State borrowing
- August 28, 2020
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Subject: Economy
Context:
The Centre offered two borrowing options to states to make up for the shortfall in the goods and services tax (GST) compensation cess fund.
Concept:
- Option 1: States can borrow the full compensation deficit of Rs 2.35 lakh crore, which includes revenue loss due to transition to GST and also the Covid-led slowdown, from the markets, facilitated by the Centre and the RBI
- Option 2: shortfall that’s purely due to GST implementation of Rs 97,000 crore via the RBI special window.
Ways and means advance
- The WMA facility enables the government to take a temporary short term loan from the central bank, mainly to address the mismatch between its inflow of revenues and outflow of expenditure.
- A higher limit provides the government flexibility to raise funds from RBI without borrowing them from the market.
- Under Section 17(5) of RBI Act, 1934, the RBI provides Ways and Means Advances (WMA) to the States banking with it to help them to tide over temporary mismatches in the cash flow of their receipts and payments. Such advances are under the Act, ‘repayable in each case not later than three months from the date of making that advance’.
- There are two types of WMA – normal and special
- While normal WMA are clean advances, special WMA are secured advances provided against the pledge of Government of India dated securities.