GST shortfall situation becomes clearer, govt may have to borrow $22 billion more to pay states

India may need to borrow more for a second straight year to compensate its states for their revenue loss due to a shortfall in the Goods and Services Tax (GST) collection, according to people with knowledge of the matter.

The additional borrowing requirement is estimated at Rs 1.58 lakh crore ($21.7 billion) in the fiscal year started April 1, said the people, who asked not to be identified citing rules. A panel on goods and services tax will meet on Friday to discuss compensation to states, among other issues.

While the amount to be paid to states works out to Rs 2.7 lakh crore, the government is expected to muster only Rs 1.1 lakh crore, the people said.

Calls made to a Finance Ministry spokesperson weren’t immediately answered.


The amount is part of a compensation that the Central government 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 coronavirus outbreak risks hurting tax collection, possibly forcing the administration to consider additional borrowings.

Should the borrowing materialise, it will be in addition to the over Rs 12 lakh crore 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 Rs 1 lakh crore bond purchase acquisition program for the current quarter. The benchmark 10-year yield is down 20 basis points to 5.97% this fiscal year.

Any additional borrowing will replicate an arrangement followed last financial year, where New Delhi borrowed Rs 1.1 lakh crore on behalf of the states and passed them on as back-to-back loans, the people said. The decision on the extra borrowing, the amount and the timing would be made after consulting with the Reserve Bank of India and states, the people said.

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While the payment to states was initially supposed to be for five years starting 2017, the Centre last year extended its scope beyond 2022 to meet the revenue gap caused by the coronavirus 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 Rs 1 lakh crore each month for seven successive months as of April, there are worries that it will slow amid regional 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 rapidly with economic losses estimated at $74 billion, all of it contained in the second quarter, Barclays Plc said in a report to clients on Tuesday. The bank lowered its economic growth forecast by 80 basis points to 9.2% for the fiscal year.



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