So, effectively, these states/UTs have obtained 1% of G-SDP additional borrowing space this fiscal each without having to undertake any of the specified reforms.
The last 0.5% of G-SDP has now been made available to the 21 states and two UTs, by waiving the rider.
The additional unconditional borrowing freedom of 0.5% of the gross state domestic product (G-SDP) given to 21 states and two Union Territories is in fulfilment of the promise made by the Centre that such incentive will be given to all states choosing its ‘Option 1’ to bridge the goods and services tax (GST) revenue shortfall in FY21.
While these will be open market borrowings (OMBs), the special RBI-facilitated window for states to raise the funds required for part GST compensation will be available to them separately, the Centre clarified on Wednesday.
As many as 20 states chose Option 1 for GST compensation on Tuesday; on Wednesday, Tamil Nadu became the 21st state to join the bandwagon; additionally, UTs of Delhi and Jammu & Kashmir also chose the route.
The extra OMB space accorded to these 21 states and two UTs added up to Rs 78,542 crore.
The decision means these states and UTs can raise 4% of G-SDP via OMBs this fiscal, even if they don’t fulfil any of the reform conditions set out by the Centre in May, as it raised the FY21 borrowing ceiling for states. The ceiling was then raised from 3% of G-SDP to 5% of G-SDP or by about `4.28 lakh crore in aggregate.
Of course, some of these states, including Andhra Pradesh, Telangana and Karnataka, have also availed themselves of a 0.25% of G-SDP additional OBM freedom as they rolled out the One-Nation-One Ration Card scheme.
As per the May decision, which was taken in view of the revenue constraints and enhanced expenditure commitments faced by the states due to the Covid-19 pandemic, the 2% of G-SDP additional borrowing was split as follows: the first 0.5 percentage point (Rs 1.07 lakh crore) was made available to all states unconditionally, the next 1 percentage point was to come in four equal tranches with each tied to “clearly specified, measurable and feasible reform actions”. The balance 0.5 percentage point was to be accessed by states, subject to their ‘completely achieving’ the milestones in at least three out of the four reform areas.
The last 0.5% of G-SDP has now been made available to the 21 states and two UTs, by waiving the rider. So, effectively, these states/UTs have obtained 1% of G-SDP additional borrowing space this fiscal each without having to undertake any of the specified reforms.
Justifying the decision to ask the states to borrow for GST compensation, a top government functionary on Tuesday said no state has so far breached even the original 3% of G-SDP borrowing target this fiscal. The Centre, in contrast, borrowed as much as Rs 7.66 lakh crore, or close to 4% of the country’s GDP, from the market in H1. So, the states have much leeway to borrow, the source said, indicating that the Opposition’s allegations of the Centre pushing the states into a debt trap are unfounded.
Under the borrowing Option 1, the Centre had put the upper limit of combined borrowing by all states at `1.1 lakh crore. The amount is related entirely to losses due to implementation of GST while it is estimated that total shortfall, which includes impact due to the pandemic, would be `2.35 lakh crore for the current fiscal.
The states don’t have to bear the interest or principal repayment costs under the special borrowing window; the repayments would be fully adjusted against future collections of the cess, which has been extended beyond June 2022, till such time necessary for servicing the debt fully. While the Option 2 – which involved raising the entire GST revenue shortfall, including the pandemic-induced one — initially meant the interest cost will be on the states, the Centre later indicated that this would also be made cost-free for states.
Ten states are, however, reluctant to accept either of the two options and insist that since it is the Centre’s obligation to compensate the states for any slippage (from the protected annual revenue growth of 14%), the borrowing must be done by the Centre.
Already, the gross State Development Loan issuance has expanded by a substantial 56.8% to Rs 3.53 lakh crore in H1FY21 from Rs 2.25 lakh crore in H1FY20. The net SDL issuance rose by an even higher 91.4% on year in H1FY21 to Rs 3.02 lakh crore.
The weighted average yield of state government dated securities (across states and tenures) auctioned on October 6 was at 6.80%, 23 bps higher than a week ago and 31 bps higher than in the first week of September.
The reforms linked to part of the extra borrowing space given to the states are one-nation-one ration card scheme; ease of doing business; reforms of power sector distribution companies and reforms of urban local bodies.
On the rolling out of the one-nation-one-ration-card scheme, on September 24, the Centre granted permission to five states – Andhra Pradesh, Telangana, Goa, Karnataka and Tripura — to raise extra resources of a total of `9,913 crore via OMBs.
The states that have chosen to use Option 1 for GST compensation are Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Sikkim, Tripura, Uttar Pradesh and Uttarakhand and Tamil Nadu.