Centre To Borrow, On-Lend Funds To States To Meet GST Compensation Shortfall
Central government will borrow Rs 1.1 lakh crore and pass the funds on to states as loans to meet the GST compensation shortfall.
The central government will borrow Rs 1.1 lakh crore and pass the funds on to states as loans to meet the GST compensation shortfall. The position is a change from the stance so far, which was that states would need to borrow via a special window.
The borrowing by the central government would avoid the situation where individual states may have to pay varying interest rates based on the market yields on their respective state development loans, the Ministry of Finance said in a statement. The central government borrowing, and loaning the amount to states will be an “administratively easier arrangement”, the statement said.
The central government’s borrowing calendar for the remaining fiscal—Oct. 19 to March 31, 2021—has been modified to account for the GST compensation financing of Rs 1.1 lakh crore.
The central government will borrow an aggregate amount of Rs 4.88 lakh crore from the market during the rest of the year. The additional borrowing will be raised via Rs 55,000 crore each in the three- and five-year tenors, said another statement by the ministry.
The amount raised by the central government will be given as back-to-back loans to states in place of the GST compensation payments. The amounts will be reflected as capital receipts of the state governments and as a part of the financing of respective state fiscal deficits.
“It may also be clarified that the General Government borrowings will not increase by this step. The states that get the benefit from the Special Window are likely to borrow a considerably lesser amount from the additional borrowing facility of 2% of GSDP under the Aatmanirbhar Package,” the government release said.
The clarification comes days after the GST Council failed to reach a consensus on how to meet GST compensation shortfall as tax revenue has fallen during the pandemic. The central government had offered states two options—allowing them to borrow Rs 1.1 lakh crore through a special window or borrow the entire shortfall of Rs 2.35 lakh crore from the market. At least 21 states have chosen to go with option 1.
Watch DK Pant, Chief Economist at India Ratings analyse the announcement and impact on fiscal deficit.
Whatever amount the central government will have to pay for the borrowing will have to be recovered from the states, or in this case from the compensation cess fund, said a government official on the condition of anonymity as he isn’t authorised to speak to the media.
In the last GST Council meeting, states had unanimously agreed to extend the levy of cess beyond 2022 in order to recoup the shortfall for this fiscal.
“I welcome the new announcement that centre will borrow through special window and provide back-to-back loans to states in lieu of compensation,” Kerala Finance Minister Thomas Isaac tweeted. The only thing that's to be resolved, he said, is how much compensation will be deferred beyond 2023.
Isaac asked the government to provide full compensation payment of Rs 2.3 lakh crore this year itself. "Since under the new arrangement additional borrowing does not affect the fiscal deficit of the centre, why should it hesitate to borrow Rs 1.7 lakh crore instead of the present offer of Rs 1.1 lakh crore?"
Puducherry Chief Minister V Narayanasamy earlier told BloombergQuint, “We will look at the proposal and I will discuss with other state finance ministers.” After the discussion, he said, a final call will be taken whether opposition states would move the Supreme Court or not.