GST Compensation Row: Centre firm on states borrowing, elaborates on options

On the other hand, under the Rs 2.35 lakh crore borrowing option--despite the larger size of borrowing--the state’s borrowing limit will be roughly 5.15 percent, as the 1 percent additional unconditional borrowing space available under option 1, will not be available in this case.

Government officials also clarified that states will not have to borrow directly from the Reserve Bank. Instead, the Centre will work out the borrowing needs of each state by consulting them.

With the Centre working as the facilitator, the Centre will also provide a letter of comfort to the lenders--in this case banks--who will subscribe to the GST compensation bonds to be issued by states, so that the bonds are fully subscribed.

The Centre estimates an interest cost of Rs 6000 crore this year if the states settle for the Rs 97,000 crore borrowing option. Officials say this can be easily met through the GST compensation cess receipts in the current year.

Elaborating on the special window, officials say, the borrowing will be collateralised against the cess receipts, the rate of interest on the compensation bonds will be uniform across states, all the states will borrow at the same time, periodically, till the Rs 97,000 crore amount has been raised in the current financial year. The aim is to replicate the GST compensation payment cycle where states are paid after every 2 months.

The Centre has yet to discuss these options with the Reserve Bank which it will, once the GST Council decides if either of the borrowing options are acceptable to the States.

The Centre is keen on the Rs 97,000 crore borrowing option, which would lessen the market borrowing and thereby allow the remaining Rs 1.38 lakh crore estimated arrears due to states on account of COVID, to be paid from the cess collections by extending the levy beyond June 2022.