Opposition leaders termed the decision as a change of stance from the central government, while economists welcomed it as a cleaner way of raising the necessary funds swiftly.
The Centre on October 15 made a departure from its stance that States should undertake market borrowings to bridge the ₹1.1 lakh crore of GST compensation shortfall this year, stating that the Government of India will now undertake the required borrowings in tranches and pass it on to States as a ‘back-to-back loan’ that will reflect on their own books.
The move may break the impasse between the Centre and States over the issue of borrowings to recompense the latter, with consensus remaining elusive despite extensive parleys over three meetings of the GST Council.
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By October 14, 21 States and Union Territories such as Delhi and Jammu and Kashmir had acceded to the Centre’s proposal that States undertake the borrowings to meet the GST compensation shortfall, with principal and interest repayments to be paid from future GST cess collections. States such as Kerala and West Bengal, which had been insistent on the Centre undertaking the borrowings, had begun preparing to move the apex court over the matter.
Opposition leaders termed the October 15 decision as a change of stance from the central government, while economists welcomed it as a cleaner way of raising the necessary funds swiftly and bring the focus back to fighting the pandemic on the ground.
“If the Centre has decided to borrow the ₹1.1 lakh crore and extend it to the states as back-to-back loans, I welcome the change of position,” former Finance Minister P. Chidambaram said.
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N.R. Bhanumurthy, vice-chancellor of the Bengaluru Ambedkar School of Economics University said, “This is a wise, timely and non-disruptive move from the Centre, especially when some States were planning to move the Supreme Court.” He added: “It will offer a big breather to States, particularly those that have high fiscal deficits and would have had to pay higher rates if they approached the market.”
In its original proposal put up at the GST Council meeting in August, the Centre said the shortfall on account of GST implementation will be borrowed by States through issue of debt under a Special Window coordinated by the Finance Ministry. “The GOI will endeavour to keep the cost at or close to the G-sec yield, and in the event of the cost being higher, will bear the margin between G-secs and average of State Development Loan yields up to 0.5% through a subsidy,” it had said.
Mr. Bhanumurthy said the new approach of the Centre borrowing from the market is a far simpler mechanism and may help bring the reluctant States on board.
Asserting that this borrowing, to be conducted through a special window, won’t affect the Centre’s fiscal deficit or expand general government debt, the finance ministry said this is being done to ensure that States won’t have to pay different interest rates for these borrowings. This will also be an administratively easier arrangement, the Ministry pointed out.
Also read | Centre used GST compensation cess elsewhere, violated law: CAG
“Under the Special Window, the estimated shortfall of ₹1.1 lakh cr (assuming all States join) will be borrowed by Government of India in appropriate tranches. The amount so borrowed will be passed on to the States as a back-to-back loan in lieu of GST Compensation Cess releases,” the finance ministry said in a statement.
“This will not have any impact on the fiscal deficit of the Government of India (GOI). The amounts will be reflected as the capital receipts of the State Governments and as part of financing of its respective fiscal deficits,” the ministry explained, adding that this will avoid the prospect of individual States having to pay differential interest rates if they borrowed this corpus as a State development loan.
On October 15 morning, Kerala Finance Minister Thomas Isaac said that some States are likely to approach the Supreme Court against ‘discriminatory and illegal action of Centre regarding GST Compensation’. Kerala Chief Minister Pinarayi Vijayan had planned to take a final decision on the State’s stance at a meeting with top officials.
The Finance Ministry stressed that the country’s general government debt, which includes both the Centre’s and States’ borrowings will not increase due to 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 (from 3% to 5%) under the Aatma Nirbhar Package,” it noted.
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