The slide in economic activities due to the imposition of localised lockdowns to deal with the second wave of Covid-19 is likely to further strain the fiscal position of state governments. The sharp decline in GST e-way bills in April and May suggests that collections are likely to be subdued at least in the first quarter of the current financial year. While economic activity may well firm up as the second wave ebbs and the vaccination drive gathers momentum, like last year, collections through the GST compensation cess will not bridge the shortfall measured against states’ protected GST revenues. The issue of how to finance this gap was raised in the 43rd meeting of the GST Council on Friday. Any uncertainty over the states’ revenue stream, especially when they have to ramp up spending, will complicate the task of fiscal management.
The Centre has pegged the total compensation requirement for states this year at Rs 2.7 lakh crore. It says it will borrow around Rs 1.58 lakh crore to compensate states for the shortfall in collections, while pegging revenue through the GST compensation cess at Rs 1.1 lakh crore. However, several issues need debating. For one, the Centre has assumed a revenue growth of 7 per cent like last year to arrive at the compensation requirement. This projection may not materialise. Further, considering that the virus spread and lockdown restrictions have varied across states, the loss across states may not be uniform. There is also the issue of the shortfall from last year that is yet to be adjusted. On its part, the Centre is hopeful that if collections rise to around Rs 1.15 lakh crore per month, then not only will the deficit this year be lower, but it will be able to compensate states by another Rs 30,000 crore for last year. However, this depends on how the economy recovers.
