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GST shortfall: Centre passing burden of debt to States, says Amit Mitra

Our Bureau Kolkata | Updated on August 30, 2020

‘Will now take up the matter with other ‘like-minded State governments’

The Centre should borrow and compensate the States for the shortfall in GST revenues, rather than thrusting suggestions on them, West Bengal Finance Minister Amit Mitra said on Sunday.

West Bengal, which has already rejected the two borrowing options proposed by the Centre, will now take up the matter with other “like-minded State governments”, including BJP-ruled ones. The idea will be to “take the Centre into confidence” regarding the non-feasibility of these new mechanisms.

 

“The Centre needs to borrow the money and compensate States for shortfall in GST. State governments cannot borrow. It impacts their finances. Moreover, the Centre can monetise such deficits, which the State governments cannot,” Mitra told reporters during a virtual press conference.

Proposed mechanisms

Typically, monetisation occurs when the RBI directly purchases government securities in the primary market, which essentially amounts to printing more money.

The first option, so proposed, includes borrowing a projected shortfall of ₹97,000 crore only on account of GST implementation — and not due to Covid-19 – through a special window for States, coordinated by the Finance Ministry.

This amount can be fully repaid from the compensation cess fund, without being counted as state debt.

The second, allows State governments to borrow ₹2.35 lakh-crore – the estimated shortfall due to Covid-induced slowdown and transition to GST – from markets, facilitated by Centre and the Reserve Bank of India.

“What is being proposed by the Centre is tantamount to monetisation of (state) debts through the back door and for the States it is a Catch-22 situation,” Mitra said.

Under the first option, States will end up borrowing the remaining shortfall of ₹1.38-lakh-crore.

“How will any write-off (of the remaining amount) happen? Ultimately, States will end up borrowing this money too. There is no clarity yet,” he said.

The second option directly pushes up interest burden and debt servicing commitments. Individual States are also likely to face the issue of higher interest rates. Borrowing limits of State governments continue to be limited under the FRBM Act. For example, West Bengal, even after exhausting borrowing limit entirely, will face a shortfall of ₹15,000 crore. “Relaxation of FRBM limits, however, is not being allowed,” Mitra said.

‘Power of centralism’

State governments agreed to GST as any revenue shortfall, due to its imposition, shall be compensated by the Centre for a period of five years. Now, under the pretext of “act of God”and “some word-play”, a huge debt burden was being thrust on States.

Alleging that “act of fraud” leading to GST revenue loss off ₹70,000 crore had taken place previously, the West Bengal Finance Minister charged that concerted efforts were being made to bulldoze federalism. The weakening of States financially was actually aimed at “imposing centralism”.

 

Published on August 30, 2020

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