Reading time: 8-10 minutes.
India and World for that matter, are going through the difficult times of pandemic of COVID – 19. The world has been shackled by this unforeseeable pandemic. It has become Hobson’s choice for countries – save lives of people or save the economies. This, indeed, is the tough and unprecedented time for the mankind. In this time, while the global economy is stumbling and stiffing, India is no exception.
To combat the evil of COVID – 19, India fortified itself with the 21 days lockdown, which was to be lifted by 14th April but due to the gravity of the circumstance, it further extended till 3rd May. In the wake of lockdown, states have sealed their borders and interstate transportation has stopped since then. Due to this, state economies have suffered the substantial damage and states are finding it difficult to maintain their cash flow and other transactions.
To fight this, RBI has come up with a number of changes in their overdraft policy for the states. This is the second time in a week that the central bank has relaxed states’ ability to borrow, after increasing their ability to borrow short – term loans on 31st March.
The Reserve Bank of India (RBI) relaxed the norms of overdraft facility for the states facing short term mismatches in the wake of pandemic crisis. As per the circular of the RBI, this shall remain in the effect till 30th September, 2020 which means that the overdraft facility shall be extended till 30th September, 2020.
In this circular, RBI said that States or Union Territory (UT) can avail the overdraft facility for 21 working days. Number of the days has been extended to 21 working days which, prior to this circular, was 14 working days as stipulated. Correspondingly, the number of days for which a State / UT can be in overdraft in a quarter has been increased to 50 working days which, prior to this, was 36 working days as stipulated.
Moreover, along with these developments, RBI has also increased the Ways and Means Advances or the WMA limits by 30%. The main aim behind this step of RBI is to enable the states to tide over the financial crisis caused by the crisis of pandemic COVID – 19.
Significance of this development:–
If we analyze this step of RBI by which the central bank eases the overdraft facility norms and the WMA limits, it tells that in the unprecedented and unforeseeable circumstance like this, developments like these can help the state economies in various ways. This development will help the state to tide over the financial crises caused by the pandemic. Since the date on which the lockdown has been announced, states have sealed their borders which has impacted the inter-state business adversely. Moreover, the states have seen the increase in the health expenditure.
By this, it is very much evident that the states are facing problems in maintaining the economy and as mentioned earlier, it is Hobson’s choice for the states and for center too, to save the economy or to save lives of people. In this extraordinary crisis, this development will be blessings in disguise for the state governments. This development will provide two extremely crucial elements to state. First one would be time, as states have more time to replay their overdrafts and second would be of money.
What is the facility?
In the usual parlance, overdraft is the borrowing facility attached to one’s bank account, at certain agreed limit. The most advantageous thing about the overdraft is the convenience of an overdraft. It can be drawn at any time and it is the most useful for the day-to-day expenses as it can help in maintaining the cash flow inexorably.
The same way, states and center have this facility of the overdraft too. They can ask for the overdraft from RBI and RBI provides the states / UTs and center with overdraft at decided interest rates. One manifest characteristic of the overdraft is the time span for which one can avail it. It is a short term measure for the availability of funds. Till now, when the state avails the overdraft from RBI they have to pay the amount in 14 working days, which, after the recent announcement, has been increased to the 21 working days.
With the facility of overdraft of RBI, the central bank has also changed the norms for Ways and Means Advance (WMA). Ways and Mean Advance is the short term liquidity arrangement made with the central bank by center and states to tide over their cash flow and other temporary mismatches. Under the WMA facility, center or state government can borrow the money for short term from central bank at the current rate of repo rate. But government has to return the sum in 90 days and if this limits gets extended then it would be counted as the overdraft under the RBI policy. The central bank has also increased the limit of this overdraft up to 7 working days.
Its pros and cons
- When we analyze the pros of the development, as mentioned earlier, it is blessings in disguise.
- The step would provide liquidity to states to manage their cash flow mismatches for short term.
- In the larger picture, this development could incentivize the government to spend more on the health facilities.
- The facility is availed for the short period of time. There is still a state of anonymity regarding the lockdown and pandemic. In this unforeseeable time, we can’t say that whether the measure for short terms would be proved to be helpful in long run.
- There is a word on the street that this pandemic crisis may continue till July or August. In this time, though this development is commendable, a comprehensive and objective long term policy for the states to enable them in maintaining the cash flow mismatches.
- Different states have different economies and thus the lockdown has affected different states in different manner. Meanwhile some of states might not be in the position to pay for the overdraft even after the completion of the stipulated time.
- There is a need for comprehensive and properly contemplated policy which enables the state to maintain liquidity in the long terms.
From the point of view of short term policy and management, this development will help states in all the way possible. But the question seems bigger than this.
We don’t know how far we all have to go. In this extraordinary times, we cannot be sure of anything. States are spending on test kits, basic amenities and what not. But the problem is that states are only spending. The income of the state has almost stopped so it has just become the way of one way spending where the element of income is conspicuously absent. In this time, apart from the short term policies, we need the preparation for the long term policies and decisions.
Approaching the upcoming time without any kind of preparation or apparatus would cost us much more. Therefore, it is the need for the hour that we don’t stop by just short term policies. As argued above, neither of us know what time has for all of us in future. Therefore it is necessary that we have the needful policy for the long term too.
There is still a question whether even the short term policies would be sufficient or not. The WMA window, as already pointed out, is intended only to tide over temporary mismatches in cash flow of receipts and payments. Given the likelihood of total government borrowings crossing Rs 20 lakh crore – a conservative underestimate – a WMA limit of Rs 120,000 crore for the Centre and Rs 51,560 crore for states may prove grossly insufficient.
We are not raising the question or doubt on the policies but the policies have to be according to the situation and circumstances. This state of obscurity demands something more from us. Therefore it is necessary that while taking any decisions or changing the existing policies we keep in mind certain questions.
First, no matter how small decision is, it can impact enormously. So we need to contemplate that whether the steps taken would be sufficient or not. Second, any short term policy can have adverse impact on the long term policy or vice versa. Therefore the policies regarding short term and long term should not be incongruent to each other.
As historian Yuval Noah Harari said “Our any decision today can affect our future.” This is an extraordinary circumstance and we have to be prepared for the upcoming times. Governments, citizens, institutions and all other elements of the society are doing the best they can. But as mentioned above, time demands something more from us. It will be beneficial for us to have proper long term policies.
If we are to combat the crisis of the pandemic, we have to be ready from all the aspects. What RBI has done is commendable but still a much more contemplation is necessary for the upcoming times in regard to long term policies.
Time will be answer to itself. But there is no second question that this pandemic has shown the world and human kind that what actually our priorities ought to be. This too shall pass!
Author: Akshat Mehta from Institute of Law, Nirma University.
Editor: Arya Mittal from Hidayatullah National Law University, Raipur.