April 18, 2020 4:10:01 am
FINANCE Ministers of three states, including Bihar where the BJP is in alliance with the Janata Dal (United), said Friday that the RBI decision to allow 60 per cent higher borrowing under Ways and Means Advances (WMA) from what it was in March 30, 2020, is inadequate given the mounting expenses of states to counter the COVID-19 pandemic.
In separate interviews with The Indian Express, the state FMs said the RBI move would help, but was at best a temporary relief. They said the Central government must raise their fiscal borrowing limits currently capped at 3 per cent of the GSDP (Gross State Domestic Product) under the Fiscal Responsibility and Budget Management (FRBM) Act.
The WMA are short-term loan facilities which allow the Centre and states to borrow funds from the RBI at repo rate (4.4 per cent now) and bridge the mismatch between expenditure and receipts. These loans have a three-month tenure, and states are allowed an overdraft of 21 days.
Bihar’s Deputy Chief Minister Sushil Kumar Modi, who is also the state Finance Minister, said, “This step by the RBI will benefit states for sure, states had demanded a hike (in WMA limits). Earlier, we had asked for a relaxation in FRBM limit… minimum 4 per cent expansion should be allowed and if there’s scope, then even more than that. There’s a precedent when the fiscal limit was raised from 3 per cent to 4 per cent,” he said.
Kerala Finance Minister Thomas Isaac also said states should be allowed to expand their fiscal limits. “It is welcome, but it will have only a marginal impact upon the fiscal crisis the states are facing. What is required is an increase in the borrowing ceiling. Now because you don’t have normal borrowing possible, you have given ways and means. It’s not going to solve any problem,” Isaac said.
Kerala, he said, had demanded an increase in the FRBM limit from 3 per cent to 5 per cent (of GSDP). The 60 per cent increase in ways and means may appear to be a very big amount but actually when seen in the perspective of the existing limits, the extra money is quite less, Isaac said.
Punjab’s Finance Minister Manpreet Singh Badal too said the WMA expansion does not solve the fiscal problem, already burdened by shrinking revenues and mounting expenditure. “WMA is a kind of borrowing and it’s not real help, and obviously there’s an interest component to it. FRBM and ways and means are not going to help states entirely. What the Constitution of India says is that if any state of the Union of India is stressed either internally or externally, the Government of India must come to the aid of that state,” he said.
For Punjab, the revenues have shrunk, he said, noting that collections have dropped to Rs 66,000 crore (in FY20) from Rs 88,000 crore. “How do I manage a shortfall of Rs 22,000 crore? They are asking to go for ways and means but how long can I go for ways and means. I’ll have to obviously slash my expenditure to a large extent because there aren’t many avenues left for revenue augmentation,” Badal said.
Isaac also said the central bank should consider permitting direct borrowing from it. “Whatever you may do, the liquidity preference among the banks is going up so fast that they are not willing to lend for long term and they aren’t willing to lend large amounts of money, so this policy is not going to be very effective. The central bank should permit states and Centre to directly borrow from it. That’s what countries are doing globally, monetising the debt,” he said.
The RBI should look for an exit strategy for the lockdown, Isaac said. “They have given largesse to corporates, for the SME sector, they should allow a restructuring of loans, should give them additional loans, otherwise how will they open up. This package does not address challenges of lockdown exit,” he said.
Economists said WMA limit relaxation is a temporary measure and sooner or later the fiscal limits for states would need to be eased. “This is for temporary mismatches. States can’t do long-term expenditure with this because it has to be returned within three months,” said Devendra Kumar Pant, Chief Economist, India Ratings & Research, said.
D K Joshi, Chief Economist, CRISIL Ratings, said, “This provides an opportunity to tide over short-term mismatches but not enough for cash-strapped states. Spending for a pandemic cannot be sustained without a fiscal expansion.”
States, however, will benefit from the additional WMA at a fixed rate of 4.4 per cent, which is quite low in relation to the higher SDL (state development loan) yields. “The sizeable enhancement in the WMA limit for the state governments will ease the liquidity tightness that they are facing, following the reduction in their revenue receipts amid a higher spending requirement during the lockdown period. The higher WMA limit is expected to temper the surge in State Development Loan issuance by the states in the first half of this financial year, and contribute to some cooling of spreads compared to the alarmingly high levels seen in the last six weeks, said Jayanta Roy, Senior Vice President & Group Head, Corporate Sector Ratings, ICRA.
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