Daily Analysis

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GST Shortfall: Centre to borrow

The Editorial covers GS paper 3 [Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.]

GST shortfall | Centre to borrow ₹1.1 lakh crore on behalf of States - The  Hindu


  • In what appears to be a relief for the states, the Centre has said it will borrow up to Rs 1.1 trillion, which is the estimated revenue shortfall on account of implementing goods and services tax. 

  • The centre will then lend the money to the states under a special window. 


What is the background?

  • The extra fund raising was reflected in the borrowing calendar released by the RBI and the finance ministry. 

  • The Centre borrowing on behalf of states is likely to ensure that a single rate of borrowing is charged and this would also be easy to administer.


What are the details of the centre’s options?

  • Under the two options put forward at the Council meeting, the first was a special window for States, in consultation with the RBI, to borrow [collectively] ₹97,000 crore at a reasonable interest rate.

  • The second option was to borrow the entire ₹2.35 lakh crore shortfall under the special window.

  • Compensation payment has been an issue since August 2019 with GST collections faltering.

  • In the current fiscal, the compensation requirement of States has been estimated at ₹3 lakh crore, of which ₹65,000 crore would be funded from the revenues garnered by levy of cess.

What are the reasons given by the centre?

  • “The wording of the Constitution and statutory preamble make it clear that the spirit of the law is not to compensate States for all types of revenue losses, but rather for that loss arising from GST implementation.”

  • The Centre has reasoned that it is already saddled with a large borrowing requirement, given the slowdown in revenue collections due to a slump in the economy.

  • While additional borrowing by the Centre influenced yields on Central Government securities (G-secs) and has other macro-economic repercussions, yields on State securities do not directly influence other yields and do not have the same repercussions.

  • Hence, it is in the collective interest of Centre and States and in the interest of the nation and of all economic entities including the private sector, not to do any avoidable borrowing at the Central level when it could be done at the State level.

What is the special window to borrow?

  • The interest on the borrowing under the special window will be paid from the cess as and when it arises until the end of the transition period; the State will not be required to service the debt or to repay it from any other source.

  • The borrowing under the special window will not be treated as debt of the State for any norms which may be prescribed by the Finance Commission etc.

How have states reacted?

  • States such as Punjab, Kerala, Delhi and West Bengal have already stated that raising debt is not an option for the already stretched State finances.

  • Kerala has asked the Centre to take a loan and provide compensation to the States.


  • As per the Constitution, a State needs permission from the Centre to take a loan and the interest will be 1-2% more if the State avails the loan.

  • Only 3% of the State’s income can be availed as loan even if permission is granted.

  • Even if the fiscal limit ceiling is enhanced by 0.5%, as suggested by the Centre, it will not be adequate for Kerala as it will not be enough to cover the GST compensation.