Back-to-back loans: Centre releases Rs 40,000 crore to states as extra GST aid

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October 08, 2021 3:00 AM

On July 15, the Centre had released Rs 75,000 crore as GST compensation to states. The total amount estimated to be released to the states in FY22 under the facility, which entails minimal fiscal cost to them, is Rs 1.59 lakh crore.

Of the Rs 40,000 crore compensation released in the latest tranche, Karnataka will get the largest amount of Rs 4,556 crore, followed by Maharashtra (Rs 3,467 crore), Gujarat (Rs 3,281 crore) and Punjab (Rs 3,052 crore).Of the Rs 40,000 crore compensation released in the latest tranche, Karnataka will get the largest amount of Rs 4,556 crore, followed by Maharashtra (Rs 3,467 crore), Gujarat (Rs 3,281 crore) and Punjab (Rs 3,052 crore).

In what could help accelerate capital expenditure by state governments, the Union government on Thursday released Rs 40,000 crore to them to bridge their GST revenue shortfall, taking the total amount released under the special back-to-back loan mechanism so far in the current financial year to Rs 1.15 lakh crore.

On July 15, the Centre had released Rs 75,000 crore as GST compensation to states. The total amount estimated to be released to the states in FY22 under the facility, which entails minimal fiscal cost to them, is Rs 1.59 lakh crore.

These loans are in addition to the normal GST revenue compensation being released every two months to states out of actual cess collections.

The front-loading of GST compensation loans will not lead to additional market borrowing by the Centre. Robust revenue receipts are giving the Centre confidence to limit its annual market borrowing programme at the budgeted level of Rs 12.05 lakh crore for FY22 even after factoring in the Rs 1.59 lakh crore borrowings to be undertaken for GST compensation to states.

Even with the relief packages and export subsidy arrears clearances announced recently, the fiscal cost of which is estimated at around Rs 2 lakh crore, the fiscal deficit target of 6.8% of GDP for 2021-22 could be adhered to, given that tax revenue receipts would likely exceed the budget estimate by about Rs 2 lakh crore and expenditure rationalisation undertaken might allow savings of about Rs 1.15 lakh crore.

Of the Rs 40,000 crore compensation released in the latest tranche, Karnataka will get the largest amount of Rs 4,556 crore, followed by Maharashtra (Rs 3,467 crore), Gujarat (Rs 3,281 crore) and Punjab (Rs 3,052 crore).

Aided by an incipient recovery in tax revenues, state governments seem to have already stepped up capital expenditure, reversing a declining trend witnessed in FY21 due to the pandemic, which dented revenues and necessitated elevated revenue spending. Data gathered by FE of 14 major states shows that they reported a combined capex of Rs 76,616 crore in April-July of FY22, up 110% year-on-year. Of course, the surge is partly aided by a low base.

The Centre has asked states to undertake Rs 1.1 lakh crore more capex in FY22 than the Rs 5 lakh crore achieved in the pre-pandemic FY20. The states are allowed net borrowing of 4% of GSDP in FY22, with 50 basis points of this linked to the achievement of incremental capex over their investment in FY20.

For the second year in a row, the government is borrowing under a special, relatively low-cost mechanism to bridge a yawning shortfall in the GST compensation cess pool and transfer the funds to states as back-to-back loans.

While the amount borrowed under the RBI-enabled mechanism last year was Rs 1.1 lakh crore, the Centre recently acknowledged in Parliament that Rs 81,179 crore was yet to be released to state governments towards fully compensating them for their GST revenue shortfall for FY21.

The Rs 1.59 lakh crore to be provided to states this fiscal as back-to-back loans would be over and above the compensation of Rs 1 lakh crore based on cess collection to be released to states during FY22.

“The total of Rs 2.59 lakh crore is expected to exceed the amount of GST compensation accruing in FY2021-22,” the finance ministry said in a statement. If the shortfall is less than the estimated Rs 2.59 lakh crore, a portion of the previous year’s arrears would be cleared in FY22.

The release of Rs 40,000 crore being made now is funded from borrowings of the Union government in 5-year securities, totalling Rs 23,500 crore and 2-year securities for Rs 16,500 crore issued in the current financial year, at a weighted average yield of 5.69% and 4.16% per annum respectively.

Besides helping the states in their capital expenditure, this release will improve health infrastructure to effectively fight Covid-19, the ministry said.

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