On April 22, the Reserve Bank of India (RBI) issued a press release on WMA arrangement for GoI for 2011-12. While the press statement came with an inexplicable lag of 22 days, data published in the weekly RBI report revealed that huge loans had been given to the GoI. However, as the mutually agreed amount of WMA was not available in the public domain, it was not known to what extent the GoI had taken recourse to overdrafts from the RBI.
The present WMA scheme goes back nearly a decade and half. The current WMA limits tend to be in favour of GoI as there is scope to use this more as resources than as a cash management instrument. A continuation of this trend has a potential adverse impact on monetary policy, debt management and financial markets. Fresh thinking is urgently required on WMAs, surplus maintenance and investment.
The WMA scheme for the Central Government was introduced on April 1, 1997, after putting an end to the the four-decade old system of ad hoc Treasury Bills to finance the Central Government deficit. The ad hocs, which found their way as an innocuous, convenient administrative arrangement to help the Government maintain its cash balance at a required minimum level, assumed larger-than-life proportions, posing a threat to monetary stability and curtailing the Reserve Bank's freedom to operate instruments of monetary policy for price stability.
The WMA scheme was designed to meet temporary mismatches in the receipts and payments of the government. The WMA is vacated after 90 days. The interest rate on WMA currently is the repo rate.
The limits for WMA are mutually decided by the RBI and GoI. When the WMA limit is crossed the government takes recourse to overdrafts, which are not allowed beyond 10 consecutive working days. The interest rate on overdrafts would be 2 per cent more than the repo rate.
The minimum balance required to be maintained by the Government of India with the Reserve Bank of India will not be less than Rs.100 crore on Fridays, on the date of closure of Government of India's financial year and on June 30, the date of closure of the annual accounts of the RBI, and not less than Rs.10 crore on other days. The cash management of GoI has considerably deteriorated in the recent past, with situations of large surplus and large deficit. This has put tremendous pressure on RBI with respect to liquidity management and conduct of monetary policy.
Due to unavailability of high frequency data on WMA/overdraft/ surplus, technical analysis becomes difficult. For example, during 2010-11, after a maintaining surplus (above Rs 50,000 crore and sometimes higher than 100,000 crore) for a considerable period (about six months), suddenly, in April the GoI entered into a deficit of high magnitude (more than Rs 45,000 crore). This had resulted in a peculiar mutual agreement of two limits in April and quarterly limits during 2011-12.
In addition to higher accommodation from the RBI in terms of WMA, the GoI also borrowed from the market through Cash Management Bills, treasury bills of various maturities (91,182 and 364 days) and dated securities. This had resulted in firming up of yields across maturities. To some extent, this had also prevented price discovery.
DEBT MANAGEMENT OFFICE
One wonders whether the GoI, which has failed to put in place an effective and efficient cash management system, can handle debt management with a separate debt management office.
The RBI is right in its recent assertion that the separation of debt management from RBI is a sub optimal choice. In the same spirit one could also argue that fixation of WMA limits with mutual agreement which has largely remained arbitrary, is also a sub-optimal choice.
The GoI must realise that poor cash management practice not only wastes money, but also inhibits the development of local financial markets and undermines the effectiveness of monetary policy. First, the limits could be formula-based as it is for the state governments . Second, in order to even out bunching of receipts from advance income tax payments, a monthly basis system could be considered against the present system of quarterly basis.
Third, the receipts given to state governments in terms of grants and tax could be reworked taking into account the cash flows.
Fourth, since consolidated sinking fund has not been put in place so far for the GOI, it may be considered, to take care of the repayment system. Fifth, the calendar for market borrowings and treasury bills to a large extent take care of repayments but it could be re-examined taking into account the cash flow statement. For this to be effective, all the agents have to be pro-active, not leaving the management to RBI.
Sixth, the approach so far has been to treat cash management of GoI and State governments separately. It is appropriate to put in place a comprehensive approach. Seventh, it would be advisable to have an expert committee to review the current arrangements for WMA/ Overdraft/ surplus and prescribe the limits and other related arrangements.
(The author is professor of Economics at KJ Somaiya Institute Management Studies and Research, Mumbai.)