GST shortfall: RBI's concerns, Kerala's legal action threat prompt Centre to borrow on behalf of states

By some accounts, things changed after Kerala Finance Minister Thomas Isaac publicly said that a few states are considering taking the Centre to court on the issue of Goods and Service Tax (GST) compensation.

 “Some of the States are likely to approach SC against discriminatory and illegal action of Centre regarding GST Compensation. Kerala CM to chair a meeting of law, tax and finance departments and advocate general to take final decision on Kerala’s stance tomorrow afternoon,” Isaac had tweeted on October 15.

That very evening, the Finance Ministry said that it would borrow Rs 1.1 lakh crore and give that amount as loan to states under a special borrowing window, rather than states do it on their own. A legal battle with states is something the political leadership wanted to avoid with regards to the GST Council, sources told Moneycontrol.

 After several GST Council meetings failed to arrive at a consensus on the borrowing mechanism to resolve the compensation issue, Finance Minister Nirmala Sitharaman after October 13 Council meeting announced that states which are willing to borrow would be allowed to do so through a special window by the Reserve Bank of India (RBI).

But before making the announcement, the Centre was still to seek the RBI's view on the same. "The discussion with the RBI was supposed to happen because some states had conveyed that they needed the money on an immediate basis. The announcement was made to tell states that those who needed money would be allowed," a senior official aware of the deliberations told Moneycontrol.

As the GST Council could not reach a consensus on borrowing options in lieu of compensation cess shortfall, Sitharaman had said after the October 13 meeting 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.

The following day, the Centre allowed 21 states to mobilise Rs 78,542 crore to opt for option 1 to meet the GST revenue shortfall.

"The RBI then expressed concerns over allowing different states to hold their own borrowing plans. There was also the issue of different states getting different rates. Hence the RBI advised that the borrowing should be routed through the Centre," the official said.

Another official explained that the Centre was only playing mediator, just as it happens when multilateral organisations give loans to state governments.

" Those (multilateral organisation) loans are routed through the Centre, it's never given directly to states. The Centre borrows and then gives it as back-to-back loans to states. This is the same," the official said.

The general government (states + centre) borrowings will not increase because of this, as 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 percent of gross state domestic product (from 3 percent to 5 percent) under the Aatma Nirbhar Package, the government in a statement said.

"This will not have any impact on the fiscal deficit of the Government of India. The amounts will be reflected as the capital receipts of the state governments and as part of financing of its respective fiscal deficits," the statement said.

Following the Centre's announcements to borrow the estimated shortfall of Rs 1.1 lakh crore and pass on to states as back-to-back loans to states on October 15, it issued a fresh borrowing plan by including the additional amount in its calendar for the second half.

"To operationalise the special window to states for meeting the GST compensation cess shortfall of Rs 1.1 lakh crore, the Government of India (GoI) borrowing calendar is being modified in consultation with Reserve Bank of India (RBI)," an official statement said.

For the remaining period of the fiscal year 2020-21 (October 19, 2020 to March 31, 2021) the Centre would borrow an aggregate amount of Rs 4.9 lakh crore. The additional amount for meeting the GST compensation shortfall would be raised equally at the rate of Rs 55,000 crore under the 3- year and 5-year tenors.

Last month, the Finance Ministry had said the government will borrow Rs 4.34 lakh crore in the second half of the current fiscal to meet its expenditure requirement amid the Covid-19 crisis.

With the addition, the total borrowing in the second half will increase to Rs 5.44 lakh crore.

As per the earlier announcement, the borrowing was to be done in 16 weekly auctions at Rs 27,000-28,000 crore and the tenures would be the same as the first half — of 2, 5, 10, 14, 30 and 40 years.

However, with the revision, Rs 5.44 lakh crore borrowing would be done over 22 weeks. Of this, Rs 56,000 crore has already been mobilised by the government, so the remaining Rs 4.88 lakh crore would be raised in the remaining 20 weeks.