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The finance ministry has agreed to borrow funds to compensate states
The finance ministry has agreed to borrow funds to compensate states

A much-needed breakthrough in the GST impasse

  • The Centre’s decision to borrow to compensate states for GST losses should help resolve the unsavory dispute and allow all to focus energies on the bigger challenges facing the country

A middle path seems to have been found to resolve the impasse between the Centre and states on the issue of goods and services tax (GST) compensation. On Thursday, the finance ministry said that it will borrow 1.1 trillion to meet the shortfall in compensation cess and pass on the money to states as back-to-back loans. Who should borrow had become a bone of contention between the two sides, with each pushing the other to do so. While the Centre invoked the force majeure clause and cited a lack of fiscal space to argue its case, states contended that the Centre was mandated to compensate them under the GST Act, hence it was for it to arrange the funds.

With the latest announcement, it appears the finance ministry has relented on states’ demand. Yet, its fiscal concerns also seem to have been simultaneously addressed. The money, the Centre said, would show as capital receipts of state governments and hence would reflect in their respective fiscal deficits, not its. The implication: its fiscal health following the borrowing would be no worse-off than it already is. The repayment of the loans given to states would be done by adjusting future cess collections due to them. States too should be satisfied with the arrangement. Since the Centre can borrow from the market at relatively lower rates, it should help them lower costs. States with weaker credit profiles, in particular, will benefit as they would have had to pay more—not only than the Centre but also better profile states—if they were to borrow directly from the market.

To be sure, clarity on some issues such as who bears the interest burden is still missing. But the principal dispute seems to have been settled. The dispute had taken an unsavory turn, threatening the spirit of cooperative federalism. India is facing big challenges on the economic and health fronts. Both the Centre and states must focus all energies on addressing these more pressing demands.

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