Centre to ensure voice of small States for ‘hardwired’ compensation is not drowned

Poornima Joshi New Delhi | Updated on September 06, 2020 Published on September 06, 2020

The Centre and States must work together to prevent the economy from bearing the cascading effect of higher interest rates   -  shylendrahoode

Some North-Eastern States do not want to be compensated immediately for Covid-related loss

At the upcoming GST Council meeting on September 19, the Centre will highlight differential demands, especially from the North-East States, only for compensation “hardwired” into the law or the shortfall in the GST compensation of ₹97,000 crore and not the entire amount of ₹2.35-lakh crore which includes Covid-related loss.

Highly placed Finance Ministry sources told BusinessLine that some North-East States do not want to be compensated immediately for the Covid-related loss and would like this amount to be serviced later as bonus.

To the demand raised by the Opposition-ruled States that the Centre should borrow the entire amount and compensate them as their Constitutional entitlement, the Finance Ministry’s view is that the distinction is immaterial because the loan is to be serviced through the Compensation Cess and will not be a burden on the States.

‘No burden on States’

“Whether the borrowing is due to GST implementation or it is a Covid-related loss, repayment is going to be serviced through the Compensation Cess that will be collected. It is not a burden on the States. It will not be payable from the States’ revenue,” said sources.

The Finance Ministry has a rationale for asking the States to borrow and it will be put forth before the GST Council in its next meeting.

“This will be put forth as an option for the Council to discuss. There is a rationale for the Centre to make this suggestion. Whether it is the Centre or the States borrow, it will eventually get into the overall Debt-to-GDP ratio. If the Centre borrows over and above the calendar that was issued at the time of the Budget, the G-Sec yield, which is the benchmark for any public or private borrowing, will shoot up. We are willing to take that burden but what if the States need to borrow for any other reason afterwards? They need to be mindful that once the G-Sec rate shoots up, they will have to borrow at a much higher rate,” said sources.

The view of the Finance Ministry is that both the States and the Centre should work together to prevent the economy from bearing the cascading effect of higher interest rates, which would ultimately hamper future investments. Sources said the voices of the smaller States, which want only the “hardwired” compensation and not the Covid-related loss at the moment, should not be “drowned” by the others.

For discussion

“All of this is up for discussion and consensus but it should not be that the smaller voices get drowned by the noise that the others are making. The Centre is willing to approach the RBI and make sure that each State gets to borrow at the same rate. There is a benefit in this for everybody in that the G-sec rates do not shoot up. The cascading effect of the Centre borrowing is much more harmful to the economy,” sources said.

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Published on September 06, 2020
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