GST shortfall: States told to borrow under special window

The Centre’s reasoning is the extra deficit of Rs 1.38 lakh crore is due to the impact of COVID-19 on the economy, which, as finance minister Nirmala Sitharaman put it, is an “extraordinary Act of God situation”

The Centre on Thursday presented two options before the states to bridge their estimated goods and services tax (GST) revenue shortfall of Rs 2.35 lakh crore (after taking into consideration the compensation cess fund) in FY21, both involving the states themselves borrowing from the market in the year. The loans will be serviced via the proceeds of the relevant compensation cess, which will apply on the specified demerit goods for a year or more beyond the current end date of FY22.

The options, as revenue Secretary Ajay Bhushan Pandey explained to reporters after the 41st GST Council meeting here, are the following: 1) States borrow Rs 97,000 crore, which is the estimated shortfall, only “on account of GST” under a special window to be facilitated in consultation with the Reserve Bank of India (RBI) at a ‘reasonable G Sec-linked interest rate’; 2) they borrow the entire Rs 2.35 lakh crore.

The Centre’s reasoning is the extra deficit of Rs 1.38 lakh crore is due to the impact of COVID-19 on the economy, which, as finance minister Nirmala Sitharaman put it, is an “extraordinary Act of God situation”. The states have been asked to convey their choice to the Council in seven working days.

The estimate of the GST shortfall implies the Centre expects the gross monthly GST revenue for August-March period of this fiscal to be around Rs 90,000/month, only marginally higher than Rs 87,422 crore collected in July.
In the first four months of this year, the gross GST receipts were way below ‘targets’ largely owing to the Covid-19 pandemic and averaged at just Rs 68,100 crore. This has already caused a shortfall of around Rs 1 lakh crore for the states for the period (assuming 50% of the gross receipts are for states after I-GST settlements), against the ‘protected’ revenue level, after factoring in Rs 22,930 crore collected as compensation cess.

The first option comes with the incentive of 0.5% unconditional FRBM relaxation for states. In May, the Centre raised the net borrowing limit for state governments liberally from 3% of G-SDP to 5% to make available an additional Rs 4.28 lakh crore to all the states combined, given the revenue dip caused by Covid-19.

While 0.5 pecentage point of the extra borrowing window will be available to all states unconditionally, many reform riders are attached to the balance facility. The Centre would rather expect the states to choose the first option and may consider relaxing the conditions to encourage them to do so.

There is actually little room for the government to raise the consolidated government borrowing level; the Centre itself had announced a sharp 54% increase in its FY21 gross borrowing target to Rs 12 lakh crore from Rs 7.8 lakh crore planned initially. The Centre is also contemplating another dose of fiscal stimulus, even though it is keen on reducing the extra budgetary cost of it by re-jigging the expenditure.

Even if states choose the first option, which means the revenue gap is not fully bridged this year, their compensation entitlement for this year would be protected but would be paid to them from the cess collected after the five years of GST have lapsed. The borrowing plan is valid for this year only and the GST Council would review the revenue position next fiscal.

“We shall facilitate the process (by) talking to the Reserve Bank and getting it at a G-Sec linked (proportionate number of years) rates for all the states so that each state doesn’t have to go running for the loan and face different situations,” Sitharaman said. She said that the Centre will facilitate borrowing so that all states can avail loans, at roughly the same interest rate.

On the question of which entity would act as the guarantor for the loans, Sitharaman said: “It is based on the GST Council’s decision and the loans are tied to the cess collection after the fifth year. So there are all these instrumentalities through which the lender would be assured.”

“This means that we may again have a very brief meeting of the Council (after seven working days).. as states’ responses are in, we would take a call,” Sitharaman said. As soon as the arrangement is agreed upon by states, we would proceed fast and clear the two bi-monthly compensation dues and also take care of the rest of the financial year. Whichever option is chosen it would only be for this year and in April next year the Council should again look at the situation for the fifth transitional year,” the finance minister said. The states’ protected S-GST revenue for the current fiscal year is Rs 7.64 lakh crore.

The government is estimating the cess proceeds in the current year to be Rs just 65,000 crore, against Rs 95,444 crore collected last year. It is unclear at this stage if the financing of the market borrowings by the states would require applying the cess on more items and/or increasing the cess rates.