GST Compensation: Centre To Borrow Rs 1.1 Lakh Crore To Meet Shortfall, To Be Passed On To States As Back-to-Back Loans

The Union Ministry Of Finance today announced that the Centre will borrow the estimated shortfall of Rs 1.1 lakh crore -- as part of a special window -- to meet the GST compensation shortfall of states.

Under the Special Window, the estimated shortfall of ₹1.1 lakh crore 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.

According to the Union Ministry Of Finance, this arrangement will not have any impact on the fiscal deficit of the Government of India as the amounts will be reflected as the capital receipts of the State Governments and as part of financing of its respective fiscal deficits.

The Union Government said that this step was done to avoid differential rates of interest that individual States may be charged for their respective SDLs and will be an administratively easier arrangement.

The Union Government also clarified that the General Government (States+Centre) 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 (from 3% to 5%) under the Aatma Nirbhar Package.

In the meeting of GST Council held on 27th August, 2020, two options were put forward and were subsequently communicated to the States.

Under the Option 1, states could borrow Rs 1,10,000 crore (estimated loss in revenue attributable to GST implementation) from the Reserve Bank of India (RBI) at a concessional rate to be negotiated by the Centre. The increased borrowing by the states would be over and above any other borrowing ceilings. Further, the principal and interest would be paid using the compensation cess to ensure that no added burden on the states.

Under the Option 2, states could borrow the entire loss amount (attributable to GST, Covid-19 and any other factor) of Rs 2,35,000 crore from the RBI. However, this borrowing would be included in the borrowing ceilings set for the states and states would have to pay the interest from their own finances. The compensation cess would only pay the principal of the loan.

Twenty-One States have given their preferences for Option-1 .  These States are - Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Sikkim, Tamil Nadu Tripura, Uttar Pradesh and Uttarakhand . Eight States are yet to exercise an option.

Under Option-1, a special borrowing window will be coordinated by the Ministry of Finance to borrow the amount of shortfall in revenue through issue of debt. The total shortfall in the revenue of the States on this account has been estimated at around Rs 1.1 lakh crore. The permission to borrow the final instalment of 0.5% of GSDP out of the 2% additional borrowings permitted by the Government of India in view of the COVID pandemic, waiving the reforms condition.

In May this year, Union Finance minister Nirmala Sitharaman raised the net borrowing limit for state governments from 3% of the gross state domestic product (GSDP) to 5% ensuring an additional availability of Rs 4.28 lakh crore to all the states combined.

While 0.50 percentage point of the extra borrowing window was be available to all states unconditionally, one percentage point made available in four equal tranches with each linked to states accomplishing reforms in three out of the four identified areas - universalisation of ‘One Nation One Ration card’, ease of doing business, power distribution and augmentation of urban local body revenues.

Kerala and few other Congress-ruled States are reportedly planning to approach the Supreme Court against Centre’s decision to allow States to borrow up to ₹1.1 lakh crore from a special window facilitated by the Reserve Bank of India as mooted by Centre.