Centre Allows 20 States To Raise Extra Funds For Picking GST Borrowing Option

The central government allowed 20 states to borrow additional 0.5% of their GDP through open market borrowing as an incentive for agreeing to go with the first option of borrowing funds to meet GST compensation shortfall.

The Department of Expenditure under the Ministry of Finance has granted permission to 20 states, mostly ruled by the Bharatiya Janata Party and its allies, to raise an additional of Rs 68,825 crore through open market borrowings, said a statement from the Ministry of Finance. This came a even after the GST Council couldn’t reach a consensus on the way to compensate states.

This additional borrowing is a benefit for states that chose option 1 offered by the central government, allowing them to borrow Rs 1.1 lakh through a special window to meet the GST compensation shortfall. Besides, the states don't have to service the interest and principal amount for borrowing GST compensation shortfall

Borrowing costs for states have fallen after the Reserve Bank of India said it will buy their debt via open market operations to help facilitate increased borrowing requirements.

The 20 states are Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Goa, Gujarat, Haryana, Himachal Pradesh, Karnataka, Madhya Pradesh, Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Odisha, Sikkim, Tripura, Uttar Pradesh and Uttarakhand. Apart from Andhra Pradesh and Maharashtra, all have governments led by the BJP or its allies.

Eight states are yet to exercise any option, the statement said. The action on the special borrowing window is being taken separately, it added.

This is “most unfortunate” and the central government is bypassing the authority of the GST Council, TS Singh Deo, Chhattisgarh’s Minister for Commercial Tax, told BloombergQuint. “It is a matter of going against the decisions taken by GST Council. We, collectively with other states, will consider all legal options.”

The meeting of the GST Council on Monday remained inconclusive on the borrowing that needs to be made to compensate states on their shortfall, with Finance Minister Nirmala Sitharaman saying that the central government will facilitate borrowing for states that approach them.

Opposition states will again ask the central government to take loan and compensate the states, Deo said. If it doesn’t agree, it will show the people of the country that the central government is not willing to help the states, he said.

The funds to compensate the states should have been arranged by the central government instead of allowing states to look for alternative means, said Parag Mehta, a partner at NA Shah Associates. The central government has been quick to pass on the burden of deficit in compensation on the states, he said.

(Corrects earlier version that misstated that the borrowing is to meet GST compensation shortfall, and also Parag Mehta's surname)