The RBI’s advisory committee that looked into the advances & overdraft facilities to states recently submitted its report. Data till February 2021 indicates that States have increasingly relied on ways & means advances, special drawing facilities & overdraft to tide over the pandemic-induced fiscal stress. This is in addition to the market borrowings. The impact of the COVID-19 pandemic on the economy is quite evident through the GDP and tax collection data. The nationwide lockdown during the first wave of COVID-19 infection in 2020 and the mitigation efforts through localized lockdowns & curfews by the State governments during the second wave, resulted in disruption in the economic activity. These disruptions had a domino effect on various sectors including the revenues earned by the government. In an earlier story, it was observed that there is a shortfall in the ‘Direct Tax’ revenues earned by the Central government, with the increased Excise duty on Petrol coming to the rescue. In another story, we have noted that there is a fall in the revenues of the States as well due to the pandemic. This had resulted in a 57% increase in the market borrowings of the State governments during the first half of 2020-21, to manage the fiscal deficit. In addition to the market loans, States depend on other sources as well to make up for the deficit due to the loss in revenues. In this story, we take a look at the different sources that the States rely on for fiscal deficit management and the trends during the pandemic. RBI provides financial accommodation to the States to manage cashflows Similar to the Union government, states incur various expenses. These include expenditure towards various schemes, administrative expenses, interest payments, etc. As part of the annual budget, the states plan the expenditure based on the revenue estimates for the year. However, in reality, various factors influence the State’s ability to meet such expenditure and result in fiscal deficit leading to cashflow issues. There could be issues because of the mismatch between estimated revenues during a particular month vis-à-vis estimated expenditure or an unexpected shortfall in the revenues or an increase in the expenditure. Such situations were common during the lockdown months when the revenues plummeted, but the expenditure increased because of the various welfare schemes. To help the states tide over such shortfalls in revenue and to meet their expenditure, the Reserve Bank of India (RBI) provides financial accommodation to the States. This is done in the form of Ways & Means Advances (WMA). Section 17(5) of the Reserve Bank of India (RBI) Act, 1934 governs the facilitation of WMA by RBI to the states. WMA is of two types: WMA: The extent to which the states can opt for WMA is reviewed periodically. A committee set up by RBI reviews the criteria that determine the WMA limits. When WMA was introduced in 1937, the WMA limit was kept equal to the minimum balance of the respective State governments which was later revised periodically as a multiple of the respective states’ minimum balance. Since 1999, an Informal Advisory Committee (IAC) is constituted by RBI to work out the criteria for setting WMA limits. Currently, an Expenditure-based WMA limit is being followed. The current recommendations were provided by a new committee constituted in August 2019. Before the committee could come up with its recommendations, the pandemic broke out in 2020 and hence an interim report for 2020-21 was released. In response to the fiscal stress to the State governments due to pandemic, the WMA limits for all the states were increased by 30% on 01 April’2020 i.e., to Rs. 41.9 thousand crores from the earlier Rs. 32.25 thousand crores. This was further increased to Rs. 51.56 thousand crores on 17 April 2020. While these measures were initially valid until 17 September 2020, the RBI has recently extended this to 30 September 2021. Special Drawing Facility (SDF): Apart from WMA, the State Governments are further provided the option of Special Drawing Facility (SDF). This facility was in place since 1953 and is provided against the collateral of their investments in marketable securities issued by the Government of India. While a limit was set earlier, the IAC has decided to allow the states to draw freely against their holdings of GoI securities since 1999. RBI provisions for Overdraft Facility beyond WMA & SDF In case the States require additional financial resources beyond WMA & SDF, there is also a provision for Overdraft Facility (ODF). Overdraft Facility (OD): The States can borrow money from RBI beyond WMA & SDF, to adjust the fiscal position, but are required to pay back immediately.