Context: Recently,the Centre has proposed to borrow Rs 4.88 lakh crore, or 62.56 per cent, in the first half of the fiscal, as against 62.25 per cent done in the previous fiscal.
More about the news:
- Increased WMA
- The government has increased the ceiling on its temporary loan facility with the Reserve Bank of India known as Ways and Means Advance (WMA).
- Out of gross borrowings of Rs 7.8 lakh crore in FY21, the Centre has proposed to borrow Rs 4.88 lakh crore.
- It is also stated by the government that WMA limit is proposed to be revised to Rs 1.20 lakh crore and would be reviewed on a need basis (from Rs 75,000 crore last year).”
- Rationale behind the increase
- The ways and means advance is increased by 60 per cent to tide over the cash flow mismatch in FY21 expected from higher spending to combat the spread of COVID-19.
- The government has also announced a Rs 1.7 lakh crore package to provide income support, free food and other facilities to the poor to help them during the 21-day national lockdown.
- There is no clarity whether the fiscal deficit target will be breached.
- Need of a stimulus in the upcoming fiscal
- The borrowing plan essentially takes care of the requirement of the cash flow of the government.
- Centre also plans to issue the debt exchange traded fund (ETF) comprising government securities to widen the base of investors.
- It will enable retail investors, who otherwise find it difficult to buy government bonds directly, take an exposure in this risk free instrument.
Ways and Means Advances
- The Reserve Bank of India (RBI) gives temporary loan facilities to the central and state governments. This loan facility is called Ways and Means Advances (WMA).
- The Ways and Means Advances scheme was introduced in 1997.
- Purpose : The Ways and Means Advances scheme was introduced to meet mismatches in the receipts and payments of the government.
- Limit of WMA: The limits for Ways and Means Advances are decided by the government and RBI mutually and revised periodically.
- WMA: The government can avail of immediate cash from the RBI, if required. But it has to return the amount within 90 days. Interest is charged at the existing repo rate.
- If the WMA exceeds 90 days: it would be treated as an overdraft (interest rate on overdrafts is 2 percentage points more than the repo rate).
Types of WMA
There are two types of Ways and Means Advances — normal and special.
- A Special WMA or Special Drawing Facility (SDF) is provided against the collateral of the government securities held by the state.
- Normal WMA: After the state has exhausted the limit of SDF, it gets normal WMA. The interest rate for SDF is one percentage point less than the repo rate.
- The number of loans under normal WMA is based on a three-year average of actual revenue and capital expenditure of the state.
Need of Ways and Means Advances
- 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.
- Flexibility to raise funds: A higher limit provides the government flexibility to raise funds from RBI without borrowing them from the market.
- More funds can help in welfare of poor and vulnerable sections and for the resurgence of the industry.
Debt Exchange Trade Facility
- Debt Exchange Traded Funds (ETFs) are simple investment products that allow the investors to take an exposure to the fixed income securities.
- The debt ETFs combine the benefits of debt investments with the flexibility of stock investment and the simplicity of mutual funds.
- These Debt ETFs traded on the cash market of the National Stock Exchange, like any other company stock, and can be bought and sold continuously at live market prices.
- Debt ETFs are passive investment instruments that are based on indices and invest in securities in the same proportion as the underlying index.
- Because of its index mirroring property, there is a complete transparency on the holdings of an ETF.
- Further due to its unique structure and creation mechanism, the ETFs have much lower expense ratios as compared to mutual funds.
Exchange Traded Funds
- Conceptually, it can be defined as a collection of Securities/Bonds may be traded on the stock exchange.
- The trading value of an ETF depends on the Net Asset Value (NAV) of the underlying stocks/Bonds in the basket.
- They are traded throughout the day like Stocks, and distinctively from Mutual funds which are traded once a day after market close.
- The number of underlying stocks in an ETF may vary from hundreds to thousands across various industries or even restricted to any particular Industry.
- Though the ETF does not give a very high return but it gives the opportunity of safe investment which equity does not provide.
Image Source: Business Standard