"The interest rate will be reasonable," Finance Minister Nirmala Sitharaman said in her note to states.
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.
The centre borrowing on behalf of states is likely to ensure that a single rate of borrowing is charged and this would also be easy to administer.
The borrowing, "will not have any impact on the fiscal deficit of the Government of India," said a statement
When GST was introduced in July 2017, states were promised 14 per cent incremental revenue over their last tax receipts in the first five years of rollout. This was to be done through a levy of a cess or surcharge on luxury and sin goods, but these collections have fallen short in recent months.
To make up for this, the centre had suggested that the states borrow against future compensation receipts. But this was not acceptable to opposition-ruled states.
The payment of GST compensation to states became an issue after revenues from cess started falling since August last year. The Centre had to dip into the excess cess amount collected during 2017-18 and 2018-19.