Centre to borrow Rs 1.1 trn to meet states' shortfall in GST compensation

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 central government will borrow Rs 1.1 trillion to meet the shortfall in GST compensation to be paid to states using a special window that "will not have any impact on the fiscal deficit".

The amount so borrowed would be passed on to states as back-to-back loans in lieu of the GST compensation cess releases, said the finance ministry on Thursday. "The amounts will be reflected as capital receipts of the state governments and as part of financing of their respective fiscal deficits."

"It may also be clarified that the General Government (States+Centre) borrowings will not increase by this step," said a press release by the ministry

"The States that get the benefit from the Special Window are likely to borrow a considerably lesser amount from the additional borrowing facility of 2 per cent of GSDP (from 3 per cent to 5 per cent) under the Aatma Nirbhar Package." The release did not say who will service the interest and principal payments.

The Centre had proposed two options after a GST Council meet on August 27, both requiring states to borrow. The meetings on October 5 and October 12 on the issue remained inconclusive. Under the second option, not picked by any state, the entire estimated shortfall of Rs 2.3 trillion on account of GST implementation and the Coronavirus (Covid-19) pandemic could be borrowed, but the interest component will be borne by states.

Tamil Nadu on Wednesday became the 21st state to pick Option 1 to access additional market borrowing, of Rs 9,627 crore, taking the total borrowing permitted by the Centre to Rs 78,000 crore, over and above the Rs 1.1 trillion special window provided to all states to compensate for inadequate GST cess collection.

The additional borrowing for states constitutes 0.5 per cent of their respective gross state domestic product.