The Centre must assure States on the timeline for payment of the GST compensation due
The past week witnessed some forward, albeit inexplicably delayed, movement towards breaking the deadlock between the Centre and States on bridging this year’s shortfall in cess collections to recompense States for adopting the GST. Following a lack of consensus at a third meeting of the GST Council on the issue last Monday, Finance Minister Nirmala Sitharaman said States that had agreed to the Centre’s proposal could begin borrowing from the market. To recap — the Centre had argued that just ₹1.1-lakh crore of the estimated ₹2.35-lakh crore shortfall in GST cess inflows was due to GST implementation; the rest was due to COVID-19. States could borrow ₹1.1-lakh crore with interest and principal payments to come from future cess collections; or borrow the ₹2.35-lakh crore, but bear the interest from their coffers. By Wednesday, 21 States had agreed to the Centre’s first option and were permitted to raise about ₹79,000 crore (0.5% of their gross State domestic product) as additional borrowing linked to their acceptance of the option. On Thursday, however, the Centre changed tack and said it was now willing to borrow the ₹1.1-lakh crore and lend it onward. Calling this an administratively easier measure to ensure States do not end up borrowing at different interest rates, the Ministry asserted this would neither increase the fiscal deficit nor the general government debt.
States and economists have welcomed this change of heart, especially as it helps bring in much needed cash for States to fight the pandemic. However, it is odd that the ‘administrative ease’ of the Centre borrowing and lending to States, had not struck North Block mandarins earlier — given that the cess collection worries surfaced soon after the lockdown was imposed. Over the course of the negotiations, States had urged the Centre to borrow and pay them, but the Finance Ministry had repeatedly stressed that this would push up interest rates and upset its fiscal math. Precious time could have been saved had the Centre made this offer earlier — seven months into a year that has seen economic activity and revenue sources dry up, and States have only received ₹20,000 crore from the GST cess. Kerala, which was considering a petition in the Supreme Court with other Opposition-ruled States, has cooled off on the legal route, but sought full payment of the ₹2.35-lakh crore shortfall this fiscal. On Friday, Ms. Sitharaman wrote to Chief Ministers suggesting that the ₹1.1-lakh crore, in addition to the 0.5% of GSDP borrowing, would give them ₹2.16-lakh crore, or almost 90% of the compensation shortfall. Cash flow assurances aside, the Centre must now talk to States to ensure greater clarity on the unanswered questions — including when the States will get the balance GST compensation. That is imperative to sustain the fragile peace attained for now.