GST compensation: 21 states may borrow Rs 78,000 cr above Rs 1.1 trn option

Tamil Nadu opts for special window, gets permission to borrow Rs 9,600 crore, Kerala reacts strongly to the Centre's move to 'divide" states

The Centre's permission to 21 states to borrow Rs 78,000 crore from the market is over and above the Rs 1.1 trillion special window given to all the states for GST compensation.  

“This is over and above the special window of Rs 1.1 trillion,” the Union finance ministry said on Wednesday.

This is bonus borrowing for states to the tune of 0.5 per cent of their respective gross state domestic product. This incentive was there in one of the two options given by the Centre to the states for paying their compensation shortfall due to the fall in comensation cess collections under GST.

The Rs 1.1 trillion borrowing will be facilitated through the special window by the finance ministry. The framework for the special window is in the works.

"A special window is being created by the Ministry of Finance to facilitate this borrowing," the ministry said in a statement.

Meanwhile, Opposition-ruled Tamil Nadu was also allowed additional market borrowing to the tune of Rs 9,627 crore on Wednesday.

The permission was given after the southern state sent its preference to the finance ministry to opt for the finance ministry window. With this, the number of states opting for the window rose to 21 and two Union Territories -- Delhi and Jammu and Kashmir. This would leave 8 states and 1 Union Territory (Puducherry) that have not yet opted for either of the two options offered by the finance ministry. 

Kerala Finance Minister Thomas Isaac reacted strongly to the Centre's policy to 'divide' states. "(I) Had repeatedly appealed to the Council to increase the unconditional component of additional 2  per cent borrowing permitted to ensure fiscal space for the states, while negotiations could go on for a new compromise option. Now the Centre is using it for dividing states. Still, the Centre wants a consensus," he tweeted. 

On Tuesday, the Department of Expenditure had allowed 20 States to raise an additional  Rs 68,825 crore through open market borrowings. “With today’s permission, 21 States have been granted permission to mobilise Rs 78,542 crore so far,” the official release said.

 

Maharashtra, Odisha, Tamil Nadu, Andhra Pradesh and Delhi are the opposition-ruled states and Union Territories which have picked an option from the two proposed by the Centre, requiring market borrowing by states themselves amid inadequate GST compesnsation cess collection. Others including Kerala, Punjab, Chhattisgarh and West Bengal have rejected both. They are pressing the Centre to do the borrowing instead. They are exploring legal options to contest Centre’s decision to proceed with its offer despite there being a divided house in the GST Council on the issue.

Other states that have chosen Option 1 are Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Karnataka, Madhya Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Uttar Pradesh and Uttarakhand.

The Centre had put forward two options after the GST Council meet on August 27, both requiring states to borrow. The meetings on October 5 and October 12 remained inconclusive on the issue. 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 can be borrowed, but the interest component will be borne by the states.

The government in May had provided an additional borrowing limit of up to 2% of GSDP to the states. The final instalment of 0.5% out of this 2% limit was linked to carrying out at least three out of four reforms stipulated by the finance ministry. However, in case of states, which have exercised Option-1, to meet the shortfall arising out of GST implementation, the condition of carrying out the reforms to avail the final instalment of 0.5% of GSDP has been waived.