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Saturday, Oct 17, 2020 13:00 [IST]

Last Update: Saturday, Oct 17, 2020 07:34 [IST]

A win-win solution

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. The ministry of finance on Wednesday said that the Centre will borrow the estimated shortfall of Rs 1.1 lakh crore on behalf of states - as part of a special window - to meet the GST compensation shortfall of states.
The amount to be borrowed will be passed on to the states as a back-to-back loan in lieu of GST compensation cess releases, the ministry said in an official statement.

The decision comes after the GST Council failed to reach a consensus on the Centre's proposal of states borrowing against future GST collections to make up for the shortfall. 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 unsavoury 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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Sikkim at a Glance

  • Area: 7096 Sq Kms
  • Capital: Gangtok
  • Altitude: 5,840 ft
  • Population: 6.10 Lakhs
  • Topography: Hilly terrain elevation from 600 to over 28,509 ft above sea level
  • Climate:
  • Summer: Min- 13°C - Max 21°C
  • Winter: Min- 0.48°C - Max 13°C
  • Rainfall: 325 cms per annum
  • Language Spoken: Nepali, Bhutia, Lepcha, Tibetan, English, Hindi