States have to borrow from RBI

States have to borrow from RBI

• The Centre acknowledged that States are likely to face a GST revenue gap of ₹3 lakh crore this year, as the economy may contract due to COVID-­19, which Finance Minister Nirmala Sitharaman termed an unforeseen “act of God”.
• As you all know that when GST was implemented on 1st July 2017, States were promised a (indirect) tax revenue growth of 14% annually for five year till 30th June 2022. It was done so because States were not agreeing to implement GST and they were worried that tax revenue can decrease. So, GST act promised States that if there is any shortfall (i.e. below 14% growth)  then they would be compensated by levying a CESS on Luxory and Sin goods
• Now, it is expected that there will be a shortfall of around Rs. 3 lakh crore this year (2020-21). Centre is suggesting that out of this shortfall of Rs. 3 lakh crore.......   Rs. 65,000 crore can be compensated by imposing Cess (try to understand that Cess also can be increased only till certain limit otherwise the demand of those goods will reduce during this Covid crisis and imposing cess will not help). 
• Out of the rest Rs. 2.35 lakh crore, Centre is saying that only Rs. 97000 crore is because of GST implementation and rest Rs. 1.38 lakh crore is because of Covid (which is an Act of God and centre is not responsible for it). And hence Centre will take care of how Rs. 97,000 crore is given to States.

Centre has proposed TWO OPTIONS:

• Option 1: States can be provided this Rs. 97,000 crore (under a special  borrowing window facilitated by RBI) at a reasonable interest rate by consulting with RBI and this amount (interest + principal) can be repaid by imposing cess after 5 years.
• Option 2:  States can be provided entire Rs. 2.35 lakh crore (under a special  borrowing window facilitated by RBI) at a reasonable interest rate by consulting with RBI and this amount (interest + principal) can be repaid by imposing cess after 5 years.
• But if States will opt for Option 1, then they can be allowed for further relaxation of 0.5% in their Fiscal Deficit limit in their FRBM Act. (Actually Centre has already allowed 2% relaxation in States fiscal deficit from 3% to 5% because of this Covid under Aatman Nirbhar Bharat) .................  (Its nowhere written that States require Centre approval to increase their Fiscal Deficit Limit, but as per Constitution if States have taken debt from Centre then they require Centre approval to take any extra debt from anywhere. And the fact is that almost all States have taken debt from Centre).

Source: The Hindu