Additional borrowing by Centre influences yields on G-secs, has other macro-economic repercussions, writes Pandey.
The Centre on Saturday wrote to States suggesting options of borrowing money to make up the ₹2.35 lakh crore shortfall in GST revenues expected in the ongoing fiscal.Two days after first suggesting to States to borrow money to make up for the shortfall, at the GST Council meeting, the Finance Ministry wrote to State Governments saying they could borrow either via a special window it would facilitate through the RBI, or raise debt from the market.While the Centre has reasoned that it is already saddled with a large borrowing requirement, given the slowdown in revenue collections due to a slump in the economy, non-BJP ruled States such as Punjab, Kerala, Delhi and West Bengal have already stated that raising debt is not an option for the already stretched State finances.In a letter to Finance Secretaries of all States and Union Territories, Union Finance Secretary Ajay Bhushan Pandey said while additional borrowing by the Centre influenced yields on Central Government securities (G-secs) and has other macro-economic repercussions, yields on State securities do not directly influence other yields and do not have the same repercussions.‘Interest of the nation’“Hence, it is in the collective interest of Centre and States and in the interest of the nation and of all economic entities including the private sector, not to do any avoidable borrowing at the Central level when it could be done at the State level,” Mr. Pandey wrote.Compensation payment has been an issue since August 2019 with GST collections faltering. In the current fiscal, the compensation requirement of States has been estimated at ₹3 lakh crore, of which ₹65,000 crore would be funded from the revenues garnered by levy of cess. In the GST Council meeting on August 27, Finance Minister Nirmala Sitharaman had said that COVID-19 was an “Act of God” and it was necessary to differentiate between GST shortfall and pandemic-related shortfall.States have said that such a distinction is not constitutionally valid.Detailing the borrowing options to meet the shortfall, Mr. Pandey wrote that under the first option, if the States choose to borrow ₹97,000 crore, which is the shortfall arising out of GST implementation, under a special window, the Centre will endeavour to keep the cost at or close to the G-sec yield.“The interest on the borrowing under the special window will be paid from the cess as and when it arises until the end of the transition period… The State will not be required to service the debt or to repay it from any other source,” he added.“The borrowing under the special window will not be treated as debt of the State for any norms which may be prescribed by the Finance Commission etc.”Under the second option, the entire shortfall of ₹2.35 lakh crore will be borrowed by States through issue of market debt.“The wording of the Constitution and statutory preamble make it clear that the spirit of the law is not to compensate States for all types of revenue losses, but rather for that loss arising from GST implementation.”
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