The Centre's insistence to not term the borrowing issue as a dispute is primarily based on concerns that states might then use it to push for a dispute resolution mechanism
The opposing states in the Goods and Services Tax (GST) Council meeting on October 12 wanted to push for forming a Group of Ministers (GoM) to resolve the borrowing deadlock, as there was no consensus on the issue.
"The opposing states wanted a GoM as well as a dispute resolution mechanism but the meeting couldn't come to an agreement on these," a senior state government official told Moneycontrol.
Finance Minister Nirmala Sitharaman while addressing the press after the Council meeting insisted that there were differences within the GST Council on the borrowing issue, but they cannot be termed as a dispute.
“There wasn’t any battle there. The GST Council is a very respected federal institution. A lot of discussions happen, definitely there can be differences. But where unanimity is not there, that doesn’t mean there is going to be a dispute…I have also said whoever wants to talk, please talk,” she had said.
The Centre's insistence to not term the borrowing issue as a dispute is primarily based on concerns that states might then use it push for a dispute resolution mechanism.
"The presence of a dispute resolution mechanism opens up more legal routes and challenges. It gives more legal teeth to any difference. The centre wanted to avoid that path completely," the official said.
The stalemate between the Centre and states over the compensation issue continued, even after a number of meetings dedicated on the same. GST Council could not reach a consensus on borrowing options in lieu of compensation cess shortfall and Finance Minister Nirmala Sitharaman said that some states questioned whether the Council has any authority to disallow those states that have already opted for one of the borrowing options from going ahead with their borrowing plans.
Kerala finance minister Thomas Isaac said that the decision to allow 21 states to choose Option 1 was illegal. “Option one involves deferment of compensation payment beyond 5 years for which a Council decision is necessary as per AG’s (Attorney General's) opinion. No such decision has been made in the Council,” Isaac posted on Twitter.
Most opposing states believe that deferment of compensation payment or extension of cess would mean that the compensation mechanism has to be formally extended beyond June 2022. "And if that has to be done, then the way to go about it is through a Constitutional amendment," the official said.
In August, the Centre had proposed two options to states, to either borrow Rs 97,000 crore (on account of GST implementation) through a special window facilitated by the RBI or to borrow the complete shortfall of Rs 2.35 lakh crore (including Rs 1.38 lakh crore due to COVID) from the market.
The amounts under the two options have since been revised to Rs 1.10 lakh crore and Rs 1.8 lakh crore, respectively.
The Centre proposed that the interest on the borrowing and principal amount, and the deferred compensation would get repaid from the cess collections.
Sitharaman had also said that states sought clarifications on why the Centre could not borrow on behalf of states and the government provided an explanation for the same. She said that the Centre has already issued the borrowing calendar for this fiscal and going beyond the calendar would immediately jack up the bond yields. "The g-sec yield will go up and if this went up then the borrowing cost will increase."
Increased borrowing costs is not something that the government can afford at a time when India is looking at more money to invest and to borrow to do business, Sitharaman said. "The impact would not be as severe if states were to borrow," she said.She also assured that states borrowing would not mean a chaotic situation, as the Centre would facilitate states, so that some states don't end up paying high-interest rates while others obtain loans at a reasonable rate.