India May Need to Borrow $22 Billion More to Pay States

A man holds a two thousand Indian rupee banknote and a five hundred Indian rupee banknote. (Photographer: Dhiraj Singh/Bloomberg)

India May Need to Borrow $22 Billion More to Pay States

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India may need to borrow more for a second straight year to compensate its states for their revenue loss due to a shortfall in a nationwide consumption tax collection, according to people with knowledge of the matter.

The additional borrowing requirement is estimated at 1.58 trillion rupees ($21.7 billion) in the fiscal year started April 1, said the people, who asked not to be identified citing rules. A panel on goods and services tax will meet on Friday to discuss compensation to states, among other issues.

While the amount to be paid to states works out to 2.7 trillion rupees, the government is expected to muster only 1.1 trillion rupees, the people said.

India May Need to Borrow $22 Billion More to Pay States

Calls made to a Finance Ministry spokesperson weren’t immediately answered.

The amount is part of a compensation that the federal government agreed to pay states for any revenue loss on account of introduction of a nationwide GST. But the economic downturn caused by the world’s worst coronavirus outbreak risks hurting tax collection, possibly forcing the administration to consider additional borrowings.

Should the borrowing materialize, it will be in addition to the over 12 trillion rupees budgeted this year to bridge the fiscal deficit. The RBI, has so far, been able to keep yields under check through its various moves such as ‘Operation Twist’ and the announcement of a one trillion-rupee bond purchase acquisition program for the current quarter. The benchmark 10-year yield is down 20 basis points to 5.97% this fiscal year.

Any additional borrowing will replicate an arrangement followed last financial year, where New Delhi borrowed 1.1 trillion rupees on behalf of the states and passed them on as back-to-back loans, the people said. The decision on the extra borrowing, the amount and the timing would be made after consulting with the Reserve Bank of India and states, the people said.

While the payment to states was initially supposed to be for five years starting 2017, the federal government last year extended its scope beyond 2022 to meet the revenue gap caused by the coronavirus pandemic. Government spending is key to sustaining the recovery of Asia’s third-largest economy from a rare recession last year.

Although GST receipts have come in at more than 1 trillion rupees each month for seven successive months as of April, there are worries that it will slow amid regional lockdowns implemented by most states to curb the deadly second wave of the pandemic.

A proposed reduction in GST rates on Covid related medical supplies may further dent revenues. In its meeting on Friday, the tax panel is expected to lower rates on oxygen concentrators, medical oxygen, pulse oximeters and Covid testing kits to 5% from 12% now.

The economic costs of the recent surge in cases are rising rapidly with economic losses estimated at $74 billion, all of it contained in the second quarter, Barclays Plc said in a report to clients on Tuesday. The bank lowered its economic growth forecast by 80 basis points to 9.2% for the fiscal year.

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