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'Difficult, Expensive': In Letter to PM Modi, Tamil Nadu CM Lists Problems With 'States Should Borrow' Plan

File photo of Tamil Nadu Chief Minister Edappadi K Palaniswami (PTI)

File photo of Tamil Nadu Chief Minister Edappadi K Palaniswami (PTI)

The Union Finance Ministry should agree to a mechanism in which the government of India (GoI) raises the required funds as a loan and lends it to the GST Compensation Fund (GSTCF) against future cess receipts, so that the GST compensation can be paid in full to the States in 2020-2021, K Palaniswami urged Prime Minister Narendra Modi in a letter.

The Centre has a moral and legal obligation to pay compensation for the shortfall in GST collections and asking States to borrow from the market is administratively difficult to implement and more expensive, Chief Minister K Palaniswami asserted on Monday.

The Union Finance Ministry should agree to a mechanism in which the government of India (GoI) raises the required funds as a loan and lends it to the GST Compensation Fund (GSTCF) against future cess receipts, so that the GST compensation can be paid in full to the States in 2020-2021, Palaniswami urged Prime Minister Narendra Modi in a letter.

In the 41st GST Council meet on August 27, Tamil Nadu suggested GoI could mobilise resources and lend the funds required to the GSTCF and that loan could be serviced through an extension of the GST Cess for a few years beyond 2021-22.

“This was a very reasonable and practical suggestion and was agreed to by almost all States," the Chief Minister said.

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“Hence, I reiterate Government of Tamil Nadu’s stance that the Government of India should advance funds to the GST Compensation Cess fund, if need be, by borrowing in the market and service the debt by an extension of the compensation cess."

Expressing concern over the two options offered to States, he said in both the options suggested by the Centre, the States are being required to borrow from the market to make good the shortfall in compensation due.

“This is administratively difficult to implement and more expensive."

Further, the reasons being cited for such an arrangement are not persuasive. “Whether the Government of India borrows or the State Governments borrow, for rating agencies and others who monitor the macro-economic indicators, it is the overall general government deficit and borrowing, that is relevant."

The argument that States borrowing for what is essentially a Government of India obligation “is a seemingly better optical arrangement" and does not appear to be a strong or valid reason.

Further, in an effort to reduce the total amount of borrowing in 2020-21, an artificial distinction is being drawn between GST implementation based losses and COVID-induced losses.

The net impact of the Centres proposed two options is to reduce the overall resources available to States in 2020-21 quite substantially to the extent of about one per cent of GDP amounting to nearly Rs two lakh Crore.

“This will really hurt spending by States on many crucial COVID 19 and non-COVID 19 related expenditure. Welfare programmes and infrastructure creating capital expenditure will suffer greatly. This will impede early resumption of growth momentum in the economy and hurt economic revival."

Seeking Modi’s intervention, Palaniswami wanted him to ensure that the States get their full dues of the compensation in the current year itself. Neither the compensation payable nor the already committed additional borrowing permissible to States -of two per cent of GSDP under the Atma Nirbhar Bharat stimulus package- must be reduced under any circumstances, he said.

A categorical assurance that any spillover of the compensation due will be paid during the period after 31st March, 2022, should be made.

“Relax the conditionalities attached to the permission to be accorded by the Government of India to States

to borrow under the Atma Nirbhar Bharat scheme."

Such measures would ensure that not only are States treated fairly in being provided the due compensation for the revenue shortfall post implementation of GST, but would also have adequate funds in 2020-21 to meet their essential expenditure commitments, and can thus effectively contribute to the economy’s revival, he said.

The Centre had on Thursday presented two options to states under which they can borrow from the market to make up for the estimated deficit of Rs 2.35 lakh crore this fiscal.

first published:August 31, 2020, 16:56 IST