“The economic slowdown followed closely by the prolonged impact of the Covid lockdown has severely impacted the fiscal position of both the Central and the State Governments. The aggregate GST collections have dropped by 34.5% over the April-July period reflecting the severe economic disruption and have sharply reduced the tax transfers to the states. This has already led to a sharp spurt in the gross consolidated borrowings of the centre and the states in the four month period to a high of Rs. 13.98 Lakh Cr, a 67.3% jump over the corresponding period of the previous year. Apart from the debt mobilisation by the centre both through short term treasury bills and longer tenure bonds, market borrowings by the states have increased by Rs. 82.810 Cr on a yoy basis. Despite the higher borrowings, many states are reportedly facing a liquidity crisis particularly due to higher expenditure in the health sector arising from the pandemic outbreak.
The matter of GST compensation to states has assumed additional relevance in such a fiscally challenging environment. Clearly, the current economic crisis has created a huge shortfall between the GST compensation requirement for states which is estimated to be Rs 3 Lakh Cr and the projected Rs. 65,000 Cr of compensation cess collection by the centre. While the central government has estimated that only Rs. 97,000 Cr is on account of the introduction of GST, it may have to facilitate the funding of the entire gap of Rs. 2.35 Lakh Cr through a mix of borrowings both directly from RBI and from the market. Such borrowings are expected to be however, serviced through the future receivables from GST compensation cess, the validity of which may get extended from the initial period of 5 years ending in June 2022. In our opinion, the decision to fund this gap through debt will further elevate the borrowing levels of the states in the current year to around Rs. 9-10 Lakh Cr from Rs. 6.32 Lakh Cr in FY20. With the fiscal deficit of the states having already climbed to 2.8% of GSDP in FY20 (RE), there is a risk that the consolidated deficit of the centre along with the states will get into double digits in FY21.”
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