Centre Transfers Rs 75,000 Crore To States In Lieu Of GST Compensation

The North Block in New Delhi, India. (Photographer: Anindito Mukherjee/Bloomberg)

Centre Transfers Rs 75,000 Crore To States In Lieu Of GST Compensation

The Union government has transferred Rs 75,000 crore to states and union territories in lieu of the expected shortfall in Goods and Services Compensation cess in the current financial year.

The amount transferred is close to 50% of the total estimated shortfall for the entire year, the Ministry of Finance said in a release on Thursday. The balance amount will be released in the second half of 2021-22 in steady instalments, the ministry said.

The funds transferred are in addition to the GST compensation being released every two months out of actual cess collection.

The central government had decided to borrow Rs 1.59 lakh crore and transfer it to states via back-to-back loans on account of inadequate collections of compensation cess. This was over and above the Rs 1 lakh crore (based on cess collection) that is estimated to be released to states during the current fiscal.

"The sum total of Rs 2.59 lakh crore is expected to exceed the amount of GST compensation accruing in FY 2021-22," the release on Thursday said.

The transfer has been funded out of existing borrowings.

Of the Rs 75,000 crore, Rs 68,500 crore was borrowed via five-year securities at a weighted average cost of 5.6%. The remaining was funded via two-year bonds at a weighted average yield of 4.25%.

The government does not intend to amend its borrowing programme for the first half of FY22, the Finance Ministry said.

All eligible states and union territories have agreed to the arrangements of funding of the compensation shortfall under the back-to-back loan facility, the release said.

"The reason we are doing it (transferring in a lump sum) is because we want states to have this money early in the year. We want to push capital expenditure and we want to make sure that they have enough for any potential health-related cost. So we have frontloaded the payment, instead of giving them the amount in weekly installments," Finance Secretary TV Somanathan told BloombergQuint.

The government will not need to change its borrowing plans, Somanathan reiterated.

The release of GST compensation of Rs 75,000 crore will substantially ease the cash flows of the state governments and help them to ramp up expenditure, said Aditi Nayar, chief economist at ICRA. "This will complement the pick-up in momentum being seen after the phased unlocking and bodes well for sustaining the nascent revival."

Nayar said the release of these funds from existing borrowings corroborates the inference that healthy tax and non tax revenues have boosted the cash flows of the central government.

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