The Finance Ministry on October 15 said that the Centre would borrow from the market to pay the GST compensation shortfall of ₹1.1 lakh crore to states, and then arrange back-to-back loans to state governments. The decision by the Centre comes as a sharp retraction of its earlier stance.
"This arrangement will not reflect in the fiscal deficit of the Centre and will appear as capital receipts for state governments," the ministry said.
"Instead of states taking small loans, one big loan will be taken by the Centre and distributed to states on the same terms. Whatever interest rate the Centre borrows on, the same rate will be passed on to the states," an official from the ministry said.
This major decision comes two days after a disagreement between Opposition-ruled states and the Centre over the compensation shortfall.
During the GST Council meeting held on October 12, states and the Centre had failed to arrive at a consensus on the borrowing options.
After the announcement made on October 12, opposition-ruled states said that they are willing to negotiate with the Centre.
"I welcome the new announcement as far as it goes. But one more issue that should be discussed is how much compensation should be deferred? I would like the entire ₹2.3 lakh crore to be paid to states this year itself," Kerala Finance Minister Thomas Isaac told The Indian Express.
The Centre had in August provided two options to the states, either borrow ₹97,000 crore from a special window facilitated by the RBI or borrow ₹2.35 lakh crore from the market. It had also given the option of extending the compensation cess levied on luxury goods beyond 2022 to repay the borrowing.
The Centre had later revised the borrowing amount to ₹1.1 lakh crore as it changed the assumption of growth in GST revenues to be 7 per cent instead of 10 per cent.
The total GST revenue shortfall for the current financial year was estimated to be about ₹3 lakh crore, of which compensation cess collection was estimated to be ₹65,000 crore, leaving a compensation deficit of ₹2.35 lakh crore.
Of this ₹2.35 lakh crore, ₹1.1 lakh crore shortfall has been estimated on account of GST implementation, while the rest is being evaluated as the impact of the COVID-19 pandemic.
"It may also be clarified that the general government (states+Centre) borrowings will not increase by this step. The states that get the benefit from the special window are likely to borrow a considerably lesser amount from the additional borrowing facility of 2% of GSDP (from 3% to 5%) under the Atma Nirbhar package," the government said on Thursday.
The Centre also said that the special window would bypass differential rates of interest that different states may be charged for their respective development loans.
Reacting to the announcement, former finance minister P Chidambaram said, "If the Centre has decided to borrow ₹1.1 lakh crore and extend it to states as back-to-loans, I welcome the change of position."