Centre softens stand, to borrow for states

₹1.1L-cr shortfall in GST compensation cess to be lent to Centre and ‘passed on to the states as a back-to-back loan’

NEW DELHI: The Union finance ministry on Thursday said that the ₹1.1 lakh crore estimated shortfall in Goods and Services Tax (GST) compensation cess will be borrowed by the central government and “passed on to the states as a back-to-back loan”, allying concern of states that they would have to pay higher interest rates if they approach the market individually.

The Centre’s move, detailed in a statement from the finance ministry, is likely to put to rest, for now, the controversy over the compensation cess shortfall that had caused a major split in the GST Council, with no consensus being reached after three meetings. It also keeps the concept of fiscal federalism, the core of GST, alive.

The finance ministry statement added that the borrowing would “not have any impact on the fiscal deficit of the Government of India” and “be reflected as capital receipts of the state government as part of the financing of the respective fiscal deficits”.

As a result, this borrowing doesn’t go into what is called general government borrowings (the debt of the Centre and the states).

“It appears that the loan is treated as capital receipts of the state governments, which will have some positive impact on state finances, but we need to see the fine print,” said the finance minister of one of the dissenting states, requesting anonymity.

The minister said it is prudent for the Union government to borrow the entire amount to get a better rate, but there are other concerns – the Centre should have borrowed the entire shortfall (₹2.35 lakh crore) and repay from the compensation cess fund as the financial position of most of the states are precarious.

Kerala finance minister Thomas Isaac welcomed the Centre’s move and asked for consensus on other matters.

“I welcome the new announcement that Centre will borrow through special window and provide back to back loans to states in lieu of Compensation. But there is one issue yet to be resolved — how much of compensation is to be deferred 2023? Negotiate this point and reach a consensus,” he said in a tweet.

“Provide full compensation payment of ₹ 2.3 lakh crore this year itself. Since under the new arrangement additional borrowing does not affect the fiscal deficit of the Centre, why should it hesitate to borrow ₹1.7 lakh crore instead of the present offer of ₹1.1 lakh crore?,” he added.