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Monday, October 26, 2020

A half step

Centre’s decision to borrow to compensate states is welcome. More clarity is needed on modalities, remaining GST shortfall

By: Editorial | Updated: October 17, 2020 10:00:46 am
coronavirus vaccineSingling out one state as a beneficiary just because it is going to vote is bad science, bad politics —and plain wrong.

After months of uncertainty, and a near breakdown of the consensual nature of decision-making in the GST Council, the Centre, on Thursday, acceded to the states’ request, announcing that it will borrow Rs 1.1 lakh crore to lend to states to compensate them for the shortfall in their GST revenues. This is indeed a welcome development, as not listening to states’ concerns, and not honouring its commitment to protect their revenues, would have set a bad precedent and further strained Centre-state relations. Operationally, this mechanism is preferable and arguably more convenient as compared to all the states rushing to the bond market. Further, the Centre’s borrowing attracts a lower interest rate as compared to that of states, and as a result, the loans to the states will be at a uniform rate, avoiding interest rate differentials across states.

Yet, several questions remain unanswered. First, the modalities of the transaction are yet to be clearly enunciated. Presumably, the transaction will be routed through the public account of India. The accounting treatment could also be along the lines of states’ loans from multilateral agencies which are routed through the Centre. However, whichever way it is treated, it will lead to a rise in general government debt. Second, while the Centre has agreed to borrow Rs 1.1 lakh crore, what happens to the remaining shortfall — assuming that the total GST revenue shortfall remains at Rs 3 lakh crore and that collections through the compensation cess stand at Rs 65,000 crore? Will the state governments settle for being compensated only for losses arising on account of implementation issues and forgo the loss in GST revenues arising out of an “act of god”? Third, if as the Centre has said, this mechanism will not impact its fiscal deficit, then why not borrow the entire expected shortfall of Rs 2.35 lakh crore? If the repayment of the loan is not an obligation of the Centre, and will be met from proceeds from future compensation cess collections, then why the reluctance to borrow the full amount?

Considering that the grand bargain struck between the Centre and the states for pushing through GST was premised on the Centre assuring states of a 14 per cent growth in their GST revenues, the controversy over the last few months should have been avoided. The Centre’s approach, in effect placing the entire burden of the loss in GST revenues on states, was not in the spirit of cooperative federalism that the NDA government professes commitment to. This half-step now taken by the Centre must be built upon to bridge the mistrust between the two. But it is also imcumbent upon the states to show some flexibility, in the spirit of cooperation, given the sweeping distress in the economy. The GST Council should thus now approach the issue of compensating states for their remaining losses in a conciliatory manner.

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