GST Council meet: States accuse Centre of 'arm-twisting' them to borrow

Centre gave the states the option to either borrow Rs 97,000 crore (shortfall according to the formula given under the law), or the entire Rs 2.35 trillion that accounts for the excess shortage in view of the Covid disruptio | (Illustration: Ajay Moh
Following a five-hour-long GST Council meeting on Thursday, states accused the Centre of ‘arm-twisting’ them to borrow, terming it a ‘betrayal of federalism’.  

Despite being given seven days to examine the two options offered by the Centre, they turned those down minutes after the meeting concluded. Most states pressed for borrowing by the Centre to compensate them for the shortfall in collections.

During the meeting, the Centre gave the states the option to either borrow Rs 97,000 crore (shortfall according to the formula given under the law), or the entire Rs 2.35 trillion that accounts for the excess shortage in view of the Covid disruption.  

T S Singh Deo, finance minister of Chhattisgarh, said states were being arm-twisted to get the compensation, which was Constitutionally guaranteed to them. He questioned why the Centre wasn’t taking the loan, given there would be no repayment burden on states and the entire principle plus interest would be repaid through cess collection anyway.

“They are saying the entire principle and interest will be repaid using cess, which will continue after the five-year timeline. They agreed to raise our FRBM (fiscal responsibility and budget management) limit. If there is no financial burden, why can’t the Centre take the loan itself, instead of asking states and UTs to take it separately?” said Deo.

Manish Sisodia, FM of Delhi, called the offer a ‘betrayal of federalism’. He said the option to avail of a loan from the RBI will not work for Delhi because it does not have the right to take a loan, as it is not a full state. 

“The Centre is shirking responsibility. In case of Delhi, as it is not a full state, it therefore doesn’t have the right to take a loan,” said Sisodia, adding that the Delhi government was facing a 57 per cent shortfall compared to the Budget target. “The Centre should take the loan and give it to Delhi, as we have to give salaries to doctors, engineers, and teachers,” he said. 

Delhi faced a Rs 7,000-crore revenue shortfall for the first quarter, which is expected to widen to Rs 21,000 crore by the end of the year. “They took away out taxing rights and are now asking us to take a loan from the RBI. It is the biggest betrayal in the name of federalism,” he said.

Puducherry concurred with Delhi. “There is going to be a big problem for us. We are a union territory, so when we go for market borrowing and get permission from the RBI, it has to go through the home ministry; it is not possible for us to borrow directly,” said Chief Minister V Narayanaswamy.

The cess should not only be for 5 years, but increased to 10, said Puducherry. Badal said all states were in financial crisis and “we have to get money and save our people”.

Punjab FM Manpreet Singh Badal said the solution of requiring states to borrow was being “thrust on us”. 

“They want to thrust the option of borrowing on us. The meeting went on for 5 hours, but it was not a happy atmosphere. Trust deficit was clearly visible. The AG’s views were read out but not circulated. We are answerable to our legislatures and Cabinet,” said Badal. 

He added that the dispute resolution mechanism provided under Section 279 of the Constitution should be activated, for states have a legal recourse if there is something they did not agree with.

Badal added that the Centre should pay a third of the deficit from the consolidated fund of India, and the remaining two-thirds may be borrowed in the sixth or seventh year.

He further pointed out that the Rs 54,000 crore of the remaining integrated GST money, which was wrongly deposited to the consolidated fund of India, should be credited back to the IGST so that compensation may be paid. 

“The government has played with the country’s economy. Almost every state is seeking compensation. It was projected that the revenues would grow as leakages come down, and the GDP increases, a proposition that seemed realistic,” added Badal.

In fact, even BJP-ruled states such as Karnataka recommended that the Central government borrow to compensate the states. Bihar, too, gave two options, the first being that the Central government borrow and give it to the states, and the second being that the states be allowed to borrow with certain conditions such as low interest rates, an increased FRBM limit, along with the condition that the Central government facilitate the borrowing.

Some states even read out the minutes of the GST Council’s 6th, 7th and 8th meeting, and picked up recorded minutes of the previous FM and previous revenue secretary to remind the Centre of its obligation.

Sisodia highlighted that ever since the GST implementation, neither had inflation reduced nor had revenues increased for states, as was earlier projected. 

Further, 70 per cent of states’ taxation rights had been subsumed. When all states are suffering from a revenue shortfall, the Centre is going back on its promise of fully compensating states for the deficit.

Jayanta Roy, group head (corporate sector ratings), ICRA, said that with the aggregate protected revenues of states — estimated by the rating agency at Rs 7.65 trillion for FY21 — the GST compensation requirement appears set to more than double to Rs 3.64 trillion for the current fiscal year, from the Rs 1.65 trillion in FY20.

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