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Business EconomyPosted at: Aug 28 2020 9:25PM


Finding ways to support states tide over Rs 3 lakh crore revenue shortfall from GST

Kolkata, Aug 28 (UNI) The research report from the State Bank of India’s Economic
Research Department, authored by Dr Soumya Kanti Ghosh, Group Chief Economic
Adviser, SBI, has proposed three options of how states could meet the shortfall and
tide over Rs three lakh crore revenue shortfall from GST.
" The Government has given option to State Governments to borrow as much as
Rs. 2.35 lakh crore in the form of borrowings, over and above Rs. 4.28 lakh crores
allowed to states under Atmanirbhar package, However, Article 293 (3) of the Indian
Constitution imposes certain restrictions on the borrowings by the State Governments. "
" The Article stipulates that a State may not, without the consent of the Government
of India, raise any borrowings if it has any loan outstanding, which is repayable to the
Government of India. Furthermore, under the Constitution, State Governments, unlike
the Centre, cannot borrow externally. The Centre plays the role of an intermediary in
the transfer of external borrowings to States. "
OPTION 1
" The first option is RBI monetizes state debt. Contextually, RBI is a banker to all state
Governments (including J&K now after August 2019). However, such an arrangement is
purely contractual and cannot be used as an alibi for state debt monetization. "
" As of now before the beginning of the each fiscal year, the feasible levels of the
market borrowing for Centre and States together is advised to the Government by RBI.
However, RBI does not invest in State Government loans either in primary issues or in
the secondary market. "
" Thus monetization of state debt is not exactly possible in the current circumstances
and it is better if the Centre monetizes the debt and gives to states and the RBI will be
also comfortable by dealing with the Centre rather than deal with close to 30 sub national
entities. "
OPTION 2
" The next option in borrowing could be a review and enlargement of WMA advances.
However this can purely be short term measure as WMA is to be liquidated within 90
days specified period and is not a multiyear measure. "
" Following the recommendations of the Advisory Committee on WMA scheme for
state governments, the WMA limit was set at Rs 32,225 crore for all states/ UTs together
until the next review in 2020-21. Currently, a new Committee (Chairman: Sudhir Shrivastava)
is reviewing these limits. Pending its recommendations, it was decided on April 1, 2020
to increase the WMA limit to Rs 51,560 crore/ 60% over and above the level as on
March 31, 2020. "
" This interim measure will remain valid till September 30, 2020. We strongly recommend
that the Committee comes up with revised recommendations on such WMA limits soon
that could even consider extension of the 90 day period to below 1 year and an interest
free agreement. The stress on state government finances is evident in FY21 as 13 states
resorted to WMA and 10 states availed OD in current fiscal year. "
OPTION 3
" The third option is recourse to NSSF. The Central Government has set up the NSSF,
which is akin to a Special Purpose Vehicle (SPV) providing an autonomous source of
finance for the Governments. "
" It mobilises small savings through post offices and banks and used to lend against
non-tradable securities issued by the States till it was discontinued in FY2017 as the
special securities carried a rate of interest of 9.5%, that was considered too high by
states. "
" We recommend that in the current extraordinary circumstances, the states be again
allowed to tap NSSF at a concessional rate of interest so that their reliance on open
market borrowings is reduced. This will require discussions at the highest level including
the Finance Commission. "
UNI SJC BM
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