A satire: Government can lend money to states but cannot pay them their GST dues!

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Let’s talk about an irony or satire happening in the field of politics led by the central government today.

So, beginning with it, Central Finance Minister Nirmala Sitharaman announced certain steps to stimulate consumer demand in a meeting held on Monday, 12th October 2020. The steps announced included an advance payment of a part of the wages of central government employees which will help the economy to witness a jump in spending during the forthcoming festival season. This is one way the government aims to bolster the economy badly hit by the coronavirus pandemic. A decision has also been taken to allow government employees to spend travel allowances, which is a part of their salaries and is exempted from income tax, on goods and services. All these announcements were made by the finance minister in addressing a press conference ahead of a meeting of the GST or Goods and Services Tax Council due later in the day.

Highlights of the press conference:

  1. It is expected that the announced measures will boost demand by Rs. 73,000 crores by March 31, 2020, by the means of consumer spending and capital expenditure.
  2. Special Festival Advance Scheme – The interest-free advance of ₹10,000 received, in the form of a prepaid RuPay Card, would have to be paid back in 10 instalments. Its one-time disbursement is nearly equal to ₹4,000 crores. Moreover, if given by all state governments an additional ₹8,000 crores are expected to be disbursed which the employees can spend on any festival.
  3. The government will also provide additional Rs. 25,000 crore package for defence infrastructure, roads, water supply and urban development.
  4. States can now avail Rs. 12,000 crore in special 50-year-loans without any interest payable.

But all this looks pretty fine, right? So what’s the problem? What’s the catch? Let me throw some light on the details of the last point.

What are the “Rs. 12,000 crore special interest-free 50-year loansbeing given to states?

While addressing the conference Nirmala Sitharaman said that the Special Interest-free 50-year-loan for Rs, 12,000 are being issued to the states for capital expenditure requirements.

According to the declarations made by the minister, the states will have the option to borrow money from the central government at 0% interest.

Following are the details:

  1. The eight North-East states will get Rs, 200 crores each.
  2. Himachal Pradesh and Uttarakhand will receive  250 crores out of the total Rs. 12,000 crores.
  3. 7,500 crores will be distributed among other states as per the devolution by 15th Financial Commission.
  4. Remaining Rs. 2,000 crores will go to states that meet centre’s criteria (stated meeting at least 3 out of 4 reforms given in Atma Nirbhar fiscal Deficit package)
  5. The received money would have to be spent by the states before March 31, 2021.
  6. The states will receive the 50% amount initially and the remaining shall be handed over once the utilize the first 50%
  7. It is compulsory criteria that the loan amount shall be spent only on new or ongoing capital projects. The states are allowed to use this amount to repay the bills of contractors and suppliers. However, all the dues have to be paid before March 31, 2020.
  8. The repayment shall be done after 50 years and will be one bullet payment.

Now let’s talk about why it is not a good idea.

The problem with this scheme in this is highlighted in a report by The State Bank of India issued a day after Finance Minister announced the scheme. Ecowrap, the report by SBI, pointed that the Fiscal Stimulus 2.0 will push country’s fiscal deficit to 9.5 per cent of the Gross Domestic Product by putting an additional burden of Rs 40,000 crore on the government. Ecowrap is authored by Dr Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India. She says that it is highly unlikely that the stimulus measures would work unless to GST component is paid by the government and above the fare entitlement amount as is done by many PSBs.

Now, this report leads us to one thing that demands our attention here- The Goods and Services Tax (GST) Council meeting on the compensation issue which still stands unresolved. The panel faced discrepancies and could not reach a consensus on using borrowing as a tool.

The panel headed by Nirmala Sitharaman is the highest decision-making body on indirect taxes. The Finance Minister stated that the centre is not in the capacity to borrow and pay the states for the shortfalls in their GST share on account of the pandemic. The panel said that this would increase the bond yields in turn, leading to a rise in borrowing costs for the government as well as the private sector. The only way to prevent this is for states to borrow against future GST receipts. However, many states are still not satisfied with the Centre’s suggestion and wanted another round of deliberation.

The deal is that the centre is obligated to pay the states their GST share. But this time it has shredded off its shoulders saying that COVID-19 is an “Act of God”, which makes the central government not liable to the compensation demanded. On October 5, as many as ten states insisted on the fact that the centre should borrow and not the states to fill in the vacuum caused by the compensation deficit of Rs 2.35 lakh crore this fiscal.

Now, the question is if the government does not have enough money to pay the GST compensation to states, which is their “Legal Right”, how can it give out interest-free loans to the states? At one part, the government says it is fiscally trapped to send out any money to the states and on the other, it goes on releasing packages which are expected to further increase its fiscal deficit

The crux of the matter is that you cannot ask someone to borrow money from you while you deny them their rightful payment. It sounds absurd and vague, doesn’t it? If the centre arranges the required funds, which are the legal right of the states,  and pays them to the respective states, the states would have enough to not even face the need to borrow, whether with interest or without interest.

By giving out the money (which is again the right of the states) in the name of loans, what is the centre trying to do? Is it promoting dependency of states on centre? Is it trying to gain public reputation or goodwill? Does this fulfil their political propaganda? Or is this simply an example of poor management of funds and giving up of responsibilities on the part of the government? Well, it won’t be entirely wrong to say so. 

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