How Centre borrowing Rs 1.1 lakh crore will impact states, Nirmala Sitharaman explains in a letter

A day after the Centre announced that it would borrow Rs 1.1 lakh crore on behalf of the states — much to the relief of the states as now they don’t have to borrow to pay the GST compensation shortfall— finance minister Nirmala Sitharaman wrote to all states explaining the change in stance.

“The current financial year is truly unprecedented in terms of the severe impact on revenues of the Covid pandemic. I am well aware of the financial difficulties that the states are facing,” the finance minister wrote.

Here are the modalities:

1. The quantum of resources available to the states will be adequate to meet the entire amount of compensation which would have been payable this year.

2. The interest rate will be very reasonable.

3. The interest and principal will be met from the future proceeds of the cess

4. The entire arrears of compensation will eventually be paid to the states.

5. The borrowing will be directly arranged by the central government and passed on back-to-back to the states.

The Centre and the opposition-ruled states had a standoff in the GST council meeting as there was no consensus on who will borrow. Earlier, the Centre had given two borrowing options in front of the states. The opposition-ruled states were also planning to move the Supreme Court. But on Thursday, the finance ministry softened its stance and agreed to borrow on behalf of the states. “The amounts will be reflected as the capital receipts of the state governments and as part of the financing of its respective fiscal deficits,” the ministry said.

The total GST revenue shortfall for the current financial year was estimated to be Rs 3 lakh crore. Out of this, compensation cess collection was estimated to be Rs 65,000 crore, which leaves a compensation deficit of Rs 2.35 lakh crore.

Of this Rs 2.35 lakh crore, Rs 1.1 lakh crore shortfall has been estimated on account of GST implementation, which now the Centre will borrow and pass on to the states.

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