If states don’t revisit the 14% revenue-growth guarantee, the compensation issue will be repeated again next year
In all the feuding between the Centre and the states, keep in mind that neither comes to the table with completely clean hands.
Finance minister Nirmala Sitharaman did well to agree to dial back on her original position that required the states to borrow to make good the shortfall in GST compensation; to be fair, by agreeing to extend the period for which GST cess is collected, so as to repay this extra borrowing, did make things easier for the states even then. Indeed, the finance minister was always on strong grounds when she said that the GST compensation had to be paid to the states from the Compensation Cess fund and not the consolidated Fund of India. When some state finance ministers—like those from West Bengal and Kerala—spoke of how the central government had a moral and constitutional duty to make good the loss in revenue—they were stretching the facts; the Centre does have a moral duty since, when then finance minister Arun Jaitley put together the GST framework, he gave them an implicit guarantee. Even at that time, the 14% revenue-growth that Jaitley promised looked excessive; indeed, long before the pandemic struck, the Compensation Cess fund was running out of cash. In FY20, Rs 1.65 lakh crore was paid out as compensation to the states while the fund collected only Rs 95,000 crore; what saved the day was the fact that, in earlier years, the fund had unspent balances.
While it looks as if things may get sorted out with the Centre agreeing to borrow Rs 1.1 lakh crore on behalf of the states—some, like Kerala, are still asking for the Centre to borrow more to cover the entire shortfall—it is critical that states meet the finance minister halfway. They need to agree to revisit the 14% guaranteed growth since, had GST not been agreed to, the states’ own tax revenues would never have risen by 14% every year. Perhaps this should be revised downwards to the nominal rate of GDP growth or just a bit more. If this is not done, the same problem that is being witnessed today will occur again in FY22 and maybe even FY23. Even in FY25, the IMF estimates India’s GDP will be 12-13% lower than what it would have been as per the pre-pandemic projections.
In all the feuding between the Centre and the states, keep in mind that neither comes to the table with completely clean hands. Even before the pandemic, the central government has been increasing taxation on various goods—such as petroleum ones—by levying a cess; unlike a tax, a cess does not have to be shared with the states. While cesses were 4.7% of the Centre’s non-GST tax revenues in FY19, they were projected to rise to 8.2% in FY21. Put another way, had there been no cesses in the FY21 budget and these were replaced by taxes, the states would have got Rs 1,25,000 crore extra. At a time when, thanks to the economy slowing, states will get a smaller amount—the budget envisaged them getting Rs 7,84,101 crore by way of devolution—of central taxes and also lower GST revenues, the cess compounds their woes. But the states, too, have been getting a free ride in various ways; all benefitted from the Uday package for electricity reforms, but none carried out the promised reform and, from the looks of things, their state electricity boards (SEBs) are being given another Rs 1.2-1.3 lakh crore or thereabouts of loans from centrally-owned financial institutions. While it is to be hoped that states will reform this time around, the important thing to keep in mind is that the central government is not obligated to give them these loans either; indeed, had it wanted, the Centre could have pushed for more stringent solutions before giving the loan; this newspaper has been pushing for forcing states to sign an agreement that allows RBI to dip into their accounts with the central bank—tax devolutions from the Centre are deposited in this account—each time a SEB defaults of a payment to a supplier.