West Bengal Finance Minister Amit Mitra has written a letter to Union Finance Minister Nirmala Sitharaman questioning a higher RBI interest rate for borrowings by the states to meet the shortfall in the GST revenue.
In the letter written on Friday, Mitra said that many states at the GST Council meetings in August and October have argued that the Central government borrow from RBI’s special window to meet the gap between the projected revenue growth of 14 per cent and the GST collection.
Mitra said the Centre has come up with a new proposal to borrow Rs 1.10 lakh crore (two-thirds of the GST shortfall) from the special window till January 2021, while the remaining
Rs 72,000 crore shortfall to be received by states only after June 2022.
Mitra said the Centre has been able to borrow from RBI’s special window at 5 per cent, while the states have to pay a higher 6.8 per cent interest rate, which implies that substantial debt servicing burden will be generated for them. In this context Mitra said due to the interest rate differential, the Centre should borrow the entire amount of Rs 1.8 lakh crore from the special window.
According to Mitra, the new proposal provides an additional borrowing limit of 0.5 per cent of GSDP to states to facilitate borrowings of Rs 72,000 crore. Mitra said this means that the Centre will borrow only two-thirds of the shortfall and states the remaining portion, if required from the market.
According to him, borrowings of Rs 1.10 lakh crore from the RBI special window will have no bearing on the fiscal deficit of the Centre which will be entirely funded by the cess collections.
As many as 22 states and 3 UTs have chosen the Option 1 to receive compensation from the Centre under the special window. The Centre has borrowed Rs 18,000 crore on behalf of the states in two installments, and has passed the funds on eligible states and UTs on October 23 and November 2 and November 9.
Before the last GST meeting, Sitharaman wrote to the states: “A total of Rs 2.16 lakh crore is unconditionally available to states under Option 1 (special window (Rs 1.1 lakh crore, under which the Centre will borrow and pass on the funds to states under a back-to-back loan arrangement ) + 0.5% extra open market borrowings sans reforms).”
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