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Innocuous or Insidious?
The ways and means advances, is an indicator that is often not studied but can help offer a critical view of the management of government finances at the state and central levels. The paper points to mismatches in data, the formula-based WMA limits placed on states versus the arbitrary nature of advances to the centre, and how and why the system may work against the spirit of cooperative federalism and further feed inefficiency in government financial management on a day-to-day basis. It offers a model scheme for the fixation of limits of WMA based on total expenditure minus fiscal deficit and calls on the government to publish the WMA data along with the overdrafts on a daily basis.
The national accounts and financial performance of the government is more often than not studied in the consolidated numbers of the kind presented in the union budget. These numbers tell us a lot but not as much about the rough edges of the management of government finances on a day-to-day basis. One indicator that helps see the back story is the “ways and means advances” (WMA). This paper takes a critical look at the WMA as an indicator, arguing that it can serve as an early sign of proficiency in the government’s financial management. We go on to argue that the WMA system, as it exists today, is deeply flawed because (i) it is marked by ad hocism; (ii) it places states at a disadvantage; (iii) it weakens the idea of cooperative federalism; and (iv) it incentivises poor management, among other ills it might breed in the system. Given its wide ramifications, it is remarkable how little the WMA is scrutinised. A badly crafted or loosely managed WMA protocol carries the potential to derail good systems and practices and can carry long-term negative implications.
The WMA is a short-term credit (of up to three months) provided by the Reserve Bank of India (RBI) to the central government to bridge a temporary mismatch in cash flows, as laid down in terms of Section 17(5) of the RBI Act, 1934. It has a long and chequered history dating back to 1935. From 1935 to 1955, the WMA was mutually agreed between the two parties and was vacated on attaining its stated maturity of three months. The WMA to the central government was discontinued in 1955 and a system of ad hoc treasury bills was put in place “as a matter of operational convenience” (Rangarajan 2022). In this context, Rangarajan (2022) further commented,
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