Centre to borrow ₹ 1.1 trillion on behalf of states

Will lend them under a special window

In a relief for the states, the Centre has said it will borrow up to ~1.1 trillion, which is the estimated revenue shortfall on account of implementing goods and services tax (GST), and lend the states under the special window.

This may come as a victory for opposition-ruled states, including Punjab, West Bengal, and Chhattisgarh, which have insisted that the Centre should do the borrowing because it is administratively easier and it can be at a low rate of interest.

“Under the special window, the estimated shortfall of ~1.1 lakh crore (assuming all the States join) will be borrowed by the Government of India in appropriate tranches. The amount so borrowed will be passed on to the states as a back-to-back loan in lieu of GST compensation cess releases,” the finance ministry said in a note on Thursday.

The clarification comes four days after the GST Council meeting ended in an impasse over the compensation mechanism and the dissenting states have been exploring legal options, including going to the Supreme Court.

The ministry said it would not have any impact on the fiscal deficit of the Centre and the amounts will be shown as capital receipts of the state governments and as part of financing their respective fiscal deficits.

“This will avoid differential rates of interest that individual states may be charged for their respective SDLS (state development loans) and will be an administratively easier arrangement,” it said.

While this will not reflect in the Central government’s borrowing, it will show up in the states’ debt. But the finance ministry said: “The states that get the benefit from the special window are likely to borrow a considerably lower amount from the additional borrowing facility of 2 per cent of GSDP (from 3 per cent to 5 per cent) under the Atmanirbhar Package.”

“IF THE CENTRE HAS DECIDED TO BORROW THE ₹1.1 TRILLION AND EXTEND IT TO THE STATES AS A BACKTO-LOANS, I WELCOME THE CHANGE OF POSITION”

P CHIDAMBARAM, former finance minister

However, a senior finance ministry official said: “It is the Centre that is facilitating the states’ borrowing. This helps the states ... the yield may be lower.”

Despite a lack of consensus on the issue in the Council meeting, the finance ministry initiated the borrowing process for 21 states that had picked the option of borrowing up to ~1.1 trillion. Under this option, the principal and interest will be repaid via compensation cess, which has now been extended beyond June 2022.

Punjab Finance Minister Manpreet Singh Badal wrote Union Finance Minister Nirmala Sitharaman in August, saying many members (of the GST Council) had stated borrowing by the states might be costlier by 50-150 basis points.

West Bengal Chief Minister Mamata Banerjee, in her letter to Prime minister Narendra Modi, had urged the Centre to do the borrowing.