Willing to compromise on GST compensation: Kerala FM Thomas Isaac

Kerala FM Thomas Isaac said the Centre must do away with the bifurcation of revenue shortfall arising due to Covid-19 and GST implementation.
Hit hard by dwindling revenues due to the Covid-19 pandemic, Kerala has indicated its willingness to ‘compromise’ amid intensifying Centre and opposition states’ tussle over goods and services tax (GST) compensation. 

While 10 key Opposition-ruled states pressed for borrowing by the Centre to make up for the compensation shortfall in the council meeting on Monday – called the third option – Kerala finance minister TM Thomas Isaac told Business Standard he was open to partial borrowing by states. 

He added that he may even agree to deferring a part of the compensation.

Around 12 opposition-ruled states and union territories (UTs), including Andhra Pradesh and Puducherry, rejected both the options proposed by the Centre to meet the compensation shortfall that requires borrowing by states. There will be further negotiations on October 12.

“Let us sit and decide. I am willing to compromise. Let the Centre and states borrow, but let the entire amount be paid this year itself as it is Covid and as we don’t have revenues,” Isaac told Business Standard.

However, he added that in the absence of a dispute resolution mechanism, states will move Supreme Court if the Centre imposes implementation of the first option of borrowing Rs 1.1 trillion from the special window of the Reserve Bank of India. This only accounts for losses due to GST implementation. The second option is borrowing Rs 2.35 trillion from the market, which also includes losses on account of the Covid-19 pandemic.

Isaac said the Centre must do away with the bifurcation of revenue shortfall arising due to Covid-19 and GST implementation. 

Also, the compensation cannot be linked to normal borrowing or additional borrowing limits allowed by states, he said. 

“The entire shortfall needs to be compensated without affecting the states’ normal or additional borrowing limits. Once these two basic principles are accepted, we can decide who should borrow — whether the Centre or state — and in what proportion. A discussion can also be there on the amount that needs to be borrowed this year and how much can be deferred to after 2022.” said Isaac.

Several states have deferred a portion of salaries and pension, including Kerala, Punjab, Rajasthan and Maharashtra, amid weak revenue position.

So far, in the current fiscal year up to October 6, 28 states and two UTs have cumulatively raised a total of Rs 3.75 trillion via market borrowings to make up for the revenue shortfall. This is 55 per cent more than the borrowings in the corresponding period of 2019-20.

According to the borrowing calendar for the first three quarters of 2020-21 (April-December), states are to borrow Rs 5.07 trillion.

States have already borrowed around 75 per cent of this amount. 

In H1 of 2020-21, borrowings by state governments were 16 per cent more than the amount as per the borrowing calendar for the period, CARE Ratings said in a note.

Barring eight states — Arunachal Pradesh, Bihar, Jharkhand, Himachal Pradesh, Punjab, Manipur, Uttar Pradesh and Tripura — the borrowing by all other states saw a notable increase — ranging between 21 per cent and 343 per cent from a year ago.

While Karnataka’s borrowing is up 343 per cent up to October 6, compared to the same period last year, Kerala has seen a 36 per cent increase in borrowing during this period.

“There has been a near sustained increase in the cost of market borrowings across states. Three of the largest borrowing states — Maharashtra, Andhra Pradesh and Karnataka — have seen their borrowing costs increase by an average 53 bps in the last one month,” the note said.

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