Centre transfers ₹6,000 crore to 16 States

Our Bureau New Delhi | Updated on October 23, 2020 Published on October 23, 2020

The Finance Ministry said that out of the 16 States, five did not have any shortfall on account of GST compensation   -  Getty Images/iStockphoto

Borrowing done at 5.19 per cent interest; tenor to be in the range of 3-5 years

The Centre on Friday announced that 16 States have received ₹6,000 crore as the first tranche of borrowing to meet GST compensation shortfall.

The borrowing is at an interest rate of 5.19 per cent. It aims to make weekly releases of ₹6,000 crore to the States and the tenor of borrowing is expected to be in the range of 3-5 years.

Borrowing scheme

The scheme of borrowing involves a special window, where the Centre borrows and then lends back-to-back to States and Union Territories. The scheme is available to all 28 States and three UTs with legislature, but since only 21 States and two UTs with legislature have opted the borrowing scheme, they will get money out of new mechanism

In a statement, Finance Ministry said that out of these, five States did not have any shortfall on account of GST compensation. So, money was borrowed and transferred to 16 States namely Andhra Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Meghalaya, Odisha, Tamil Nadu, Tripura, Uttar Pradesh, Uttarakhand and 2 Union Territories: Delhi and Jammu and Kashmir.

Better interest rates

On October 15, the Centre unveiled a new borrowing mechanism on the lines of the model adopted for funding ‘externally aided projects.’ After the Centre borrows the amounts, it will on-lend them to the States as a back-to-back loan in lieu of GST compensation cess releases.

This administratively easier borrowing arrangement will be done through a special window and has many benefits for the States including better interest rates (avoid differential rates) and need to borrow lesser amounts for funding the Aatma Nirbhar package.

Officials said, “It is just like what Centre does for externally-aided projects - by borrowing from World Bank, ADB kind of institutions and then lend to States. It will not be on the book of Central government, which means no impact on Centre’s fiscal deficit. Also, if each of the State goes to borrow separately, then there will be too much fluctuation in the yield rates (on SDL Loans). But if Centre borrows for all of them together, the rate will be much lower.”

It may be recalled that Under Option-I, States were to be provided a special window of borrowing of ₹1.1 lakh crore, and over and above that, an authorisation for additional open market borrowings of 0.5 per cent of their GSDP.

The authorisation for increased OMBs of 0.5 per cent of GSDP has been issued by Ministry of Finance on October 13 in relaxation of the reform conditions that were stipulated for eligibility. Additionally, under Option-I, the States are also eligible to carry forward their unutilised borrowing space to the next financial year.

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Published on October 23, 2020
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