‘FRBM hike not enough; need 0.75 percentage point leeway’

While the Centre has proposed increasing the Fiscal Responsibility and Budget Management (FRBM) limit for states by half a percentage point of their gross state domestic product (GSDP) to facilitate borrowing, Kerala argues that it will need to be raised by 0.75 percentage points. In an interview with Dilasha Seth, Kerala Finance Minister THOMAS ISAAC says if the issue isn't settled, states will have to move Supreme Court. Edited excerpts:

Although you have asked for seven days’ time to examine the proposal tabled by the Centre on compensation, what is your initial reaction? Does it seem feasible?

Compensation of around ~3 trillion is required, of which ~70,000 crore will come from cess collection. The remaining ~2.3 trillion has been divided into two parts by Union Finance Minister Nirmala Sitharaman — owing to goods and services tax (GST) implementation and Covid-19.

The implication that the latter doesn’t deserve to be compensated fully is not constitutionally valid as the Constitution makes no such distinction.

For the first option, the fiscal deficit ceiling of states will have to be raised by 0.75 percentage points. The Centre is talking about raising it only by 0.5 percentage points. That will reduce my normal borrowing. Why should I do that? States will lose out on ~50,000 crore. It’s very tricky, hence I said that we will study this within a week and revert.

That is the first option. How about the second option?

Let’s imagine the second option is picked and ~2.3 trillion is entirely borrowed by states. In this case, states will lose 0.5 percent of GDP if FRBM limit is raised by 1 percentage point. The Centre will, therefore, need to increase the fiscal deficit ceiling of states by 1.5 percentage points. But there is no assurance from the government on the exact hike. There is no statesmanship on their part.

The Centre has said there will be no financial burden on states as even the interest component will be repaid using the cess collection. What is the issue then?

The issue is that states are being asked to sacrifice the compensation and accept this as a norm.

Incidentally, Bjp-ruled states such as Karnataka were in favour of borrowing by the Centre, and Bihar made some sensible points. While other BJP ministers were mum about it, Goa and Assam were activity rooting for the proposal given by the Centre.

Do you also believe that it will be better if the Centre did the entire borrowing?

Absolutely. States have to pay a rate of interest that is 1-2 percentage points higher than the Centre. Then, there is the FRBM Act. The Centre can borrow from the Reserve Bank of India and it will not have any impact on the fiscal deficit.

They will monetise the debt, so it will not show up anywhere and it will be repaid after some time.

If the issue isn’t settled, states will have to move Supreme Court. That will be nasty for the GST Council. It will be a big legal battle which will shake the federal structure to the core

What happens in case no consensus is reached on the issue even after seven days?

Then there will be a dispute between the Centre and the states. A dispute settlement mechanism will have to be set up. If it doesn’t get settled, then states will have to move Supreme Court. That will be nasty for the GST Council.

It will be a big legal battle and will shake the federal structure to the core.