The Centre, in a detailed 12-page letter to States and Union Territories detailing the options to bridge the GST compensation gap, has categorically refused to borrow, and stuck to the offer made by Finance Minister Nirmala Sitharaman to the GST Council on August 26.
In the letter, the Centre has said that it already faces a very large borrowing requirement this year. Additional borrowing would increase the yields on government securities and would have other macro-economic repercussions as well.
"The yield on G-secs acts as a benchmark for State borrowing as well as private sector borrowing. Hence any rise in Central borrowing costs ipso facto drives up borrowing costs for all borrowers, including not only the States but also the entire private sector," said the letter.
In comparison, yields on state government securities did not directly influence other yields and did not have the same type of macro-economic repercussions, the letter pointed out.
"Hence it is in the collective interest of Centre and States, and in the interest of the nation and of all economic entities including the private sector, not to do any avoidable borrowing at the Central level when it could be done at the State level,” the letter pointed out
Option 1: Rs 97,000 crore borrowing
Detailing the two borrowing options for states, the centre has calculated Rs 97,000 crore as the pure GST revenue gap under the first option, by quantifying the difference between 14 percent assured GST compensation rate and actual revenue collection on a nominal GDP growth estimate of 10 percent mentioned in the budget.
The Centre has sweetened this option by allowing a Special Window to the states for their borrowing which will be facilitated by the finance ministry in consultation with the RBI.
Borrowing through this special window will not be treated as debt of the states. The cess receipts will be used to service the interest cost of the state borrowing from the time of the borrowing, while after June 2022, with the extension of the cess, the receipts will be used for principal repayment
The Centre has also offered to pay upto 0.5 percent as margin between the G-secs and average of State Development Loan yields , if the cost of the borrowing is higher. The amount will be paid through a subsidy.
The Centre has also offered unencumbered additional borrowing limits announced earlier under AtmaNirbhar Bharat of 0.5 percent each, which if unutilised can be rolled over by states to the next fiscal. The earlier additional borrowing limit of 0.5 percent will be delinked from achieving certain reforms and this alone will enable Rs 1 lakh crore of borrowing.
Option 2: Rs 2.35 lakh crore borrowing
Against this, for additional state borrowing of 2.35 lakh crores, which Includes the COVID impact of Rs 1.38 lakh crores, the Centre seems to be suggesting a carrot and stick policy. The Centre says this borrowing will be “market” debt, and the interest payment will have to be managed by the states on their own, meaning they cannot use the cess receipts for the same. Only the principal amount can be repaid through the cess receipts after June 2022.
Also in terms of the principal payment, state borrowing for the actual COVID impact estimate of Rs 1.38 lakh crore, will be on the state’s balance sheet, meaning it will be part of their debt burden. Debt relaxation will be limited only upto the actual GST related estimated loss of Rs 97,000 crore.
Also, the options suggested for relaxed borrowing limits, are minus the 0.5 percent unconditional borrowing ease given under AtmaNirbhar and nor is the untied additional 0.5 percent bonus for meeting some of the reforms , available under this option.
Instead, under the formula suggested for calculating the new borrowing limits for states, the Centre says either the Rs 97,000 crore (pure GST loss) amount can be added to the 3 percent normal borrowing limits under the state FRBMs or the states can opt for 1 percent additional space of their state GDP. Another 1 percent additional borrowing limit announced in the AtmaNirbhar Bharat package for undertaking reforms will be available, but the unutilised amount will not be rolled over to next fiscal.
As CNBC-TV18 reported on August 27, the Centre has ruled out the option of the GST Council borrowing, saying “The notion of borrowing by the GST Council is not practically or legally feasible or desirable”.Finance and Revenue Secretary Ajay Bhushan Pandey and Expenditure Secretary TV Somanathan will respond to the queries of Finance Secretaries of States and UTs on this letter on Sept 1.