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Business News/ News / India/  States may cut FY21 capex by 3 lakh crore due to GST shortfall: ICRA
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States may cut FY21 capex by ₹3 lakh crore due to GST shortfall: ICRA

The compensation requirement of states has been estimated at ₹3 lakh crore

The government has offered two options to the state governments for bridging the gap,Premium
The government has offered two options to the state governments for bridging the gap,

States may have to significantly cut their expenditure by as much as 3.4 lakh crore in the current fiscal if they are not paid full compensation relating to Goods and Services Tax (GST), investment information agency ICRA has said.

"The fiscal deficit of states may rise up to 4.25 to 5.52 per cent of gross state domestic product in FY21, curtailing their capital spending by 1 lakh crore to 3.4 lakh crore, considering shortfalls in GST and central tax devolution (CTD)," it said in an update on state government finances.

The compensation requirement of states has been estimated at 3 lakh crore of which 65,000 crore will be funded from the revenues garnered by the levy of cess. This leaves a shortfall of 2.35 lakh crore.

In contrast, rating agency ICRA estimated that the gap between the GST compensation requirement and the cess collections is more than the government's estimates. ICRA has pegged the gap at 2.92 lakh crore.

However, the government has offered two options to the state governments for bridging the gap, which varies in terms of the amount that can be borrowed, the source of borrowing, rate of interest on borrowings, payment of interest, charge on cess collected after the five-year GST transition period ends in July 2022.

ICRA estimates the CTD to the states in FY21 at 5 lakh crore, a substantial 2.8 lakh crore lower than the 7.8 lakh crore budgeted by the government partly on account of the adverse impact of the Covid-19 pandemic on consumption and the government' tax revenues as well as adjustment for excess devolution made in FY20.

"Given that borrowing limit set by the government acts as a soft constraint to the size of state governments' fiscal deficits, capital spending may have to be curtailed in aggregate by the states in FY21 by 1 lakh crore to 3.4 lakh crore in ICRA's assessment after taking into account the anticipated shortfalls in GST compensation and CTD despite the two options for additional borrowings put forth by the central government."


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Published: 11 Sep 2020, 06:50 AM IST
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