In a sharp retraction of its earlier position, the Finance Ministry Thursday said the Centre would borrow from the market to pay the GST compensation shortfall of Rs 1.1 lakh crore to states, and then act as an intermediary to arrange back-to-back loans to state governments.
This arrangement, it said, will not reflect in the fiscal deficit of the Centre and will appear as capital receipts for state governments.
A senior Finance Ministry official said the back-to-back loan would be similar to the way funding from multilateral institutions such as the World Bank and Asian Development Bank is routed to states, where the Centre borrows and then lends to states. “So instead of states taking small loans, one big loan will be taken by the Centre and distributed to states on the exact same terms. Whatever interest rate the Centre borrows on, the same rate will be passed on to the states,” the official said.
The development comes two days after a standoff between Opposition-ruled states and the Centre over the compensation shortfall. At Monday’s GST Council meeting, both sides had failed to arrive at a consensus on the borrowing options.
After Thursday’s announcement, Opposition-ruled states said they are willing to negotiate with the Centre. “I welcome the new announcement as far as it goes. But one more issue that should be discussed is how much compensation should be deferred? I would like the entire Rs 2.3 lakh crore to be paid to states this year itself,” Kerala Finance Minister Thomas Isaac told The Indian Express.
Though Isaac didn’t foreclose other options, including a possible legal challenge, he said the Centre should now reach out to opposing states. “We are willing to talk,” he said.
The Centre had in August given two options to the states — either borrow Rs 97,000 crore from a special window facilitated by the RBI or borrow Rs 2.35 lakh crore from the market. It had also proposed extending the compensation cess levied on luxury, demerit and sin goods beyond 2022 to repay the borrowing.
The Centre had later revised the borrowing amount under Option 1 to Rs 1.1 lakh crore as it changed the assumption of growth in GST revenues to be 7 per cent instead of the earlier 10 per cent.
The total GST revenue shortfall for the current financial year was estimated to be Rs 3 lakh crore, of which compensation cess collection was estimated to be Rs 65,000 crore, leaving a compensation deficit of Rs 2.35 lakh crore. Of this Rs 2.35 lakh crore, Rs 1.1 lakh crore shortfall has been estimated on account of GST implementation, while the rest of the amount is being estimated as the impact of the COVID-19 pandemic.
In all, 21 states and two Union Territories have already agreed to ‘Option-1’ of the borrowing plan, while the other opposing states had earlier said that they would meet on Friday to consider moving the Supreme Court. Seven states had not detailed their choice for the Centre’s earlier borrowing proposal, under which a special window was to be coordinated by the Centre for the states to borrow.
“It may also be 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 Atma Nirbhar package,” the government said in Thursday’s statement.
It added that the process under the special window would avoid differential rates of interest that individual states may be charged for their respective state development loans.
Reacting to Thursday’s announcement, senior Congress leader and former finance minister P Chidambaram said, “If the Centre has decided to borrow Rs 1.1 lakh crore and extend it to states as back-to-loans, I welcome the change of position.”
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