After four months of confrontation over GST (Goods and Services Tax) dues, the central government has decided to borrow up to ₹ 1.1 lakh crore on behalf of states. Finance Minister Nirmala Sitharaman has, in a letter to states, explained the reason for the turnaround.
“Based on the suggestion of many states, it has now been decided that the central government will initially receive the amount and then pass it on back-to-back to the states as loan. This will enable ease of coordination and simplicity in borrowing, apart from ensuring a favourable interest rate,” the Finance Minister explains.
A slowdown in the economy has resulted in a drop in GST collections, upsetting the budgets of states that had given up their right to collect local taxes such as sales tax or Value Added Tax.
To make up for the shortfall, borrowing from the market was proposed. In a statement, the Union Finance Ministry said states were offered a special window to borrow ₹ 1.1 lakh crore over and above their existing limits to bridge the shortfall. The money will now be borrowed by the centre and passed on to states.
Nirmala Sitharaman said the quantum of resources available to states was adequate to meet the entire amount of compensation which would have been payable this year.
“The interest rate will be very reasonable. The interest and principal will be met from the future proceeds of the cess,” said her note.
The entire arrear of compensation would eventually be paid to the states, said the minister. She said she was “sensitive to the fact that states need to be protected from the adverse consequences of higher borrowing in the form of interest liability and addition to debt”. The centre would therefore arrange the borrowing in a manner that the cost would be at or close to the interest rate of the central government.