As first state signs up, Centre proposes loan window via state-owned banks

“It might be something like a negotiated loan. There could be some 4-5 banks who are willing to lend. Then the repayment could happen through deducting,” an official said. The method of deducting would be opted for in line with the repayment process for other government debt, wherein the government doesn’t repay their loans. Instead, the issuer of the loan, say, Reserve Bank of India deducts the government account.

The modalities are being worked upon by the Finance Ministry keeping in mind the legal feasibility of the mechanism, the official said, adding that it could be along the lines of the process followed for bank recapitalisation. “One way could be to release the funds to states and the RBI can deduct their account or the RBI can deduct the central government’s cash account directly, which could be then linked to the cess fund for repayment purpose. The options are being discussed to decide as to what will be legally feasible,” the official said. The details will be firmed up once there is clarity on the number of states opting for option 1 and option 2. “Though a uniform choice may make it easier to implement the mechanism, every state has the freedom to choose between the two options,” the official said.

The Centre and Opposition-ruled states are in conflict over the financing of the GST shortfall of Rs 2.35 lakh crore in the current fiscal. Of this, as per the Centre’s calculation, about Rs 97,000 crore is on account of GST implementation and the rest is the impact of Covid-19 on states’ revenues.

The Centre had proposed two options to the states: to borrow Rs 97,000 crore either from a special window facilitated by the RBI or the full amount of Rs 2.35 lakh crore from the market. It also proposed extending the compensation cess levied on luxury, demerit and sin goods beyond 2022 to facilitate the repayment of the borrowed amount. After a meeting was held by the Finance Secretary and Expenditure Secretary on Tuesday with states to clarify the details regarding the two borrowing options, states, especially the BJP-ruled states, are expected to finalise their choices in next few days, with most expected to tilt in favour of option 1 with a lower borrowing amount.