Centre to Borrow to Make Up for States’ GST Shortfall

In a sharp retort from its earlier stance, the Finance Ministry on Thursday, 15 October, said the Centre would borrow from the market to pay the GST compensation shortfall of Rs 1.1 lakh crore to states.

This will not reflect in the fiscal deficit of the Centre and will appear as capital receipts for state governments.

On Monday, 12 October, Finance Minister Nirmala Sitharaman had said that ‘no consensus was arrived at’ on the way to make up for GST shortfall of states.

The Centre cannot borrow to make up for the shortfall of states as it will lead to rise in borrowing cost, Sitharaman had pointed out then.

The Centre has now taken the decision that instead of states taking small loans, one big loan will be taken by the Centre and distributed to states. The same borrowing interest rate will be passed on to the states, sources told The Indian Express.

“If the centre has decided to borrow the Rs 1.1 lakh crore and extend it to the states as a back-to-loans, I welcome the change of position. I thank all the economists, academics and newspaper editors who had supported our position,” senior Congress leader P Chidambaram tweeted.

“I welcome the new announcement as far as it goes. But one more issue that should be discussed is how much compensation should be deferred? I would like the entire Rs 2.3 lakh crore to be paid to states this year itself,” Kerala Finance Minister Thomas Isaac told The Indian Express.

After Thursday’s meeting, 12 states had accepted the Centre’s proposal to borrow from the markets, but nine others placed the onus of borrowing on the Government of India.

During a meeting in August, the Centre had given two options of borrowing to the states. One, borrow Rs 97,000 crore from a special window facilitated by the RBI. Two, borrow the entire expected shortfall of Rs 2,35,000 crore this year. It had also proposed extending the compensation cess levied on luxury, demerit and sin goods beyond 2022 to repay the borrowing.