Centre may need to borrow extra ₹1.58 trillion to pay states

Ahead of a government panel meeting on Friday (May 28) on the Goods and Services Tax, reports suggest the Centre may have to borrow more for a second year in a row to compensate the states for their revenue losses.

The additional borrowing is estimated at ₹1.58 trillion ($21.7 billion) in the fiscal year started April 1, the reports said. The GST panel is scheduled to meet on May 28 to discuss compensation to states, among other issues.

While the amount to be paid to states works out to ₹2.7 trillion, the government is expected to muster only  Rs1.1 trillion, news agencies quoting sources said.

Also read: GST collection hits a record of ₹1.24 lakh crore in March

The amount is part of the compensation that the Centre agreed to pay states for any revenue loss on account of introduction of a nationwide GST. But the economic downturn caused by the world’s worst COVID outbreak risks hurting tax collection, possibly forcing the government to consider additional borrowings.

Should the borrowing materialise, it will be in addition to the over ₹12 trillion budgeted this year to bridge the fiscal deficit gap. The RBI has so far been able to keep yields under check through its various moves such as ‘Operation Twist’ and the announcement of a one trillion-rupee bond purchase acquisition programme for the current quarter. The benchmark 10-year yield is down 20 basis points to 5.97% this fiscal year.

Also read: Second wave poses downside risks to economy, says finance ministry

Any additional borrowing will replicate an arrangement followed last financial year, where the Centre borrowed ₹1.1 trillion on behalf of the states and passed them on as back-to-back loans, the sources said. The decision on the extra borrowing, the amount and the timing would be made after consulting with the RBI and states, the sources said.

While the payment to states was initially supposed to be for five years starting 2017, the federal government last year extended its scope beyond 2022 to meet the revenue gap caused by the pandemic. Government spending is key to sustaining the recovery of Asia’s third-largest economy from a rare recession last year.

Although GST receipts have come in at more than ₹1 trillion each month for seven successive months as of April, there are worries that it will slow amid lockdowns implemented by most states to curb the deadly second wave of the pandemic.

The economic costs of the recent surge in cases are rising with economic losses estimated at $74 billion, all of it contained in the second quarter, Barclays said in a report on Tuesday (May 25). The bank lowered its economic growth forecast by 80 basis points to 9.2% for the fiscal year.