be availed by the government is typically 3 months, after which the advance is expected to be repaid in full.
5. How does WMA help in controlling inflation?
A) By reducing government borrowing from the market
B) By increasing government spending
C) By maintaining liquidity in the banking system
D) By increasing tax revenues
Answer: (C) See the Explanation
Explanation: WMA helps maintain liquidity in the banking system by providing temporary financial assistance to the government. This prevents short-term cash shortages and reduces the need for government borrowing from the market, which could otherwise contribute to inflationary pressures.
GS Mains Questions and Model Answers
Q1: Explain the concept of Ways and Means Advances (WMA) in the context of the Indian economy. How does it help the government manage its finances?
Answer: Ways and Means Advances (WMA) are short-term credit facilities provided by the Reserve Bank of India (RBI) to the central and state governments. These advances are designed to help the government bridge the gap between its expenditure and receipts, ensuring smooth functioning of government operations. WMA is particularly useful when the government experiences a temporary shortfall in cash flow and needs immediate liquidity to meet urgent payment obligations, such as salaries, pensions, and other administrative costs. By availing of WMA, the government can avoid resorting to more expensive borrowing options, which helps in maintaining fiscal discipline and controlling inflation. The advances are repaid within a short period, usually within the same financial year, ensuring minimal interest burden on the government.
Q2: What are the advantages and limitations of using Ways and Means Advances (WMA) for government financing?
Answer: The advantages of using WMA for government financing include:
- Short-Term Liquidity: WMA helps the government maintain liquidity during periods of fiscal imbalance without resorting to long-term borrowing.
- Cost-Effective: WMA is generally cheaper than other forms of borrowing, such as market borrowings, as it has a short repayment period and low interest rates.
- Fiscal Discipline: By using WMA, the government can maintain fiscal discipline while managing its cash flow needs efficiently.
- Short-Term Solution: WMA is a temporary measure and does not address long-term structural deficits.
- Dependency: Over-reliance on WMA could lead to fiscal imbalances in the long run.
Q3: How does the Reserve Bank of India (RBI) regulate the use of Ways and Means Advances (WMA)?
Answer: The RBI regulates the use of WMA by setting annual limits for the advances provided to the central and state governments. These limits are reviewed periodically based on the government's fiscal situation, revenue receipts, and expenditure requirements. The RBI also monitors the use of WMA to ensure that it is repaid within the stipulated time frame, generally within a few months. The limits for WMA are determined as a percentage of the government's average revenue receipts over a specific period. The RBI also ensures that the use of WMA does not lead to excessive borrowing or negatively impact the inflation rate, as excessive reliance on WMA could lead to inflationary pressures in the economy.
Previous Year Questions on WMA
1. UPSC CSE Prelims 2020:
Question: What is the purpose of Ways and Means Advances (WMA) provided by the RBI to the government?
A) To finance the government's long-term infrastructure projects
B) To provide temporary funds to meet short-term liquidity needs
C) To provide subsidies for government schemes
D) To finance the fiscal deficit
Answer: (B)
Explanation: WMA is provided by the RBI to the government to help it meet its short-term liquidity needs, ensuring smooth operations when there is a mismatch between receipts and payments.
2. UPSC CSE Mains 2019 (GS Paper 2):
Question: "Explain the role of Ways and Means Advances (WMA) in managing the fiscal position of the government. How does it impact inflation?"
Answer: Ways and Means Advances (WMA) help the government manage its short-term liquidity requirements, ensuring that it can meet its expenditure obligations without resorting to long-term borrowing. The use of WMA prevents fiscal imbalances and avoids market borrowing, which could lead to higher interest rates and inflation. By managing short-term cash flows, WMA contributes to maintaining fiscal discipline and mitigating inflationary pressures in the economy.
Download the PREPP App and attempt FREE IAS Exam Mock Tests and get complete study material!
UPSC IAS : GS - Indian Economy - Subject Knowledge Test
Live Test : UPSC CSE Prelims CSAT (Paper-II) (July 22 - 25)
UPSC CSE Prelims 2026 GS Paper 1 Question Paper (24-May-2026)
UPSC CSE Prelims 2026 CSAT Paper 2 Question Paper (24-May-2026)
17 February 2025 | The Hindu Must Read Articles | Current Affairs
16 February 2026 | The Hindu Must Read Articles | Current Affairs
13 February 2026 | The Hindu Must Read Articles | Current Affairs
Comments