The North Block of the Central Secretariat building in New Delhi, which houses the Ministry of Finance. (Photographer: Prashanth Vishwanathan/Bloomberg)

Is The Government Facing A Cash-Flow Mismatch... Again?

Four months into the financial year, the central government appears to be facing a short-term cash flow mismatch. Apart from scheduled borrowings, the government has increased the limit on advances from the RBI and is resorting to raising short-term funds via cash management bills.

On Tuesday, the government raised Rs 20,000 crore via an auction of cash management bills with a maturity of 70-days, according to the auction result notified by the Reserve Bank of India. Since the start of this fiscal, the government has already borrowed four times using this instrument, which is typically used to tide over short-term cash flow mismatches.

  • On June 4, the government raised Rs 20,000 crore via 21-day CMBs.
  • Another Rs 20,000 crore was borrowed on June 11 with 70-day bills.
  • A third tranche of 45-day CMBs was issued on June 25, raising Rs 25,000 crore.
  • The fourth tranche of CMBs was auctioned on Tuesday, raising Rs 20,000 crore.

Soumyajit Niyogi, associate director at India Ratings, says the borrowings via short-term instruments suggests a mismatch in revenue and expenditure.

The borrowing through long-dated cash management bills sends two signals. First, that overall expenditure is running high, leading to a mismatch. Second, that they are not expecting the situation to ease immediately which is why they are borrowing for longer tenures like 70 days.
Soumyajit Niyogi, Associate Director, India Ratings

Also read: How The Government Met Its FY18 Fiscal Goal

Apart from raising funds via CMBs, the RBI has also increased the limit for ‘Ways And Means Advances’ to the government. These are temporary advances given by the RBI to government to tide over a mismatch in receipts and payments. For the April-June 2018 quarter, the limit for such advances was set at Rs 60,000 crore. This has been raised to Rs 70,000 crore for the July-September quarter.

The short term funds borrowed via CMBs and advances from the RBI are in addition to the scheduled borrowings via government bonds and T-bills. The government had said it plans to borrow Rs 2.88 lakh crore from the markets in the first half of the current fiscal. Straying from precedent, the government had chosen not to front-load its borrowings this year to calm yields in the government bond markets.

According to Aditi Nayar, principal economist at ICRA, the auction of CMBs suggests that some cash flow mismatches have arisen for the government.

Such mismatches may have been precipitated by a combination of factors, including a spurt in expenditure, muted advance tax collections in June 2018, higher refunds of direct taxes in recent months, as well as large balances of unsettled IGST (integrated GST).
Aditi Nayar, Principal Economist, ICRA

Nayar explains IGST paid on interstate transactions is intended to be distributed between the centre and states. The collected IGST lies in a pool and until it is allocated, it's not available for use. Large unsettled IGST balances may be tightening cash flows of both the centre and the states, Nayar added.

Fiscal data available for the first two months of the year shows that the deficit until May stood at Rs 3.45 lakh crore. That’s 55.3 percent of the targeted Rs 6.24 lakh crore in 2018-19. The April-May gap was lower than the 68.3 percent seen in 2017-18.

The government had resorted to borrowings via cash management bills last year too. Between April-June, it raised nearly Rs 1.4 lakh crore via these short term instruments.