Breach of Trust

Context: Centre’s argument that loss in Goods and Services (GST) revenue as a result of COVID-19 is not a shortfall arising out of the “implementation of GST” instead is an act of god is legally and morally untenable.

Argument offered by the Centre against borrowing

• Risk of rise in interest rates: cautions the government against borrowing the amount to be paid under-compensation cess.
• Risks of the high fiscal deficit: Monetization of the debt may lead to unsustainable fiscal deficit impacting the future growth of India.

Arguments necessitating Centre’s support 

• High cost of borrowing for the states: The cost of borrowing by states would be higher by 1-2% points than the Centre and will result into increase in the fiscal deficit of states.
• Different compensation requirements of the states will require the permissible increase in fiscal deficit ceiling of each state separately.
• Moral responsibility of the Centre:
• When there was surplus in the cess fund, as was the case in the first two years, the surplus funds were deposited in the Consolidated Fund of India.
• Symmetry demands that when the cess fund is in deficit and requires temporary accommodation, the Government of India should support it.
• The legally untenable argument of ‘act of God’’: Section 7 of the Compensation Law on “Calculation and Release of Compensation” makes no distinction between acts of gods, humans or nature.
• Constitutional Right of the states: The payment of full compensation is a constitutional right of the states, and there can be no compromise on this principle.
• Non-payment of full compensation will aggravate the crisis:
• It will force the states to cut their expenditure, which will further undermine aggregate demand and economic recovery.
• Fiscal expenditure is a must for stimulating the economic growth and recovery.
• States account for 60% of total government expenditure in India.

Conclusion: The stand of the Indian government on GST compensation issue is devoid of any macro-economic logic and is not a contra-cyclical, but a pro-cyclical stance.