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On GST, a breakthrough | HT Editorial – editorials

The Centre has decided to borrow Rs 1.1 lakh crore and pass it on to states as debt in lieu of Goods and Services Tax (GST) compensation cess payments. While this amount is about half the expected shortfall of Rs 2.35 lakh crore in the current fiscal year, it is equal to the shortfall the Centre had attributed to GST implementation. The remaining Rs 1.25 lakh crore gap was described as the result of Covid-19’s economic impact. The Centre’s decision to do the borrowing is a change from its earlier stance of asking individual states to borrow their respective shortfall. Whether or not this will end the impasse in the GST Council remains to be seen. Some state governments have asked that the Centre borrow the entire shortfall in compensation cess payments. However, the Centre’s decision will definitely reduce its trust deficit with states.

The Centre’s decision to change its stance and the early positive responses of state governments to this decision is welcome. Fiscal federalism is among the central pillars of India’s constitutional framework. It is essential to preserve its sanctity and spirit if India has to further its pro-reform agenda without generating a feeling of bitterness between New Delhi and state capitals. Had the Centre stuck to its earlier stand, this sense of bitterness would have got aggravated, for states believe they have done most of the heavy lifting during the pandemic, with increased expenditure and reduced revenue inflows. The fact that the Centre pulled back reflects a willingness to listen and incorporate democratic feedback.

The decision will also avoid uncertainty and unnecessary chaos in financial markets. It would have been a challenge for Reserve Bank of India (RBI) to deal with individual states raising money on their own. This will also benefit some states, which would have otherwise not got a low interest rate. Some reports suggest that it is RBI which nudged the Centre to borrow rather than leave it to the states. While the Centre insists that the decision will not have any impact on its deficit or borrowing numbers, this seems more like an accounting innovation, which is in keeping with the now institutionalised practice of diverting some of the spending to off-budget items. Ideally, such practices are avoidable. However, this is not the time to overemphasise fiscal discipline. India needs to spend its way out of the recession, and the Centre should lead the charge on this.

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