GST Compensation Financing May Debut A New Type Of Government Borrowing — Exclusive
The central government’s proposal to states to finance a shortfall in compensation cess for the current financial year may bring to the markets a new kind of government security. This security, if states accept the proposal, would in some ways be a hybrid of central government and state government bonds.
The centre has suggested two options to the states. The first, being discussed actively, includes a Rs 97,000 crore borrowing plan via what the government had termed as an “RBI window.” This Rs 97,000 crore is the shortfall computed to be on account of GST compensation.
In a conversation with BloombergQuint, the government’s Expenditure Secretary TV Somanathan clarified that the plan doesn’t include any direct purchase of state government bonds, also known as state development loans, by the Reserve Bank of India.
Instead, what the government is suggesting is a special issue of state bonds, which, for all practical purposes, would be backstopped by the centre.
“We aren’t necessarily indicating that the RBI would be directly buying securities of the states. As we have said in the note we circulated, we will coordinate this borrowing at as attractive rates as possible rather than leave the states to form their own borrowing calendars as they normally do... We will try to get as good a price on this borrowing as we can manage,” Somanathan said. “We will coordinate, we will assist, we may even group it to make sure they get as low a cost as possible and , if necessary, we are willing to subsidise it to make [the cost] equal to G-Secs.”
Somanathan went on to give the analogy of bond securitised by future receivables, although he specified that a securitised structure is not the precise description of that they have in mind.
You could make a special issue of state bonds where the centre gives an undertaking or a letter of comfort that the interest and principle will be serviced from the compensation cess account held by the Government of India. The annual receipts of that cess account are more than adequate to service those costs. The servicing costs would be somewhere close to Rs 6,000 crore per annum.TV Somanathan, Expenditure Secretary, Government of India
Such a structure would ensure that there is a very specific revenue stream which can be earmarked for the payment of this debt, Somanathan added. “And that could be under-written by the central government because the money is actually credited to the GST compensation fund, which is controlled by the central government.”
Somanathan, however, said there is some “legal ambiguity that a tax which is fully assigned to states, [is it possible] for us to securitise a receipt that does not belong to us.”
Should these securities be eventually issued, but at a higher cost than pure central government securities, the government has offered to bear the cost of up to 0.5%, Somanathan reiterated.
In the second proposed formula, the centre will provide a letter of comfort that the principal will be deducted from the compensation cess kitty, while the interest on these borrowings would be borne by respective state budgets. In that case, they can borrow the full estimated shortfall, Somanathan said. He said certain “countervailing adjustments” would need to be made in the debt ceilings of states using this option to avoid an unsustainable level of debt.
Where Will It Be Counted?
The borrowings under the first option will not be counted as debt-to-GDP of state governments, while in the second option they would add to that ratio, Somanathan said.
How then would the debt under the first option be accounted for?
“An academic would count it as general government debt and so would I. But it won’t be counted as states’ for Finance Commission purposes. Some Finance Commissions have things that are linked to state debt-to-GDP ratios. So in option one, it will not be counted as state debt as it will be paid from a dedicated tax source,” he said. “It won’t be centre’s either but it will be India’s.”
Somanathan acknowledged that any debt raised in this way would add to the general government debt but added that rating agencies, among others, do tend to differentiate between central government debt and state debt.
Why Not Monetise Directly Via RBI?
When asked why the government is taking this circuitous route when it can exercise an option to borrow directly from the RBI, given the shock to the economy?
“That’s an alternative. Its an alternative we don’t prefer. We need to spend a lot. We are still in month 6 of a 12-month year. There are lots of uncertainties. We aren’t taking a preferred option of doing that,” Somanathan said. “Purely on economic merits I agree [that direct monetisation could be considered] but these are matters for the central bank of the day and the Department of Economic Affairs to deliberate. As an academic point, I don’t disagree.”
Watch the full interaction here: