GST shortfall: Bengal, Kerala finance ministers say Centre should borrow, not states

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August 29, 2020 7:45 AM

The states have been given two options — either to borrow Rs 97,000 crore with an additional fiscal deficit headroom of 0.5% or Rs 2.35 lakh crore without any FRBM relaxation.

He added that the proposal to extend the compensation cess fund mechanism beyond five years was reasonable only if the Centre offered to borrow.He added that the proposal to extend the compensation cess fund mechanism beyond five years was reasonable only if the Centre offered to borrow.

Finance ministers of West Bengal and Kerala on Friday said their states won’t be on board with the borrowing plan suggested by the Centre to meet the states’ protected goods and services tax revenue target, unless the Centre offers to raise the loan.

Speaking to CNBV TV 18, they said their states are not equipped to borrow at a rate that is available to the Centre. In the GST Council meeting on Thursday, the Centre proposed that states can borrow under a special dispensation which would ensure a G-Sec linked rate of interest. The interest cost would be borne from the proceeds of the compensation cess fund accruing after June 2022. The states have been given two options — either to borrow Rs 97,000 crore with an additional fiscal deficit headroom of 0.5% or Rs 2.35 lakh crore without any FRBM relaxation.

“The states do not have the capacity to borrow: some of them aren’t able to pay salaries and even pensions. The Centre has the capacity to borrow because it can monetise its fiscal deficit which means RBI can print money for them. The Centre can borrow at 2% lower rates than what is available for states,” West Bengal FM Amit Mitra said. He added that the proposal to extend the compensation cess fund mechanism beyond five years was reasonable only if the Centre offered to borrow.

“Interest and amortisation payment can be done through extended cess beyond five years,” he said.

Union finance minister Nirmala Sitharaman had said the Centre would “facilitate’ the borrowing process by talking to the Reserve Bank. She added that all states could be made available the loans at roughly the same interest rate.

In the same vein, Kerala finance minister Thomas Isaac said that while the Central government’s proposal was that borrowing Rs 97,000 crore would be covered under an 0.5% headroom in fiscal deficit but his own calculation showed that the amount would require a much higher ceiling.

Both the state ministers also said that the Central government’s distinction of categorising revenue shortfall under two different heads — one strictly due to GST implementation and another due to Covid-19 impact — was a ‘red herring’ and ‘unconstitutional’.

Explaining the two borrowing options finance secretary Ajay Bhushan Pandey had said that in the absence of the pandemic, revenue shortfall (after cess) due to implementation of GST alone would be Rs 97,000 crore considering a the gap between states’ protected revenue growth of 14% year-on-year and actual GST mop-up growth.

The second option for borrowing is Rs 2.35 lakh crore, which is the expected shortfall in states’ entitlement due largely to pandemic-induced economic slowdown and also due to GST implementation issue. The gap between protected revenue and states’ GST earning this fiscal is expected to be Rs 3 lakh crore, a part of which would be met with Rs 65,000 crore of estimated cess collection, leaving a gap of Rs 2.35 lakh crore at the end of the year.

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