After five-hour-long deliberations to resolve the Goods and Services Tax (GST) compensation issue on which the central and state governments had reached an impasse, Finance Minister Nirmala Sitharaman gave states two options under which they could borrow from the market to make up for the estimated deficit of Rs 2.35 lakh crore in FY21, created due to the economic losses caused by COVID-19.
Out of this deficit amount, about Rs 97,000 crore could be attributed to the implementation of the GST, while the rest is on account of the slowdown inflicted by the pandemic. Under the first option, the Centre in consultation with the Reserve Bank of India (RBI) will provide a special window to states to borrow Rs 97,000 crore at a reasonable rate of interest and this money can then be repaid after five years from the collection of cess.
The second option before the states is to borrow the entire GST compensation gap of Rs 2.35 lakh crore in FY21 in consultation with the RBI. The states have been given seven days to decide which option they want.
The Central government is legally bound to compensate states from the compensation cess that is collected. "The attempt of Centre to introduce a distinction in revenue shortfall as due to implementation of GST and as that caused by COVID and that latter doesn’t deserve to be compensated fully is not constitutionally valid. Constitution makes no such distinction," Finance Minister of Kerala Thomas Issac said after the Council meeting.
Issac said that in both the options provided for GST compensation, states would have to sacrifice a part of compensation. "In the first option only 0.5 percent additional borrowing is permitted for the pending dues of Rs 1.65 lakh (crore). Full compensation is the constitutional right of states."
The Fiscal Responsibility and Budget Management committee had suggested bringing down the general government debt-to-GDP ratio to 60 percent by 2023. The calculation included 40 percent for the central debt and 20 percent for states' debt. Though accepted, the government pushed the deadline to 2024-25.
The COVID-19 pandemic and the consequent clampdown on economic activities would now require states and the Centre to spend more to spur growth. This would increase the debt-to- GDP ratios of both the Centre and the states, which could be further spiked if any added liabilities come up.
The states are now concerned that if the debt to meet the compensation gap is put on the balance sheet of states, it would limit their borrowing capacities in future.
"If this money goes into the states' balance sheet, what will happen to state finances till the time the money is returned. Because then the interest amount will sit in the states' budget," said Devendra Pant, chief economist, India Ratings & Research.
According to Isaac's calculations, "Total GST shortfall for 2020-21 is Rs 3 lakh crore. Cess collection is Rs 0.7 lakh crore. Gap is Rs 2.3 lakh crore. The Centre to borrow Rs 1.65 lakh crore. States to borrow Rs 1.65 lakh crore for which states' FD (fiscal deficit) ceiling has to be raised by 25 percent. But promised raise is only 17 percent. Thus states will lose 0.5 lakh crore."
Delhi's Deputy Chief Minister Manish Sisodia has said that the government's refusal to pay GST compensation to states is the biggest betrayal in the history of federalism in India. "Under GST, central govt was liable to give compensation for 5 years, they have refused to do so. States are feeling cheated," Sisodia said.