Key Details
The committee’s proposals adjust how much short-term support states can access, how their limits are set and how long they can remain in overdraft. The proposed state-wise limits use accounts data for 2022–23 to 2024–25.
Proposal | Existing Position → Recommendation |
|---|---|
Aggregate Ways and Means Advances (WMA) limit | ₹61,008 crore → ₹67,839 crore, up 11.2% |
Basis for state-wise WMA limits | Shift from an expenditure-based calculation to adjusted revenue receipts |
Future WMA revisions | Consider annual revisions, with increases capped at 4% and no state’s limit reduced |
Special Drawing Facility (SDF) against debt-repayment funds | Raise the eligible share from 50% to 75% |
Overdraft duration | 14 → 10 consecutive working days; 36 → 30 working days in a quarter |
A Higher Limit With a Different Basis
The committee recommends a moderate increase in WMA rather than one that rises in proportion to state spending. It argues that revenue receipts better reflect a state’s capacity to repay a temporary advance. Its proposed calculation deducts lottery-related expenditure and adds net spending on natural calamities where that spending is positive.
The change matters because WMA is intended to bridge short-lived cash-flow gaps, not finance a continuing budget deficit. The committee found that some states use RBI liquidity support frequently, while others hold large precautionary cash balances despite borrowing from the market.
Reserve Funds Now Provide More of the Cash Support
States can obtain concessional, collateral-backed support through the SDF against eligible holdings in the Consolidated Sinking Fund, set aside for debt repayment, and the Guarantee Redemption Fund, set aside for obligations arising from government guarantees. SDF has become a more important source of liquidity than WMA as these funds have grown.
To encourage contributions, the committee proposes raising the SDF limit against eligible sinking-fund holdings from 50% to 75%. It also recommends continuing the temporary relaxation already in place for guarantee-fund holdings beyond September 2026. States whose reserve funds exceed the suggested level of 5% of outstanding marketable debt or guarantees would gain more flexibility to use the excess, while concessional SDF support would be limited to holdings up to that level.
Cash Management Differs Sharply Across States
The report urges states to spread market borrowing through the year rather than crowding it into the final quarter. Borrowing while holding large, low-yielding cash balances can leave a state paying more on its debt than it earns on its cash.
It also examines SNA-SPARSH, the system that releases funds for Centrally Sponsored Schemes when payments are due. States had expressed concern that losing access to funds transferred in advance would strain their cash positions. The committee’s review finds no significant rise in RBI liquidity use following the system’s introduction, although it acknowledges initial adjustment difficulties.
What Are Ways and Means Advances (WMA)?
WMA are short-term advances from the RBI that allow a state to make payments when its receipts arrive later. A state first draws eligible collateral-backed support through the SDF. WMA provides the next layer; an overdraft arises when the WMA limit is exhausted.
Policy Relevance
The RBI’s decision on the recommendations would affect states differently. States with thin reserve funds may rely more on the proposed WMA increase; those with substantial sinking or guarantee funds may benefit more from SDF access. That makes the state-wise limits and incentives to build genuine reserves as important as the aggregate ₹67,839 crore figure.
The report also identifies a cash-management choice for state finance departments: better forecasting and more evenly timed borrowing could reduce both routine reliance on short-term support and the cost of holding idle borrowed cash. The test of any revised RBI limits will be whether they absorb temporary mismatches without becoming a regular means of financing deficits.
Follow the Full Report Here: Report of the Advisory Committee on Ways and Means Advances to State Governments