After having rejected the options presented by the Centre for bridging the compensation deficit of Rs 2.35 lakh crore this year, states are insisting on the Centre to borrow to make good the shortfall. Kerala Finance Minister Thomas Isaac, in an interview with The Indian Express, said the states will not give up this issue as it is their constitutional right, adding that legal options could be considered after they have exhausted all other options. Edited excerpts:
States are jointly taking the decision of rejecting the Centre’s borrowing proposal. What is the way forward?
We are not just rejecting the proposals. We are putting forward a third option: central government borrows the full compensation and the states will agree to extend the cess for sufficiently long period to recoup this amount.
Why is this a viable proposal? Because, one, if states were to borrow, their FRBM limit has to be sufficiently raised but the Centre is not willing to do that, they are trying to put conditions on that borrowing. These are unconditional, we don’t like. Two, it’s impossible to operate it as the compensation requirements of states vary very widely. Northeastern states had surplus till Covid came and there are many states where as much as 40-45 per cent of the revenues is through compensation. So how can you have a single ratio of fiscal deficit. It will become complicated. So it is simple that the central government borrows. It is also a moral obligation because if it is a surplus in the cess fund, it goes to the Consolidated Fund of India (CFI). The undistributed IGST (integrated GST) goes to the CFI. So whenever there is a surplus, it goes into the CFI, but when there is a deficit, it’s asymmetry. They should support the states. Therefore, Centre should borrow and provide.
When you first proposed borrowing, reminding earlier comments made in the GST Council, was it always about the Centre borrowing or were you looking at borrowing by the GST Council, but which is probably legally not feasible?
Central borrowing is very simple, they can directly borrow from the markets or they are afraid it will affect interest rates and so on. Look, here you are rolling out a Rs 21-lakh crore stimulus package which is mostly based upon borrowed funds, almost entirely. So what is the big deal. States are saying it’s only Rs 2.3 lakh crore, so it can be accommodated. But if they are afraid that interest rates will rise and so on, monetise the debt. Simple. That’s what all the countries were doing.
If not, then legally empower the GST Council to borrow or empower the empowered committee to borrow, that also is possible. But why go to all that when the Centre can directly borrow.
What about the reasons stated by the Centre for not being able to borrow as their interest rates may rise, while states can borrow?
This is all meaningless. Whether the state borrows or the Centre borrows, the macroeconomic impact will be the same. Nobody looks at the fiscal deficit of the Centre and states, they see the combined fiscal deficit. And therefore, impact on the economy will be the same. We have had a 24 per cent decline in GDP and how can anybody think of cutting expenditure. All our budgets have been premised upon 14 per cent increase in the GST and therefore, the moment they say they won’t provide compensation for Covid loss, saying there is no expenditure against Covid, that you are giving a peer stimulus, you are not following a contra-cyclical policy but a pro-cyclical policy. The revenues have come down, therefore, cut your expenditures. This is pro-cyclical. Which government in the world is following that?
Are any legal options being explored? Or will you put across your point in the next Council meeting?
Our chief ministers are writing (letters to the Prime Minister), the state governments’ chief ministers are opposed to it … the Government of India will have to respond to that. So let’s see what is there in the response, then we will respond again. But be sure that this issue, we are not going to give up. This is a Constitutional right, they cannot take the rights of the states.
They are saying loss due to implementation of GST. Therefore, they are saying that external factors like Covid are not covered by the Constitution but the Constitution defines, the (GST Compensation) law defines how the loss is to be calculated. It is very clearly written how the loss has to be calculated, 14 per cent growth every year on base year of 2015-16 and from that you minus your actual collection. That gap is a compensation gap. It is clearly defined. So, what they are saying is illegal. That can be fought in the court also … we will consider it after exhausting all other possibilities in the GST Council.
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