GST shortfall: Centre’s ‘novel’ borrowing plan

Unusual times demand unusual solutions. The borrowing mechanism to meet the GST compensation shortfall appears to be one. After taking a tough stance on some States’ demand that the Centre, and not they, should do the borrowing, the Union Government decided to adopt the time-tested formula — the Funding Model for External Aided Projects — to borrow ₹1.1-lakh-crore.

When multilateral agencies decide to lend for a project in a State or Union Territory, it is not the beneficiary that borrows but the Centre. With sovereign guarantee, funds become available at a much lower, and a single, rate as the Centre borrows not just for one project but for many schemes across various States/UTs. It also works well for the funding agency.

If each State/UT were to borrow independently, two issues will arise: First, the funding agency may not be comfortable dealing with individual States/UTs and, second, the cost of fund will vary from State to State and UT to UT depending on each’s strengths and weaknesses.

Happily, also, in this way of the Centre borrowing to on-lend to States/UTs, the fiscal deficit of the Centre is not impacted.

Yes... After a lot of discussion and consultation, the Centre on October 15 unveiled the borrowing mechanism to meet the GST compensation shortfall. This will benefit all the States/UTs that agree to Option 1, wherein ₹1.1-lakh crore would be borrowed to meet the GST compensation shortfall out of the estimated total gap of ₹2.35-lakh crore. As 21 States and three UTs signed up for this option, they were covered under this mechanism.

So, the ₹1.1-lakh-crore shortfall (assuming all States join in) will be borrowed by the Government of India in tranches, and passed on to the States/UTs as back-to-back loans in lieu of GST Compensation Cess releases.

The amounts will reflect as capital receipts of the State governments and as part of financing of their respective fiscal deficits. This will also avoid the differential rates of interest that individual States may be charged for their respective SDLs (State Development Loans) and will be an administratively easier arrangement..

Two weeks and two tranches of borrowing, each of ₹6,000 crore, later, it appears to be working. Funds have been transferred to 16 States and three UTs (five States did not have any shortfall). The first tranche was borrowed at 5.19 per cent and the second at 4.42 per cent. The tenor is 3-5 years. Experts believe that had State individually gone to the market to borrow, the interest rates would have been 30- 40 basis points or even higher.

Borrowing is to be serviced (both principal and interest) by the money collected through the compensation cess that is levied on items such as cigarettes, tobacco related product, automobiles, etc. The GST Council has already decided to extend levying of the compensation cess beyond June 2022.

The Centre has clarified that General Government (States+Centre) borrowings will not increase by this step. 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 per cent of GSDP (from 3-5 per cent) under the Atmanirbhar package.

So, the Centre will borrow ₹6,000 crore every Monday till the initial target of ₹1.1-lakh-crore shortfall is met. So, 18 tranches of ₹6,000 crore and one of ₹2,000 crore is expected. However, if the shortfall reduces with buoyancy in GST collection, then the number of tranches could be cut. However, the Government is yet to clarify on this issue.

States such as West Bengal, Kerala, Jharkhand, Telangana, Punjab, Rajasthan and Chattishgarh have not opted for Option 1 and are not getting the funds. The Centre says it is talking to them. If they do not agree to Option 1, then they will get money when it becomes available through the compensation cess.

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