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Special GST window: Centre to borrow, extend back-to-back loans to states.


Date: 16-10-2020
Subject: Special GST window: Centre to borrow, extend back-to-back loans to states
The ministry said that process under the special window would avoid differential rates of interest that individual states would have been charged if they themselves hit the market via issuance of state development loans (SDLs).

The finance ministry on Thursday said that the Centre will borrow for paying GST compensation to states in FY21 and the funds will be passed on to the state governments as back-to-back loans, in lieu of the GST compensation cess disbursal. The borrowings will not reflect on the Centre’s fiscal deficit and will appear as capital receipts for state governments, as part of financing of their respective fiscal deficits, it added.

The ministry said that process under the special window would avoid differential rates of interest that individual states would have been charged if they themselves hit the market via issuance of state development loans (SDLs). Also, the mechanism would be administratively easier.

The Centre’s latest move on the face of it addresses the dispute being raised by eight states over the states being asked to borrow for the GST shortfall. Earlier in the day, Kerala finance minister Thomas Isaac tweeted that “some of the States are likely to approach the Supreme Court against discriminatory and illegal action of Centre regarding GST Compensation”.

However, the uncertainty over whether the entire GST revenue shortfall that states are estimated to incur this year will be compensated sans any cost to them could still be sore point for the dissenting states.

Clearly, the Centre is playing the role of intermediary to ensure that the general government borrowing costs don’t rise. It is relying on the proceeds from an extended cess to service the debt due to the special window to the states, as it has promised that the states don’t have to bear any cost.

It is not immediately clear whether the Centre’s additional borrowing for this facility will be shown on the Centre’s books as part of the extra-budgetary resources, and as a part of the total capex.

As many as 22 states and the UT of Jammu and Kashmir have agreed to use the Option 1 proposed by the Centre to bridge part of their GST revenue shortfall. They have been hence given additional unconditional borrowing freedom of 0.5% of the gross state domestic product (G-SDP) in FY21.

The decision meant these states and UTs could raise 4% of G-SDP via OMBs this fiscal, even if they don’t fulfil any of the reform conditions set out by the Centre in May, as it raised the FY21 borrowing ceiling for states. The ceiling was then raised from 3% of G-SDP to 5% of G-SDP or by about Rs 4.28 lakh crore in aggregate.

“It may also be clarified that the general government (states+Centre) borrowings will not increase by this (special window) 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% of G-SDP (from 3% to 5%) under the Aatmanirbhar package,” the finance ministry said.

Under the borrowing Option 1, the Centre had put the upper limit of combined borrowing by all states at Rs 1.1 lakh crore. In addition to additional open market borrowings of 0.5% of G-SDP sans conditions, the states opting for this window are also eligible to carry forward their unutilised borrowing space to the next financial year.

The amount is related entirely to losses due to implementation of GST while it is estimated that total shortfall, which includes impact due to pandemic, would be Rs 2.35 lakh crore for the current fiscal.

Justifying an earlier decision to ask the states borrow for GST compensation, the Centre had said that no state has so far breached even the original 3% of G-SDP borrowing target this fiscal. The Centre, in contrast, borrowed as much as Rs 7.66 lakh crore, or close to 4% of the country’s GDP, from the market in H1. So, the states have much leeway to borrow, the Centre had then said.

Already, the gross State Development Loan issuance expanded by a substantial 56.8% to Rs 3.53 lakh crore in H1FY21 from Rs 2.25 lakh crore in H1FY20. The net SDL issuance rose by an even higher 91.4% on year in H1FY21 to Rs 3.02 lakh crore.

The weighted average yield of state government dated securities (across states and tenures) auctioned October 6 was at 6.80%, 23 bps higher than week ago and 31 bps higher than that in the first week of September.

Source:-financialexpress.com

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