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Thursday, September 24, 2020

Citing strained finances, states ask Centre to borrow

State Bank of India in a research report Friday also proposed Centre to make arrangements with the RBI to facilitate such borrowing.

By: ENS Economic Bureau | New Delhi | August 29, 2020 12:30:55 am
economic package, 20-lakh crore package, nirmala sitharaman press conference, nirmala sitharaman press conference live, nirmala sitharaman press conference live updates, nirmala sitharaman press conference updates, nirmala sitharaman press conference today, nirmala sitharaman press meet today, finance minister, finance minister speech, finance minister latest newsThe Centre first admitted to problems on compensation payment in the 37th GST Council meeting held in Goa in September 2019.

A day after the Centre listed two options for bridging the revenue gap in the 41st Goods and Services Tax (GST) Council meeting, several states have raised concerns about their inability to borrow at lower rates and instead demanded the Centre to borrow. States cited their strained finances and the struggle to pay salaries and pensions to not undertake borrowing to meet the compensation gap, adding that the Centre’s capacity to borrow is higher than states.

“Centre has a higher capacity to borrow. Their interest rate for borrowing is also lower than states. The servicing of debt can be done more efficiently by the Centre than states,” a state finance minister said.

State Bank of India in a research report Friday also proposed Centre to make arrangements with the RBI to facilitate such borrowing. It listed three options for the states to meet the revenue shortfall: monetisation of state debt by the Reserve Bank of India (RBI), expansion of ways and means advances limit and allowing states to tap National Small Savings Fund (NSSF) for funds at a concessional rate of interest.

“As of now before the beginning of each fiscal year, the feasible levels of the market borrowing for Centre and States together is advised to the Government by RBI. However, RBI does not invest in State Government loans either in primary issues or in the secondary market. Thus monetization of state debt is not exactly possible in the current circumstances and it is better if the Centre monetizes the debt and gives to states and the RBI will be also comfortable by dealing with the Centre rather than deal with close to 30 sub national entities,” the report said.

States have also termed the distinction between the GST shortfall and COVID-19 related shortfall as unconstitutional. They also said that the extension of compensation cess beyond the five-year transition period till 2022 should happen only in case the Centre proposes to borrow, after which interest payments can be paid for from the compensation cess collections. States are for now awaiting written details of the two options from the Centre.

Former Finance Minister P Chidambaram also said that under the law, the obligation to compensate the states falls solely on the central government, which is passing the buck of financial burden to states. “The two options given by the Modi government to the States to bridge the GST Compensation gap is a gross violation of the law and an abdication of the responsibility of the central government…states must reject both options and demand, in one voice, that Centre must find the resources and provide the money to the states,” he tweeted.

In the Council meeting held Thursday, states were given an option of a special window, in consultation with the RBI, to borrow the projected GST shortfall of Rs 97,000 crore, and an amount that can be repaid after five years of GST, ending June 2022, from the compensation cess fund. A 0.5 per cent relaxation in the borrowing limit under The Fiscal Responsibility and Budget Management (FRBM) Act would be provided, delinked from the conditions announced earlier as part of the pandemic package. The second option was to borrow the entire projected shortfall of Rs 2.35 lakh crore — both on account of faltering GST collections and the expected shortfall due to the pandemic — facilitated by the RBI. No FRBM relaxation has been mentioned for this option so far.

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