All About States Borrowing for GST Compensation

States are opting for a special borrowing window for compensation under the GST.

States are considering to opt for a special borrowing window for meeting its compensation under GST (Goods and Tax Services).
Puducherry, Maharashtra, Gujarat, Karnataka, Goa, Himachal Pradesh, Bihar, Assam, Uttar Pradesh, Delhi, and Jammu and Kashmir opted for the special borrowing window followed by Rajasthan.
The other states that are yet to join are Kerala, Punjab, West Bengal, Chhattisgarh, and Jharkhand.
The borrowing options are floated by the Central Government is to resolve the compensation deficit in the present financial year.
The Central Government made the borrowing options very simple and with a low-interest rate.
The estimated GST revenue shortfall for the current fiscal was Rs 3 Lakh Crore.
Of the total revenue shortfall, the compensation cess collection is estimated to be Rs 65,000 crore.
This left a compensation deficit of Rs 2.35 lakh crore.
In the compensation deficit of Rs 2.35 lakh crore, Rs 1.1 lakh crore is the estimated shortfall on account of GST implementation.
The rest is being estimated as the impact of the COVID pandemic.
The Centre gave two options in August to the states which included borrowing Rs. 97,000 crore from the special window facilitated by the RBI or to borrow Rs 2.35 lakh crore from the market.
The options have revised to Rs. 1.10 lakh crore and Rs. 1.8 lakh crore.
The Ministry is in dialogue with the opposing states to join the scheme.

The Centre will borrow the money from the market and will arrange the loans.
The Centre will act as an intermediary to arrange loans for the payment of GST compensation shortfall of Rs 1.1 lakh crore to states.
This arrangement will appear as capital receipts for the state government and for the Centre not as fiscal deficit.
States like Kerala, Punjab, and Chhattisgarh ordered clarification and no-strings-attached to the borrowing mechanism.
The states also expected inclusion of the balance compensation deficit amount beyond the proposed borrowing of Rs 1.10 lakh crore under the back-to-back borrowing mechanism.

States should tap the window separately for borrowing.
The major concern for borrowing was that states, even if divided into groups they should tap the market for borrowing separately.
This leads to differential rates with wide variance in the interest rates among the states with more debt and less debt.
The major tool for market borrowing for the states is the State Development Loans (SDL).
These are generally at a premium, higher than the yields of the Central government’s securities.
So for the states to borrow will be costlier when compared with Centre borrowing at a uniform rate and then passing it back as loans.

The Centre has already borrowed Rs 12,000 crore in two equal installments.
● These installments are passed on to 21 states and three Union Territories on October 23 and November 2.
The interest rate of the second round of borrowing was at 4.42% and the first round of borrowing at 5.19% lower than the cost of borrowing for the States.
Karnataka, Maharashtra, and Gujarat received total amounts of Rs 1,872 crore, Rs 1,808 crore, and Rs1,391 crore respectively.
On October 23, the first tranche of the borrowing was done where the Centre borrowed and transferred Rs 6000 crore to 16 states and two UTs.
The Ministry will release Rs 6,000 crore every week to the states.