In a sharp U-turn 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.
Experts have weighed in on what this means for the Centre, the states and the overall economic situation.
Centre Finds a Middle-Ground: Livemint
In a piece titled “A much needed breakthrough in the GST impasse”, Livemint argues that this decision by the Centre is expected to help resolve the “unsavoury dispute”. Further, the piece suggested that prima facie the Centre has given in to the states’ demand, while simultaneously appearing to have addressed its own fiscal concerns.
“The money, the Centre said, would show as capital receipts of state governments and hence would reflect in their respective fiscal deficits, not its. The implication: its fiscal health following the borrowing would be no worse-off than it already is. The repayment of the loans given to states would be done by adjusting future cess collections due to them. States too should be satisfied with the arrangement.”
I Welcome the Change of Heart: P Chidambaram
Former finance minister P Chidambaram said that he welcomes the Centre’s decision to borrow Rs 1,10,208 crore and give back-to-back loans to state governments.
Taking to Twitter, however, Chidambaram also pointed out that there still is no clarity on who will borrow the money and how the debt will be serviced and repaid. Pointing out that the Finance Minister’s letter to the state suggests that the gap in GST compensation is Rs 1,06,830 crore for this financial year, Chidambaram said: “Centre must resolve the impasse immediately by offering the same terms for Rs 1,06,830 crore as it has now offered for Rs 1,10,208 crore.”
“Having taken the correct first step, I urge the PM and the FM to take the second step also and re-establish the trust between the Centre and the states.”
Most Efficient Way of Borrowing: MK Venu
The Wire’s Founding Editor MK Venu took to Twitter to point out that he had been urging the same and “this is the most efficient way of borrowing as many states will individually find it difficult to borrow at higher rates.”
He pointed out, in his tweets, that states borrow at nearly 100 basis points more than the Centre does.
“Why pay such huge extra interest cost when Centre can easily borrow cheaper and transfer the loan to states!”
Should Help Ease Spread of State Development Loans: Jayanta Rao
Senior vice-president and group head of ICRA Ratings, Jayanta Roy, according to Business Standard, lauded this decision by the Centre as something that would help ease the spread of State Development Loans. Roy further suggested that the step would decrease the supply of state bonds in the second half of Financial Year 2021 from the level that was being formerly predicted.
“The cost of such borrowing would go down. In conjunction with the plan to conduct open market operations in SDLs, announced by the Reserve Bank of India, such measures should help ease SDL spread,”Jayanta Rao told Business Standard .
‘How Much Compensation to be Deferred to 2023?’: Thomas Isaac
Finance Minister of Kerala Thomas Isaac took to Twitter to welcome the new announcement, but with a caveat.
Stating that one issue is yet to be resolved, Isaac asked: “How much of compensation is to be deferred to 2023?”
“Provide full compensation payment of Rs 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 Rs 1.7 lakh crore instead of the present offer of Rs 1.1 lakh crore?”
(At The Quint, we question everything. Play an active role in shaping our journalism by becoming a member today.)