The Karnataka government has decided to amend the Karnataka Fiscal Responsibility Act, 2002 during the forthcoming session of the state legislature to facilitate borrowing to the extent 5 per cent of the gross state domestic produce (GSDP) to overcome revenue shortages incurred during the Covid-19 crisis.
The decision to modify the Act from the earlier GSDP of 3 per cent was taken at a Tuesday meeting of the state cabinet headed by Chief Minister B S Yediyurappa, who also holds the finance portfolio.
The changes in borrowing limits imposed on the state will enable the state to borrow an additional Rs 33,000 crore needed for development work during the current fiscal, state Law Minister J C Madhuswamy said in a press briefing after the cabinet meeting.
“The Central government has permitted an increase in borrowing limits up to 5 per cent of GSDP due to the Covid-19 crisis. We have decided to modify the state fiscal responsibility Act to increase borrowing from 3 per cent to 5 per cent. The state will be able to borrow Rs 36,000 crore under the amended law but we have decided to borrow Rs 33,000 crore,” the minister said.
He said the increase in borrowing limits was only a one-time measure to tide over a crisis. He said that the state government would separately seek its due in terms of outstanding GST compensation of over Rs 11,000 crore from the Centre.
Earlier this month, the Karnataka government had decided to seek a lower GST compensation offer made by the Central government in order to be eligible for unrestricted borrowing of up to 1 per cent of the GSDP to make up for a huge shortfall of revenues expected in the current Covid-struck fiscal.
After evaluating two options to avail GST compensation of Rs 18,289 crore or Rs 25,508 crore at meetings held with senior officials, Yediyurappa announced that the state would opt for the lower compensation in order to be in a position to unconditionally borrow up to 1 per cent (Rs 18,036 crore) of the GSDP.
Under the first option, Karnataka would be eligible for a total compensation of Rs 18,289 crore, with Rs 6,965 crore coming from the cess collected and the remaining amount of Rs 11,324 crore being obtained by borrowing through a special window, where the burden of principal and interest repayment is met out of a compensation cess fund that accrues in the future.
Under the option opted for by the Karnataka government, an additional borrowing of Rs 18,036 crore will be possible and another 1 per cent can be borrowed, linked to certain reforms as suggested by the Centre, with the possibility of taking the additional borrowings forward to the 2021-22 financial year if necessary, the Karnataka government noted.
Under the second option, Karnataka would be eligible for a total compensation of Rs 25,508 crore, with Rs 6,965 crore coming from the cess collected and the remaining Rs 18,543 crore from borrowing through an issue of market debt.
“Under this option, unconditional borrowing of 1 per cent of GSDP (Rs 18,036 crore) would not be separately available to the state. As a result, the net borrowing of the state will reduce substantially by an amount of Rs 10,817 crore. Further, in option 2 the interest on borrowing through market debt shall be paid by the state from its own resources,” the state government said.
The move by the Karnataka government to borrow funds to make up for the shortfall of revenue and GST compensation by the Centre instead of insisting on the central government borrowing the funds for the state has been criticised by opposition leaders in the state.
“Yediyurappa lacks the courage to fight against injustice. His lust for position has replaced his spine and this has made him accept the Rs 97,000 crore formula. Does this mean he is willing to forgo additional gap which is pictured as loss due to pandemic and betray Kannadigas?” Congress leader and former chief minister Siddaramaiah said last week.
“There is no way to determine exact loss due to pandemic or recession or implementation. GST Compensation Act mandates Centre to pay the gap to States without any rider and the Narendra Modi govt should honor its commitment,” he had said.
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